Explained: How The Introduction Of Family Investment Fund (FIF) In GIFT City Will Help Family Offices In India

India has the third-highest number of centi-millionaires in the world, according to a report published by Henley and Partners. With India’s growing wealth, a large number of wealthy Indian families have set up family offices to take care of the family’s money.

India’s Family Offices Are Relatively New

The recent bull market in both public and private asset classes has brought a wave of liquidity for many business families, prompting a rush to start family offices. A family office is usually a separate entity set up and controlled by the family or individual along with a separate team to look after the family’s investments specifically.

These offices are usually set up after a promoter exits a business, or through existing funds of the promoter. The Indian family office space is still relatively new, with most being set up formally in the last decade. Hence, the space is not as well-organized as it is in other countries.

Unlike other mature markets, some family offices might not have a separate team and would be run by the finance team of the company or just employ an external advisor.

These family offices today are also more open to riskier asset classes like stocks, private equity, private credit or venture capital, unlike a decade back when promoters preferred low-risk asset classes.

However, as the market matures, many wealthy individuals and families are exploring options to set up formal family offices with a focus on long-term investment performance.

Why do the Wealthy Prefer Singapore and UAE Over India?

India, however, has lost out on significant capital due to more family offices opting for offshore locations like Dubai and Singapore. Last year, India’s richest man Mukesh Ambani opened a family office in Singapore. This isn’t an isolated case, but a result of several disadvantages that family offices established in India currently face.

For one, the tax rates in India are significantly higher compared to the other locations previously mentioned. Similarly, making foreign investments can be difficult due to a number of rules governing such an investment. In addition, many wealthy Indians prefer to operate from both within and outside India, making the US dollar a preferred currency.

In order to prevent such capital outflows the government has introduced several measures to encourage family offices to set up bases in India.

What is the Government Doing to Woo Family Offices?

The recent introduction of the family investment fund (FIF) in GIFT City is one of the steps to prevent the outflow of capital. The fund can be set up as a corporate body, LLP, proprietorship, trust or company where an individual or a single family controls the company, and has substantial economic interest.

Earlier, a ‘single family’ definition would only mean individual family members, limiting overseas remittance to the $250,000 limit under the liberalized remittance scheme.

The new regulations would allow an Indian non-individual entity to be considered a single family, and it would be allowed to put up to 50 per cent of its net worth into the fund.

This in turn would allow individuals to free up the $250,000 personal remittance limit for other purposes. Further, companies that have been profitable for three years can make a foreign direct investment, which is not applicable for family offices in IFSC.

Tax exemptions have also been made available, with a 100 per cent income tax holiday for ten consecutive years within a 15-year period. Given that a significant number of family offices are increasing exposure to assets like stocks, private equity, and venture capital, it is likely that they would opt for a tax rebate after the fifth year.

However, in order to prevent misuse of these tax rebates, the rebates are subject to the nature of investments qualifying certain criteria. In addition, GST exemptions have been provided.

In addition, to allow these funds to attract top talent, these funds have been allowed to share economic interests with employees, directors, and other non-family members. Overall, this could help slow down the flow of capital into other countries as the family office space in India continues growing.