The establishment of Family Investment Funds (FIFs) by ultra-rich Indian families in Gift City, Gandhinagar, is encountering roadblocks due to regulatory uncertainty, causing authorized banks to put applications on hold. The lack of clarity surrounding remittances and ownership control has become a major hurdle for these affluent families seeking to set up family offices within India’s International Financial Services Centre (IFSC).
Last year, the Indian government permitted the creation of FIFs in Gift City, aiming to encourage wealthy Indian families to establish their family offices domestically. Traditionally, affluent Indians have favored setting up family offices in overseas jurisdictions like Singapore or London.
However, the offshore jurisdiction status of Gift City has led to ambiguity regarding rules governing remittances into the IFSC, according to sources familiar with the matter. Email queries to representatives of the Reserve Bank of India (RBI) and Gift City remained unanswered as of press time on Tuesday.
The confusion arises from conflicting interpretations of regulations. While initial indications suggested that outward remittances could be made through the Overseas Portfolio Investment (OPI) route, the RBI is reportedly considering Indian residents’ control over IFSC FIFs as incompatible with the OPI route. As a result, some authorized banks are halting FIF applications.
Moin Ladha, a partner at Khaitan & Co., highlighted the lack of clarity surrounding the treatment of initial remittances or fund infusions to set up entities in Gift City as FIFs. Ladha stated, “There is a lack of clarity on the treatment of initial amounts remitted to set up an entity in Gift City, which would be the Family Investment Fund.”
The challenge lies in determining whether the remittance for the initial setup could be considered as an overseas direct investment (ODI) or a portfolio investment, adding complexity to the regulatory landscape.
Suresh Swamy, a partner at Price Waterhouse & Co. LLP, pointed out the ambiguity within the Overseas Investment Rules, 2022, stating, “Under the Overseas Investment Rules, 2022, ambiguity remains regarding the classification of investments in a family office as an Overseas Portfolio Investment (OPI) or Overseas Direct Investment (ODI). RBI’s stand traditionally has been to restrict an entity from making OPI through its ODI entities. However, the application of this rule within the context of IFSC remains unclear.”
While Family Offices can be set up via the ODI route, it is limited to entities structured as corporates, and it involves higher compliance requirements. The ODI rules also come with a condition of bona fide purpose, restricting the use of this route for defined purposes such as expansion, acquisition, or setting up businesses in a foreign country. In contrast, FIFs can pool funds not only from individual family members but also from entities where the family holds at least 90% economic interest.
Resolving these regulatory uncertainties is crucial for Gift City, as FIFs could become a vital source of business, attracting wealthy Indian families looking to invest overseas. Clarifying the rules would position Gift City as a competitive alternative to traditional family office destinations like Singapore and London.
