The last few months have seen a significant uptick in enquiries from wealthy Indians wanting to set up family offices abroad, but other than the clarity from RBI on rules, a number of other hurdles remain, said people in the know.
This follows the change in overseas investment rules in August last year, with the Reserve Bank of India (RBI) permitting profitable non-financial entities to set up financial services units outside India and invest up to 400% of the investing firm’s net worth.
“This is a welcome liberalisation and allows Indian business and industrial houses to create a investing vehicle and family office outside India in a regulatorily-compliant, flexible and also tax-efficient manner, and tap opportunities outside India, listed as well as unlisted. However, it may be appropriate for the RBI to expressly clarify that financial services activities include investing activity as well,” said Punit Shah, partner, Dhruva Advisors.
Market watchers believe that the RBI is likely to issue FAQs to clarify certain aspects regarding layering, portfolio investments and pricing guidelines pertaining to the new overseas investment rules. These rules now permit transactions by Indian entities in foreign entities provided they do not have more than two layers of subsidiaries, directly or indirectly.
The RBI recently met with authorised dealer banks and lawyers, assuring them that it would issue the FAQs soon.
The interest of the high net worth individuals (HNIs) in setting up family offices overseas is two-fold. First, many of the second-generation HNI families desire to relocate and settle abroad for education, better lifestyle, business expansion and new opportunities. Second, the high tax regime in India, investment opportunities abroad as well as opening up of the overseas portfolio investment regime for Indian entities (in addition to individuals) have made it easier for Indian HNIs make lifestyle and long-term decisions on setting up family offices.
The popular jurisdictions for establishing overseas family office vehicles are Dubai and Singapore. Singapore, in fact, recently opened an agency to welcome family wealth management firms. These two are also among the most appealing cities to millionaire migrants and make up the top three among luxury property markets, where prices are expected to rise fastest this year, according to an authored article by Ruchir Sharma, chair of Rockefeller International, in the Financial Times.
“Singapore and Dubai are preferred because of their status as financial and holding entity centres, proximity to India, favourable tax regime and regulatory environment for such vehicles and lucrative permanent residency plans on investment conditions. These jurisdictions also have a robust judiciary and arbitration structure for any future disputes or separation within the families, robust professional trustee environment for family trust, inheritance and privacy laws to instill confidence in HNI families,” said Yashesh Ashar, a chartered accountant.
The more important hurdles are the Liberalised Remittance Scheme (LRS) limits and non-permissibility for setting up and investments in trust structures overseas.
“Trusts, being a non-corporate remote special purpose vehicle, are the most preferred route for succession planning globally (including India). These can be overcome by further liberalisation of the FEMA laws in relation to outbound investments in family trusts abroad by individuals and Indian entities,” said Ashar.
According to experts, the government may not be in favour of Indian HNIs setting up family offices abroad and may wish to bring in regulations in India to support set-up of such family office. The government has already notified the permissibility of setting up single family offices in IFSC.
“However, restrictions on LRS and outward remittances, limited global exposure at IFSC level, lack of robust trust and family laws, and development of judiciary and arbitration on family office matters, lack of regulatory environment for professional trustees for family offices and the taxation regime are some of the areas which the government would need to work on for Indian HNIs to consider IFSC as a viable jurisdiction for family offices in IFSC,” said Ashar.