Why are India's super wealthy looking abroad for family offices?

RIL Chairman Mukesh Ambani is setting up a family office. It's a trend among wealthy Indian families who set up such entities, often overseas. Find out why the India's super wealthy are looking abroad

For once, Mukesh Ambani is not a disruptor. He is walking the beaten path. The Reliance Industries Chairman, who is also the second-wealthiest man of Asia, is reportedly setting up a branch of his family office offshore, in Singapore. Ambani -- whose wealth was recently pegged at 86.6 billion dollars by Forbes -- is said to already have a family office running in Mumbai. Most of the top Indian business families and start-up founders also have family offices abroad.

According to a report, the majority of the Ambani family’s investments were into Reliance Industries, or RIL. Their part stake deals and acquisitions were also routed through RIL. So the Singapore office will most likely focus more on global asset classes, which are increasingly becoming popular with the next generation of India’s wealthy as they look to diversify their investments. According to auditors and wealth managers, a large number of wealthy Indians are setting up family offices in overseas jurisdictions like Singapore and Dubai to de-risk their portfolio from currency and geographical risks. Tax planning for the next generation, lower capital gains tax and greater ease of doing business overseas are also important factors driving the rush to foreign locales.

Mukesh Ambani is also said to have selected a manager, who will recruit staff and get the new Singapore-based entity running. Office space too has been selected and it is expected to be operational in about a year.

Let us also have a brief look at family offices. They are of two types. First is the single-family office, which is a private wealth management advisory firm set up by ultra-high-net-worth individuals. It only serves their family's investment and financial needs. Ambanis have opted for this type. Their primary investment function is wealth preservation and creation. And then, there are multi-family offices for those who may not require a full-fledged single-family entity. They provide all the required services, but the family doesn’t have to set up its own firm.

India reportedly has an estimated 300 family offices, with an average asset under management of 100 million dollars each. Some even have multi-billion corpuses. Gautam Adani, Ratan Tata, Pawan Munjal, Azim Premji, NR Narayana Murthy, and the Mariwala family, all, have family offices. India’s media and sports celebrities and tech entrepreneurs have also jumped on the bandwagon. The list includes Yuvraj Singh, Priyanka Chopra Jonas, Akshay Kumar, Madhuri Dixit Nene, Sachin Tendulkar, Ritesh Agarwal, Kunal Bahl, Vijay S Sharma, Sachin Bansal and Rajul Garg, among others.

Coming back to Mukesh Ambani, the location selected by him for expanding his family office is not much of a surprise. According to a report by law firm Rajah & Tann Singapore and Deloitte, Singapore has emerged as the preferred choice for family offices in Asia due to its position as an international financial hub, which has a strong regulatory framework, stable and pro-business policies, tax incentive schemes, and well-developed infrastructure. The Monetary Authority of Singapore estimates that 700 family offices were located in the city-state by the end of 2021, up from 400 a year earlier.

Singapore’s competitive tax regime is particularly attractive. Its corporate tax rate is currently 17 per cent. Meanwhile, India charges a corporate tax rate of 30 per cent, with a reduced rate of 25 per cent for companies with up to 400 crore rupees in gross turnover.

Singapore also has a quasi-territorial tax system, which allows tax exemptions for select foreign-sourced income like branch profits, service income and dividends. It also does not impose capital gains tax or withholding tax on dividends. Last but not least, the city-state has double taxation avoidance agreements with about 100 countries, including India.

This is also an opportune time for Ambani's move. Vishwas Panjiar, a partner at Nangia Andersen LLP, explains that the Reserve Bank of India's Overseas Investment Regulations, notified on the 22nd of August, will facilitate overseas investments by family offices. The erstwhile ODI regulations made it difficult for family offices to set up holding companies or fund structures overseas as they required such entities to be necessarily approved by a regulatory authority in the host country.

The problem was that most developed economies did not regulate such entities. But, under the new regulations, an approval will be necessary only if it is required under the host country’s laws. They also allow an Indian entity, which is not engaged in financial services, to make overseas direct investments in an entity that is engaged in such activities, except banking and insurance. As a consequence, a family office should now also be able to set up a fund overseas through its operating entity. According to multiple reports, more and more Indian family offices are looking to shift or expand overseas. Experts say that bigger family offices are being set up in Singapore, Dubai and London. The recent regulatory changes could super-charge this trend.

Wealthy Indians seeking to expand their foreign investment options, especially through overseas family offices, is par for the course. But, in a sense, it is still a commentary on the remaining gaps in the ease of doing business and regulatory environment in India, which lead them to select foreign jurisdictions. How quickly India can plug these gaps will have an impact beyond just family offices and will play a key role in lifting its economic performance.