Family Investment Fund (FIF) in GIFT CITY: A New Regime

India is charting a new path as a prominent global financial center through the establishment of its first International Financial Services Center (IFSC) - GIFT City. Family offices now have the opportunity to create a Fund Management Entity (FME) called a Family Investment Fund (FIF) within GIFT City.

What is Family Investment Fund (FIF)?

‘Family Investment Fund’ (“FIF”) as a self-managed fund set up in the IFSC for pooling money from a ‘single family’. FIFs can set up as either (a) companies, (b) contributory trust, (c) LLPs or in other forms permitted by the International Financial Services Centres Authority (“IFSCA”).

What is the new regulation and its significance?

The FIF can now pool resources from a single family or entities under the family's control. These entities can take the form of sole proprietorship firms, partnership firms, LLPs, trusts, companies, or other corporate bodies where an individual or a group of individuals from a single family have control and hold at least 90% economic interest, directly or indirectly.

This new regulation marks a significant milestone as it directly addresses major challenges that impact the global plans of family offices. Under LRS, individual investors can contribute only up to $250,000 to FIFs, acceptance of contributions from family-owned entities is a major relief for meeting the minimum corpus requirement of $ 10 million.

GIFT City offers a range of advantages that make it an ideal choice for family offices compared to offshore destinations:

Unrestricted Global Diversification: The FIF serves as a powerful tool for building a diversified portfolio that extends beyond domestic assets. It allows for a wide range of international options, including listed and unlisted securities, as well as tangible assets such as real estate, bullion, and art. Individual investors can contribute up to $250,000 to FIFs (subject to the 20% tax collection at source, or TCS, applicable from 1 July). Additionally, qualifying Indian entities that are 90% family-owned can contribute up to 50% of their net worth. The fund must accumulate a minimum corpus of $10 million within three years of establishment. FIFs also benefit from access to banks located in GIFT City, where they can potentially secure leverage through loans.

Maximizing the Liberalised Remittance Scheme (LRS) Limit: Establishing an FIF offers a significant advantage in maximizing the LRS limit for family members. By utilizing the entity route, an FIF can achieve the required corpus of $10 million, allowing individual family members to preserve their personal $250,000 global remittance limit for other international ventures.

Progressive Regulation: Concerns have been raised in the past about India's strict rules on international investments. However, the IFSCA, which oversees regulation in GIFT City, operates based on a modern and transparent regulatory framework that promotes ease of business operations and investor protection.

For instance, the requirement for profitable track records of three years to make overseas direct investments (ODIs) does not apply to family offices in the IFSC. The recent fund management regulations introduced by IFSCA aim to regulate the fund management entity (FME) rather than the funds themselves. Coupled with tax incentives, these regulations are expected to attract global fund managers to GIFT City. The FIF is treated as an Indian resident for taxation purposes but as a foreign resident for exchange control. All investments made by the FIF are subject to FME regulations.

The GIFT City Advantage: GIFT City provides unparalleled opportunities for Indian high-net-worth individuals (HNIs) to access diverse financial services domestically, eliminating the need for overseas transactions. Its close proximity to major Indian cities like Ahmedabad and Mumbai ensures seamless connectivity to global markets. Furthermore, the costs associated with administration, setup, and ongoing operations are significantly lower compared to similar foreign jurisdictions.

Tax Concessions: Operating within the confines of a Special Economic Zone (SEZ), GIFT City offers several tax benefits and exemptions. One enticing prospect is the potential for a 100% income tax exemption for 10 consecutive years within a 15-year period (subject to the nature of qualifying investments as requisite 'business'), along with exemptions from GST. Asset classes with longer exit horizons, such as global private equity/venture capital funds, become particularly attractive when viewed through this lens.

Is there 100% tax exemption on capital gains of investments made by FIFs?

Business income of FIFs is 100% exempted for 10 years. If tax authorities are convinced that Capital gains of FIF qualify as its business income, it may enjoy the exemption subject to general principles of characterisation.

By establishing an FIF in GIFT City, family offices can leverage the expertise of wealth managers and advisers to enhance their investment strategies. The status of India as a global financial hub depends on IFSCA maintaining its relatively open regulatory approach. If the regulatory body continues to embrace progressiveness and competitiveness, GIFT City has the potential to evolve into a formidable global financial hub in due course.