Banks & legal eagles quietly revive foreign family office
Some large private banks and law firms are assisting Indian families with offshore family offices. These institutions are navigating regulatory interpretations regarding cross-border fund transfers. While regulations permit overseas investment i...
Private banks, law firms and wealth managers are helping Indian promoter and business families set up family offices in Singapore and other overseas jurisdictions
Mumbai: A few large private banks, along with top law firms and wealth managers, are ducking an unwritten ban to handhold Indian promoter and business families to set up family offices in Singapore and other jurisdictions.
They aren't violating regulations-at least not in letter. But bankers and lawyers are sharply divided over whether such cross-border fund transfers to offshore vehicles managing international investments of families goes against the intent of Reserve Bank of India (RBI) and New Delhi.
The story has seen twists and turns in past few years. During a 2023 conference call, a senior RBI official cautioned bankers against remittances to foreign family offices-even though the finance ministry's overseas investment regulations of August 2022 for the first time permitted a non-financial services entity in India (say, a manufacturing or services business) to make overseas direct investment (ODI) under the automatic route in an overseas entity engaged in financial services activities.
Since banks rarely defy the RBI, they largely stopped such remittances post the concall. However, multiple sources told ET that thanks to RBI's silence since that informal guidance in 2023, some banks, particularly a large private sector lender, have over the past few months started taking a literal and aggressive stance to selectively clear remittances for foreign family offices. "Increasingly promoter and family business owners are looking to diversify investment portfolio by investing overseas. But, there's no clarity in the industry as banks and law firms evaluate whether foreign family offices are compliant under RBI guidelines. So, clear regulatory guidelines will be important," said Puneet Sachdev, partner, EY India.
A leading Singapore bank has teamed up with two large law firms and a wealth manager in advising families in Mumbai, Delhi, Ahmedabad, Pune, Kolkata, and Bengaluru. About ₹1,500 crore is estimated to have been remitted in the past two months.
In ODI documents, families keep 'financial services' as activity code. Technically, they aren't wrong because regulations define 'financial services activity' as one which if undertaken in India must be regulated by or registered with a regulator. Since a domestic investment firm managing a family's money qualifies as RBI-regulated finance company, an overseas family office doing the same is considered kosher.
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Still, several banks are reluctant -unsure how it would go down with RBI, particularly with rupee under pressure. Also, they think 'financial services activity' necessarily envisages a business activity relating to financial services and not merely family office.
According to Vishal Gada, founder & CEO of Aurtus, a tax, transaction and regulatory advisory firm, "The intent of government and RBI is especially relevant given that the family investment fund (FIF) route in GIFT City, which offered a comparable avenue for overseas investments by Indian family offices, has remained paused for years. From a practical standpoint, if regulators have not been inclined to advance GIFT City-FIFs, it's reasonable to question whether they would be comfortable with ODIs for foreign family offices. This has considerable economic and regulatory significance, involving potentially significant foreign-exchange outflows."
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Gada, whose firm advises family offices in India and abroad, said government or RBI should clear the air.
Besides high fees, banks can't refuse families whose group companies generate business. After forming family office in Singapore, some invite NRI relatives to enlist the entity as restricted collective investment schemes (RCIS). Since RCIS are regulated by Monetary Authority of Singapore, it lends further legitimacy.
Where FEMA is ambiguous, RBI generally follows the principle that what can't be done directly can't be done indirectly, said Harshal Bhuta, partner at the CA firm PR Bhuta. However, he thinks this principle is inapplicable here as August 2022 Rules expressly permit non-financial Indian entities to establish overseas financial services entities for investment activities (including in listed securities). Accordingly, the activity should be directly permitted under FEMA as there's no indirect structuring, said Bhuta. As more banks are tempted to take such views, there's a lurking worry how Mint Street and Delhi would react.
