GIFT Deep-Dive

November 2023

Family Investment Fund – New Route of Foreign Investment Through GIFT

About IFSC at GIFT: The GOI on April 27, 2020, established IFSCA under the International Financial Services Centers Authority Act, 2019. GIFT, located at Gandhinagar in Gujarat is developed as India’s first IFSC. The IFSC reinforces India’s strategic position as a global hub for financial services. It seeks to bring to India, those types of financial services and transactions that are currently carried on outside India by overseas financial institutions and overseas branches/ subsidiaries of Indian financial institutions.

An IFSC is a financial center that cater to customers outside their own jurisdiction. An IFSC is, thus, a jurisdiction that provides world class financial services to nonresidents and residents, to the extent permissible under the current regulations, in a currency other than the domestic currency (Indian Rupee) of the location where the IFSC is located.

The IFSC at GIFT has been designated for all practical purposes as a 'deemed foreign territory' which would have the same ecosystem as other offshore locations, but which is physically on Indian soil.

The GIFT is buzzing with business activities ever since its establishment. There are so many players which have set up shop at GIFT and carrying out banking, insurance and capital markets activities.

In order to boost the activities at IFSC in India, the Government has provided plenty of tax benefits to entities set up at IFSC which include-

∞ 100% Tax Exemption (for 10 out of 15 years) u/s. 80LA of the IT Act

∞ 9% Minimum Alternate Tax (“MAT”)

∞ 0% Security Transaction Tax (“STT”) /Commodity Transaction Tax (“CTT”)

∞ 0% Capital Gains Tax

∞ 0 % Stamp Duty

∞ 0% Goods & Service Tax (“GST”)

Investment through Family Investment Fund (“FIF”) in GIFT 

In order to attract ultra-High Net Worth Individuals (“HNIs”) families to invest in IFSC who otherwise want to invest abroad by forming family offices abroad, the IFSCA has launched a new investment vehicle, namely FIF Scheme.

For this purpose, IFSCA, under IFSCA (Fund Management) Regulations, 2022, Part: C has laid down conditions for setting up of a FIF in GIFT.

Under these Regulations, “Family Investment Fund” is defined as a self-managed fund pooling money only from a single family and which has been set up in terms of these regulations. “Single family” is defined as a group of individuals who are the lineal descendants of a common ancestor and includes their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, ex nuptial children). IFSCA Circular F. No. 333/IFSCA/FIF/2022-23 dated March 01, 2023, clarifies that “single family” as defined in the regulation shall also include entities such as sole proprietorship firm, partnership firm, company, LLP, trust or a body corporate, in which an individual or a group of individuals of a single-family exercises control and directly or indirectly hold substantial economic interest.

FIF could be set up as a Company, Trust (Contributory Trust only) or LLP or any other form as may be permitted by the IFSCA from time to time. It should maintain a minimum corpus of USD 10 million within a period of three years from the date of obtaining certificate of registration from IFSCA.

Further, the FIF is permitted to make various investments such as: 

∞ Securities issued by unlisted entities;

∞ Securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdictions;

∞ Money market instruments;

∞ Debt securities;

∞ Securitized debt instruments, which are either asset backed or mortgage-backed securities;

∞ Other investment schemes set up in IFSC, India and foreign jurisdiction; 

∞ Derivatives including commodity derivatives;

∞ Units of mutual funds and AIFs in India and foreign jurisdiction;

∞ Investment in LLPs;

∞ Physical assets (real estate, bullion, art, etc.);

∞ Such other securities or financial product /assets or instruments as specified by the Authority

FIF is permitted even to borrow funds or engage in leveraging activities as per their risk management policy.

Hence, FIF has been floated under the GIFT route as an attractive investment vehicle for the ultra HNI families of India.

However, there exists certain dilemma about the legality of the said vehicle, when looked upon from the perspective of the FEMA regulations. 

Compatibility of FIF with extant FEMA rules/regulations

Presently, under the Foreign Exchange Management (Overseas Investment) Rules, 2022, individuals are permitted to make investments abroad only within the limit of USD 2,50,000 under the Liberalized Remittance Scheme. Said investments may be made under Overseas Direct Investment (“ODI”) or Overseas Portfolio Investment (“OPI”) route. The permissible investments include investment even in IFSC, however, the limit of USD 2,50,000 marks as a deterrent for setting up IFSC, which has a requirement of maintaining minimum corpus of USD 10 million within a period of three years from the date of registration. Hence, individuals of a single family, by themselves are unlikely to able to set up an FIF in IFSC with the current permissible limits for investment under the FEMA Rule. The current permissible limits for investment under the FEMA Rule. 

As against this, unlisted companies in India are permitted, up to 50% of their net worth, to make contribution to an investment fund or vehicle set up in an IFSC as OPI. Hence, at first blush, it may appear that unlisted companies, controlled by a single family, may be permitted to invest in FIF in GIFT up to 50% of their net worth as OPI. However, if one were to consider the definition of OPI and ODI under the FEMA Rules, it would appear that the investment made by the entity in FIF may be counted as ODI as against OPI since there would be an element of control in investment in FIF whereas OPI contemplates investments which does not have any element of control. Now, permissible of investment as ODI in an FIF too is a grey area, since an FIF may or may not be regarded as being engaged in ‘financial service activity’.

Said uncertainties in the compatibility and permissibility of FIF with the current FEMA Rules and Regulations is acting as a deterrent for the successful implementation of this new investment vehicle.

The GOI and all the regulators have been working together to make GIFT one of the leading IFSCs at par with London, New York, Hong Kong, Singapore and Dubai. However, there is a long path ahead to resolve various regulatory issues as above, so as to make GIFT a success.

Investment through FIF in GIFT is undoubtedly a great opportunity for Indian families who wish to hold a part of their wealth in different foreign assets and currencies, but the very nature of such investment transaction is in dilemma, which needs immediate attention of the Government.