GIFT City has stopped allowing domestic family offices to set up investment funds in its finance hub due to concerns raised by the Reserve Bank of India (RBI), said a senior official on the sidelines of the Global Fintech Fest. The Reserve Bank of India (RBI) is worried that loosening capital controls for such instruments could result in loopholes that may be used to evade taxes and money laundering, according to recent media reports. The central bank is concerned that the movement of large funds could disrupt exchange rate management and forex reserves. Sandip Shah, head of the IFSC Department at Gujarat International Finance Tec-city (GIFT) said that after feedback from the RBI, the regulator for GIFT City has stopped approvals for domestic family investment funds. However, overseas family offices have had no trouble with approvals, he said. Another CEO told FE that many family offices are enquiring about the potential to set-up office in GIFT city. However, in the absence of regulatory clarity, they are unable to do so. Last week, a debate had sparked on social media with the former Infosys CFO Mohandas Pai sounding an alarm over the issue. Pai slammed the regulator’s decision of halting approvals saying that it would hamper global investments. Requesting Prime Minister Narendra Modi to intervene, Pai said that the decision goes against what the Centre has been aspiring to do–“globalise, compete globally and build a developed India.” In January, billionaire Azim Premji’s family office received the first in-principle approval to set up a family investment fund in the special economic zone, raising the hopes of dozens of applications that were in the works. Premji’s Bengaluru-based investment arm Premji Invest and Narayana Murthy-backed Catamaran Ventures were among the first to seek approvals. This move may hold back GIFT City’s goal to become a global financial hub that can compete with Singapore, Dubai, and Hong Kong. With the stoppage in approvals, family funds are also considering setting up investment offices in these competing countries. The GIFT City has been set up in Gujarat as a free-market project with different rules and relaxations on taxes to attract foreign investments and promote ease of doing business on par with global financial centres. Family Investment Funds (FIFs) are self-managed pooling vehicles to manage the wealth of a family, and can only pool money from a single family in GIFT City. An FIF is allowed to borrow or engage in leveraging activities based on its risk management policy and can be structured as open-ended or closed-ended as needed. Family Investment Funds in GIFT City have a wide range of permissible investments and enjoy tax benefits, including a tax holiday on business income for up to ten years within a fifteen-year period. Unlike other investment vehicles, contributions by Family Offices/Resident Individuals are considered Overseas Portfolio Investment (OPI).
