Several investors took to social media to express concern over reports claiming market regulators have stopped allowing family offices to set up investment funds in Gujarat International Finance-Tec (GIFT) City, fearing tax evasion. Mint explains:

What does this report say?

As per a Bloomberg report on 20 August, GIFT City regulator International Financial Services Centres Authority has halted approvals for family office funds after feedback from the Reserve Bank of India, which is worried that loosening capital controls for such instruments could result in loopholes that may be used for money laundering. The resultant move could stymie GIFT City’s ambitions to be a centre used by wealthy Indians for investments abroad. The development comes after the financial hub granted its first in-principle approval to billionaire Azim Premji to set up a family investment fund in January.

What were the norms earlier?

India, known to have strict controls on moving capital, capped overseas investments at $250,000 for residents. Limited to buying property, shares and securities, and setting up joint ventures and subsidiaries, these investments are made through instruments offered by HSBC Holdings, 360 One WAM and Nuvama Wealth Management in GIFT City. The latest move aims to curb family offices from moving more than the permitted capital abroad. N.R. Narayana Murthy’s Catamaran Ventures was also among family offices looking for approvals, but the lack of clear regulation has pushed many to open up in London and Singapore.

How has the industry reacted to the move?

Venture capitalist Mohandas Pai tagged Prime Minister Modi on X, asking him to intervene. The move was against efforts to build a more developed India, he said. Navam Capital’s Rajeev Mantri said on X, “Indian financial investors cannot buy and acquire critical technologies, leaving the field open to American, European, Japanese and even Chinese buyers.”

How have regulators responded?

Business Standard cited officials in the government as saying the regulator has not made such a move. Indian residents, subject to eligibility, are permitted to make overseas direct investments under the automatic route, meaning they can invest without prior RBI approval. Indian entities can invest 400% of their net worth, and individuals can move up to $250,000 in a financial year. Indian alternative investment funds and venture capital funds can make overseas investments as overseas portfolio investments.

Are there any other concerns for GIFT city?

Despite approval challenges, GIFT City’s fund registrations have tripled from September 2022 to March this year. However, many global funds, despite obtaining a licence, remain inactive due to operational hurdles. Firms also struggle to attract talent, especially in fund administration roles. Funds face delays in obtaining office spaces as GIFT City is still developing, with limited infrastructure. Additionally, the IFSCA requirement for substantial presence and active business engagement may deter players.