Market regulators have banned local family offices from setting up mutual funds in their new financial hub, fearing that these arrangements could be used to evade taxes and capital controls, according to a Bloomberg report. The Gujarat International Finance Tec (GIFT) City regulator is stopping the approval of family mutual funds following feedback from the Reserve Bank of India (RBI).
The RBI fears that easing capital controls on such instruments could create loopholes that could be exploited for money laundering. The move could harm GIFT City’s ambitions to be a one-stop shop for high net worth individuals seeking foreign investment. The financial hub in Gujarat was set up as a pilot project for the free market, unhampered by local tax and capital flow regulations.
Read also: Mauritius wants to settle in GIFT City
In January, the special economic zone gave billionaire Azim Premji’s family office its first in-principle approval to invest its capital abroad, Bloomberg News reported, raising hopes of dozens of applications that were in process. With no final approval since then, family funds are now trying to open investment offices in countries such as Singapore and Dubai, the people said.
India’s current norms for sending money abroad
India has strict controls on the transfer of capital abroad. Foreign exchange regulations limit foreign investment to $250,000 for each resident. According to the report, this limit includes the purchase of real estate, investments in stocks and securities, and the establishment of joint ventures or subsidiaries.
Read also: Mint Explainer: Why Gift City is seeking tax parity with domestic mutual funds
India residents can invest abroad in GIFT City through instruments of global banks and wealth advisors such as HSBC Holdings Plc, 360 One WAM and Nuvama Wealth Management. The latest move is intended to close the legal loophole that would have allowed India residents to transfer more than the permissible capital abroad, the people said.
This comes amid a wealth boom in the world’s fastest-growing economy. According to a wealth report by Knight Frank, the number of people with assets of more than $30 million is expected to rise by 50 percent between 2023 and 2028. As they seek to diversify their investments, they have become a prime target for banks looking for new money.
