Fund structures are gaining popularity among wealthy individuals in India as optimum structures to help with wealth planning, investments, and tax management. Family offices are viewing GIFT City, India’s first international financial services centre (“IFSC”), for the purpose of facilitating global investments in a structured manner.
The IFSC funds regime envisages a ‘Family Investment Fund’ (“FIF”) as a self-managed fund set up in the IFSC for pooling money from a ‘single family’. FIFs can be set up as either (i) companies, (ii) contributory trust, (iii) LLPs or in other forms permitted by the International Financial Services Centres Authority (“IFSCA”) and can operate as close ended or open ended schemes, and are permitted to invest in shares, securities real estate, bullion and in certain other assets. To promote the setup of family investment funds in IFSC, the IFSCA, vide a circular dated March 01, 2023,[1] has provided certain relaxations with respect to Family Investment Funds under the IFSCA (Fund Management) Regulations, 2022 (“FM Regulations”). This article explores the key modifications that have come into force and how they would positively impact the functioning of a family office in IFSC.
- Expanding the Definition of ‘single family’ to include entities: An FIF is a self-managed fund, pooling money only from a ‘single family’ in accordance with the FM Regulations. The definition of ‘single family’ was earlier limited to a ‘group of individuals who are lineal descendants of a common ancestor and include their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, ex nuptial children)’.[2] Now, the circular has expanded the definition to also include entities such as sole proprietorship firm, partnership firm, company, LLP, trust or a body corporate, in which an individual or a group of individuals of a single family exercises control and directly or indirectly holds “substantial economic interest”[3].
By broadening the scope of the definition of a ‘single family’, the IFSCA has permitted FIFs to be funded even by entities in which an individual or a group of individuals of a single family hold, either directly or indirectly, substantial economic interest. However, a FIF shall not seek money from individuals or entities outside the single family. - Contributions by non-family members in the FIF for the sole purposes of allocating economic interests: Family offices often seek to incentivise employees, directors and persons providing services to the office (such as an investment manager) by allocating beneficial interests to them, in recognition for the work done by such persons for the family office. In the IFSC, however, a FIF could not accept contributions from persons who are outside the ‘single family’.
Now, in order to align the interests of such non-family members with those of the FIF, the IFSCA has specified that a FIF may accept contributions, for the limited purpose of allocating economic interest, to FIF’s employees, directors, fund management entity (“FME”), and other persons providing services to the FIF, in line with the internal policies of the FIF, not exceeding 20% (twenty percent) of the FIF’s profits. This will enable employees and service providers to partake in the gains of a FIF to a reasonable extent. - Flexibility to set-up additional investment vehicles: The IFSCA has now permitted FIFs to establish additional investment vehicles in the form of companies, LLPs, trusts or any other form as specified by the IFSCA, such that the additional vehicles are also considered to be a part of the FIF for the purpose of meeting the requirements of the FM Regulations. Such additional vehicles would need to obtain prior approval of the IFSCA and pay the relevant fees as applicable to a FIF.
Since the additional vehicle(s) would be viewed as part of the main FIF itself, this provision would give family offices the flexibility to structure their economic interest allocation as they deem fit. For example, the additional vehicle may be structured as a different type of entity than the main FIF, and accordingly may have the flexibility to undertake different types of investments than the main FIF. The additional vehicle may be structured as that particular type of entity, depending on the desired taxation treatment, regulatory compliances, and complexity of documentation required by the family.
Further, the target corpus of the FIF[4] may be divided between the main FIF and the additional entities, considering that the circular provides that the additional vehicles would be considered as part of FIF for the purposes of meeting regulatory requirement. - Protecting minority persons (non-family members) holding economic interest in the entity of a single family: To protect the interests of persons outside the single family, holding economic interest in the entity of the single family up to the permissible limit (up to 10% economic interest), the IFSCA has directed FIFs to disclose all risks in relation to investments in FIFs to such persons. If such non-family member does not wish to continue to hold interest in the entity of a single family, an exit must be offered to such persons in the following manner:
- The exit must be offered only by a person/ group of persons from the single family, which holds minimum 90% interest in the entity;
- The minimum price of acquisition of such interest should not be less than the price determined by an independent third-party service provider, such as a fund administrator or custodian registered with the IFSCA, a valuer registered with the IBBI or such other person as may be specified by the IFSCA.[5]
- The service provider shall also provide a valuation report, giving justification for such valuation.
- Procedural Requirements: According to the circular, before commencing investment activities, an undertaking shall be given to the Principal Officer of the FME by the individuals of the single family who are contributing to the FIF. The undertaking shall state that such individuals understand the risks, costs, and benefits of investing in the FIF and that measures such as regulatory inspection and supervision, disclosures may not be available in FIFs as they are for other schemes in the IFSC.
This allows the FIF to function more efficiently than other schemes, saving time and cost in relation to disclosures and regulatory inspections, while also making sure that the individuals of the single family understand the potential risks of investing in FIFs.
To sum up, it is remarkable to note the manner in which the IFSCA has provided an impetus to single families to set up FIFs in the IFSC, while protecting the interests of non-family members holding economic interest in the family’s entity. The IFSCA has broadened the eligibility criteria for single families by recognising various types of entities and introducing a minimum threshold to ensure that the family’s interest is not diluted. These clarifications are a positive step by the IFSCA towards providing a conducive regulatory environment for family offices to thrive.
For further information, please contact:
Vivaik Sharma, Partner, Cyril Amarchand Mangaldas
vivaik.sharma@cyrilshroff.com
[1] IFSCA Circular dated March 01, 2023 ‘Clarifications in relation to Family Investment Funds’, https://ifsca.gov.in/Viewer/Index/392.
[2] Section 2 (1)(jj) of the FM Regulations.
[3] As per the circular, “substantial economic interest” shall mean at least 90% economic interest, as demonstrated by the FIF in an appropriate manner to the satisfaction of IFSCA which may, inter alia, include:
i. percentage of shareholding in case of a company with share capital; or right to exercise control in case of a company without share capital;
ii. percentage share of profits in case of partnership firm and limited liability partnership;
iii. percentage of beneficial interest specified in trust deed in case of a determinate trust; or pro-rata share in the trust property in case of an indeterminate trust; or
iv. any other manner as may be demonstrated to the satisfaction of the Authority
[4] According to Regulation 104 (3) of the FM Regulations, an FIF should maintain a minimum corpus of USD 10 million within a period of 3 years from the date of obtaining registration certificate.
[5] Such service provider shall take into account the following factors:
- The highest price paid by any person for acquiring any interest in the entity during the last twelve months;
- The fair price of the entity, to be determined after taking into account valuation parameters including return on net worth, book value, earning per share, price earning multiple vis-à-vis the industry average, and such other parameters as are customary for valuation of such entities.
