The latest regulatory action aims to close a loophole that could have allowed resident Indians to transfer more than the permitted capital abroad
Indian regulators have recently taken a significant step by halting the approval of family office investment funds in Gujarat’s International Finance Tec-City (GIFT City). This decision stems from concerns that these investment vehicles could be exploited to evade taxes and bypass stringent capital controls, according to sources familiar with the matter.
The move comes after the Reserve Bank of India (RBI) expressed apprehension about potential loopholes that might arise from loosening capital controls for family office funds. The central bank is particularly worried that these instruments could be misused for money laundering, leading the regulator for GIFT City to put a stop to further approvals.
This development could dampen the ambitions of GIFT City, which was envisioned as a premier financial hub for wealthy individuals to channel their overseas investments. Located in Prime Minister Narendra Modi’s home state of Gujarat, GIFT City was designed to operate as a free-market zone, exempt from local regulations on taxes and capital flows.
This comes at a time when India’s economy is booming, with the number of individuals holding more than $30 million in assets expected to grow by 50% between 2023 and 2028, according to a Knight Frank wealth report. As these wealthy individuals seek to diversify their investments, they have become prime targets for global banks eager to manage new wealth
Earlier this year, the special economic zone granted its first in-principle approval to billionaire Azim Premji’s family office, raising expectations among other high-net-worth individuals planning to set up similar funds. However, with no final approvals granted since then, many family offices are now exploring alternative locations such as Singapore and Dubai.
India’s foreign exchange regulations impose strict limits on capital movement abroad, capping overseas investments for residents at $250,000 per year. This limit encompasses the purchase of property, investment in shares and securities, and the establishment of joint ventures or subsidiaries. Resident Indians can still make overseas investments through global banks and wealth advisors, such as HSBC Holdings Plc, 360 One WAM, and Nuvama Wealth Management, which offer various instruments in GIFT City.
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