Fund transfers from family trusts to non-resident beneficiaries are attracting scrutiny from regulators due to their potential to bypass remittance ceilings. Mrugank Paranjape looks at the rules governing trust transfers involving NRIs and what is making banks extra-vigilant
Backdrop of falling foreign exchange reserves
India’s foreign currency assets, vital for financing imports and managing external shocks, have dropped to a five-month low of $566 billion as of December 13, 2024, amid rising global outflows and increasing import bills for essentials like energy. In this context, trust transfers involving cash, securities, or dividends to NRIs have drawn scrutiny from regulators due to their potential to bypass remittance ceilings and contribute to unproductive forex outflows. While legitimate in many cases, misuse of trusts poses significant risks to macroeconomic stability, making it imperative for banks and the RBI to closely monitor such transactions and ensure sustainable outflows during periods of strained reserves. As frontline enforcers of Foreign Exchange Management Act (FEMA) regulations, banks play a central role in scrutinising trust transfers and ensuring compliance with RBI norms. Trusts are often complex structures that provide flexibility in asset management, but this flexibility can obscure the real purpose of transfers, raising concerns about misuse.
Permissible limits for transfer of cash & securities
Under the FEMA Act, trust transfers involving NRIs are strictly regulated to protect India’s foreign exchange reserves. A resident Indian can gift shares, securities, or convertible debentures to an NRI close relative, capped at $50,000 per financial year, while cash remittances under the Liberalised Remittance Scheme (LRS) allow up to $250,000 annually.
This disparity creates a loophole where high-net-worth individuals may use trusts to transfer securities, which NRIs later liquidate, effectively bypassing remittance limits.
While dividends on securities can be freely transferred as current account transactions, the combined outflows from dividend payouts, securities liquidation, and repatriation of proceeds often strain forex reserves. Banks and regulators remain vigilant about such cumulative outflows, given the potential impact on India’s macroeconomic stability during declining reserves.
Onus on banks to monitor transfers
The $50,000 limit on gifting securities to NRIs can seem restrictive for high-net-worth individuals. To circumvent this limit, trusts can be used as intermediaries to facilitate larger transfers over time, allowing cumulative amounts to exceed permissible ceilings. This creates a risk of capital flight, as funds ultimately leave the country.
When securities gifted to NRIs are liquidated, the proceeds are often repatriated abroad. While repatriation is legal under FEMA if it meets RBI conditions, banks must verify the origin of the securities, valuation details, and compliance documentation to approve such transfers. The process is resource-intensive, and any oversight exposes banks to risks of regulatory non-compliance.
Finally, banks must be more aware of the cumulative forex impact of dividends and sale proceeds from gifted securities. Dividends, while permissible under FEMA as current account transactions, add to the outflows of foreign exchange.
Legal imperative for family offices
Family offices, which manage wealth and assets for high-net-worth individuals, are increasingly at the centre of trust transfers. While trusts are legitimate tools for wealth management and succession planning, their misuse in circumventing FEMA and LRS limits remains the cause of existing regulatory concerns. Legal professionals advising family offices must ensure compliance with the following:
- Transfers of securities must adhere to the $50,000 per year ceiling for NRIs. Any transaction exceeding this limit should be done with prior approval from the RBI.
- Clear documentation is necessary for securities gifted to NRIs, including ownership details, valuation, and the trust/beneficiary relationship.
- Repatriation of proceeds from sold securities must comply with RBI norms.
- Dividends earned on securities must be transparently recorded as per rules.
These measures are essential to align trust transfers with FEMA provisions and prevent regulatory breaches that could trigger penalties or investigations.
Strengthening oversight
Banks will continue to remain vigilant in scrutinising these transfers for compliance. The disparity between this securities transfer limit and the cash remittance ceiling under LRS creates a regulatory loophole that will continue to be closely monitored. Family offices and legal professionals are critical in ensuring trust transactions are transparent, well-documented, and compliant with FEMA provisions. Given the current state of forex reserves, the regulatory focus must remain on preventing unproductive capital outflows that widen the trade deficit and trigger inflationary and currency pressures.
By fostering greater transparency, enforcing compliance, and balancing individual financial aspirations with national economic priorities, India can ensure that trust transfers support long-term economic stability without jeopardising its forex reserves.
The writer is managing partner, MCQube. Views are personal.
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