At a time when SEBI rules restrict mutual fund houses from routing Indian investors’ money into global markets, GIFT City is emerging as a more viable investment option for those looking to diversify globally.
GIFT City is also fast emerging as an investment route for NRIs, as well as other investors, to diversify their investments globally at a significantly lower cost and with tax advantages.
Some key global funds launched recently include Parag Parikh IFSC S&P 500 Fund of Fund and Parag Parikh IFSC NASDAQ 100 Fund of Fund. DSP has also launched DSP Global Equity Fund, an actively managed globally diversified equity scheme.
“Retail access to GIFT City has improved significantly over the past 18–24 months. They can invest via GIFT-based Fund of Funds offered by Indian AMCs or through direct investment via LRS into GIFT funds. Many wealth managers, including large distributors, now provide seamless onboarding to GIFT funds. This has made the process nearly as easy as investing in a domestic mutual fund,” says Arihant Bardia CIO and Founder Valtrust.
There are two sets of regulations that investors need to be aware of while investing abroad. One is the RBI’s LRS rules, which are relevant while sending Indian Rupee abroad after converting into US dollars. And, the other that matters is the Sebi rule on overseas investments by mutual fund houses.
Sebi Rules
Indian investors are allowed to invest in global markets, including the US stock market, via international mutual funds. However, SEBI, the securities market regulator, has capped the limit for overseas funds since November 2020.
According to SEBI regulations, the total amount of overseas investment in the mutual fund industry is capped at US$7 billion. Further, any one mutual fund house may invest a total of $1 billion USD in foreign assets.
Mutual Funds can make overseas investments subject to a maximum of US $ 600 million per Mutual Fund, within the overall industry limit of US $ 7 billion. In case of overseas investments, US $ 50 million would be reserved for each Mutual Fund individually, within the overall industry limit of US $ 7 billion.
Mutual Funds can make investments in overseas Exchange Traded Fund (ETF), subject to a maximum of US $ 200 million per Mutual Fund, within the overall industry limit of US $ 1 billion.
Since SEBI has not fully relaxed or expanded these limits, domestic mutual fund houses continue to face restrictions on launching or collecting more in most global funds.
But, does that mean funds offered in GIFT city also fall under the SEBI-mandated limits? “No. Investments into GIFT City funds do not fall under SEBI’s overseas MF limits. This is because GIFT funds are regulated by IFSCA, not SEBI. When Indian residents invest in a GIFT-based fund, it is treated as an Overseas Portfolio Investment (OPI) through a recognised IFSC pooled vehicle. Therefore, the investment does not count towards the USD 7 billion/ 1 billion cap applicable to domestic mutual funds,” says Bardia.
RBI LRS Rules
Indian investors can invest in global markets, US stocks, international real estate etc, subject to RBI’s Liberalised Remittance Scheme (LRS) rules. Under the RBI’s Liberalised Remittance Scheme (LRS), every resident, including minors (countersigned by a guardian), is allowed to remit up to 2.5 lakh US dollars (USD 2,50,000) per fiscal year.
This limit holds even in the case of investments made through GIFT City. “Resident individuals will remain subject to the USD 250,000 annual LRS limit set by RBI. This applies regardless of whether the investment is made directly overseas or routed through GIFT City,” adds Bardia.
India is opening up to global investors, including NRIs living all over the world. NRIs are finding the investment opportunities in GIFT City more appealing than those in their country of residence. GIFT City, or the Gujarat International Financial-Tec City, is India’s first IFSC, or International Financial Services Centre. It is approved and regulated by the government under the Special Economic Zones Act, 2005.
“GIFT is becoming the preferred route for global investing as it is not constrained by SEBI’s USD 7 billion limit, no US inheritance tax exposure when investing into US markets, lower frictional costs vs direct LRS investing (FX, brokerage, custody), and cleaner taxation since tax is paid at the fund level in IFSC,” informs Bardia.