Why opening Family Investment Funds in GIFT City makes Sense

Source -  The New Indian Express

NEW DELHI: With the rising number of high-net-worth individuals (HNIs), there is a growing awareness of the benefits of establishing Family Investment Funds (FIFs) in the Gujarat International Finance Tec-City (GIFT City) in Gujarat.

According to some research reports, India is projected to experience an 85% increase in millionaires, with a potential surge of $22.5 trillion in Indian investable wealth by 2034. This wealth expansion underscores the importance of succession planning, with experts highlighting FIFs as a crucial strategy for effective succession planning.”

The concept of FIF is gradually gaining attraction and recently Azim Premji’s family office received an in-principle approval to set up FIF in GIFT City. Premji’s Bengaluru-based investment arm Premji Invest and Narayana Murthy-backed Catamaran Ventures were among the first to seek approvals.

So, what is a FIF and why are these HNIs ensuring their presence in GIFT City?

FIFs are self-managed pooling vehicles to manage the wealth of a family. In GIFT City, an FIF can only pool money from a single family, as per the IFSCA (Fund Management) Regulations, 2022. FIF can take the form of a company, LLP, or contributory trust with a minimum corpus requirement of $10 million within three years of registration.

FIF is allowed to borrow or engage in leveraging activities based on its risk management policy and can be structured as open-ended or closed-ended as needed. Unlike other investment vehicles, contributions by Family Offices/Resident Individuals are considered Overseas Portfolio Investment (OPI). Family Investment Funds in GIFT City have a wide range of permissible investments and enjoy tax benefits, including a tax holiday on business income for up to ten years within a fifteen-year period, nil Minimum Alternate Tax (MAT) for domestic companies opting for a concessional tax regime, and a 10% tax rate on dividends paid to non-residents.

Is it important to set up a physical office in GIFT City?

Lokesh Shah, partner with IndusLaw said, “It is mandatory to set up a physical office in GIFT City by FIFs. In order to set up FIF in GIFT City, one of the preliminary steps is to identify space and obtain a provisional letter of allotment for the office space.

Post this, one has to apply to SEZ authority for unit approval. In order to obtain SEZ approval, the application form requires details of the physical office.” Mahesh Shekdar, Co-founder at Dovetail Group said, “An office with minimum one employee is required; rightly so as all entities should have substance where they set up.”

Regulatory framework

The regulatory framework in GIFT City has a crucial role to play in the structuring and management of FIF. “Under the new Overseas Investment (OI) Rules, 2022, overseas investments in unlisted companies generally fall under the category of ODI. Schedule V permits overseas investment in IFSC by a person resident in India – importantly, the contribution by Indian residents into an investment fund or vehicle set up in an IFSC will be treated as OPI,” Shah stated.

How FIF is different in GIFT City from Mumbai, Dubai and Singapore GIFT IFSC has numerous advantages to offer when compared to financial centres like Dubai and Singapore. GIFT IFSC scores over these jurisdictions in terms of cost of doing business and ease of set-up. Besides, significant efforts are being taken to develop the infrastructure, business environment and human capital.

Mahesh Shekdar, Co-founder at Dovetail Group, said, “Having an FIF, in fact, is a great regulatory advantage, it allows both India inbound flows and India outbound flows from GIFT IFSC. Some family offices may find it challenging to have an office but it is becoming a global phenomenon to have substance requirements.”

He added, “Mumbai does not have a FIF equivalent regulatory framework, but Singapore has taken the lead in this space; few thousand family funds have been set up in Singapore already. Dubai is picking up as well. This might be an opportunity for GIFT IFSC. Also, taxation can be favourable depending on the structuring undertaken.”