Family offices & Family Investment Funds – What do they mean?

This year is poised to be a significant one for India's high-net-worth individuals (HNIs) and family offices. They are marking a shift towards global portfolio diversification. Historically, India's strict controls and non-transparent regulations on capital outflows have posed significant challenges for the global investment aspirations of the ultra-rich and HNIs.

However, a notable change is on the horizon with the emergence of family investment funds, which have gained momentum following the establishment of guidelines in mid-2022. A prominent example is the family office of billionaire and IT company founder, Azim Premji, which has received preliminary approval to establish a family investment fund (FIF) at the Gujarat International Finance Tec-City (GIFT City).
 

What Is FIF?

Family Investment Funds (FIFs) or family offices are self-managed investment vehicles formed to manage the wealth of a wealthy family. Traditionally family offices in India operated in a more informal and unstructured way. To give more structure to it Indian government has allowed the provision of setting up of more formal Family investment funds (FIFs) in International Financial Services Centre or GIFT city. FIFs can adopt various legal structures including that of companies, contributory trusts, limited liability partnerships, and proprietorships. These funds offer considerable operational flexibility, operating as either open or closed-ended schemes, and can create diversified investment portfolios that may include international listed and unlisted securities, as well as tangible assets like bullion and overseas real estate.
 

Investments made by FIFs are governed under the Fund Management Entity (FME) regulations. An FIF is required to maintain a minimum capital of $10 million within three years of commencing its operations. For regulatory and exchange control purposes, an FIF will be treated as a resident of India, yet it will be considered a foreign resident in the context of exchange control regulations.
 

Booming Family Office

In India, family offices—private wealth management advisory firms that serve ultra-high-net-worth individuals—have traditionally been the preserve of business families with intergenerational wealth. However, the surge in start-up successes and entrepreneurial achievements has broadened the base of individuals accumulating substantial wealth. These new wealth holders seek not only to achieve their financial objectives but also to build a legacy and ensure a smooth transition of wealth to future generations. Consequently, having family offices to manage their wealth privately has become a preferred strategy for them.

The emergence of Family Investment Funds (FIF) is set to revolutionize the concept of family offices in India. Historically, ultra-high-net-worth individuals (UHNIs) have established their family offices in overseas locations such as Dubai and Singapore, attracted by benefits like lower taxes and access to global markets. In contrast, India's financial regulations, including the Liberalised Remittance Scheme and Overseas Direct Investment guidelines under the Foreign Exchange Management Act, 1991, have been perceived as restrictive. The introduction of FIFs in GIFT City, however, promises to offer many of the advantages previously only found in foreign jurisdictions. This development could significantly alter the landscape for family offices in India, making domestic options more attractive for wealth management and global investment.
 

Taxation

The primary advantage of Family Investment Funds (FIF) lies favorable taxation  and a variety of other exemption benefits. The tax treatment of FIFs depends on their structure, whether established as a trust, a Limited Liability Partnership (LLP), or a company. FIFs located in GIFT City benefit from a complete tax exemption for a duration of 10 years within a 15-year window, as per the Income Tax Act of 1961, provided certain conditions are met. Additionally, these funds enjoy exemptions under the Goods and Services Tax (GST).

Legal and tax professionals suggest that for FIFs organized as trusts or LLPs, taxation should be applied at only one level. This policy positions GIFT City on equal footing with foreign jurisdictions that are currently favored by family offices, which also offer the benefit of single-layer taxation. This makes GIFT City an increasingly attractive option for family offices looking for efficient tax structures and aiming to consolidate their investment activities within India.
 

Advantage Gift City

Gift City, located in Gandhinagar, Gujarat, stands as India's beacon of international finance, modeled after global financial powerhouses like Dubai, Singapore, and Hong Kong. Its appeal lies in a host of tax benefits and exemptions, thanks to its status as a special economic zone. The Indian government's commitment to investor-friendly and stable regulations has set the stage for a diverse range of financial institutions, including banks, asset management, and advisory firms, to establish their presence in Gift City. This ecosystem presents a significant advantage for Family Investment Funds (FIFs), which can tap into the comprehensive services available.
 

Remarkably, FIFs in Gift City are permitted to borrow funds for leveraging purposes from local banks, showcasing the flexible financial environment. The rules governing overseas investments into Gift City are particularly accommodating. For instance, the August 2022 framework restricts resident Indians from investing in foreign financial service businesses, but this doesn't apply to investments in the International Financial Services Centre (IFSC) like Gift City. Similarly, the requirement for a three-year profitable track record for overseas direct investment (ODI) is waived for family offices in IFSCs.
 

Investments in pooling vehicles such as FIFs established in Gift City are classified as overseas portfolio investment (OPI), simplifying compliance compared to ODI. This classification benefits FIFs by allowing them global investment opportunities without the constraints of FEMA regulations.

For individual investors, using the Liberalised Remittance Scheme (LRS) route caps overseas investments in securities and properties at $250,000 per annum. Establishing an FIF enables maximizing this limit through the family-owned entity, preserving individual LRS quotas for other investment avenues.
 

Conclusion

The Indian government's ongoing emphasis on fostering a business and investor-friendly environment promises a stable climate for investment and taxation. The inclusion of India in global bond indices underscores this commitment. Gift City, with its favorable regulatory framework, invites family offices and affluent individuals to consider the advantages of FIFs. The stipulation for FIFs to maintain a physical office in Gift City, complete with a principal office in charge of investment decisions, aims to build confidence among family offices and alleviate any potential concerns.