Family offices opt for Cat-III AIFs in GIFT City after policy change

Global volatility, favourable tax regime make them take alternative investment fund route

Family offices, particularly those abroad, are opting for Category-III alternative investment funds (AIFs) in GIFT City, instead of setting up family investment funds (FIFs) in the financial hub.

 

Last year, seven Indian family offices applied to establish FIFs in GIFT City. Two prominent offices secured in-principle approval from the GIFT City regulator. However, the FIF route for domestic family offices to make overseas investments has not been approved yet. Offshore entities are allowed to set up FIFs, but the option has not gained significant traction, said experts, who believe more incentives may be needed.

 

Industry players believe that recent amendments to fund management regulations by the International Financial Services Centres Authority (IFSCA) have made the AIF route more attractive for family offices. Experts noted that previous regulations lacked clarity on the tax regime applicable to FIFs, subjecting inbound FIFs investing in public markets to the foreign portfolio investor (FPI) tax regime. Without access to treaty benefits, these FIFs would face capital gains tax on debt and derivatives, as well as a 20 per cent tax rate, plus additional surcharge and cess, on dividend and interest income. 

 

Under revised regulations, a FIF may be classified as a Category-III AIF, depending on its investment strategy. Suresh Swamy, partner at Price Waterhouse & Co LLP, explained that due to this clarification, an inbound FIF primarily investing in listed securities in India may be classified as a Category-III AIF and thus eligible for the Specified Fund regime. This regime offers key benefits, including exemption from capital gains tax on debt and derivative securities, and a flat 10 per cent tax rate on dividend and interest income from such securities.

 

According to Swamy, these changes have generated interest among non-resident Indian family offices looking to invest in Indian public markets. To qualify for this regime, a FIF would need to obtain a certificate as a Category-III AIF.

 

Meanwhile, the number of Category-III AIF schemes in GIFT City has increased from 50 in December 2023 to 116 as of December 2024, with many more major players planning new launches in the financial hub.

 

“Due to polarisation and expensive valuations in the US market, many family offices and ultra-high-net-worth individuals based in the Middle East are looking to diversify into India and other emerging markets. The advent of GIFT City has made this process more convenient. The income generated from derivatives strategies via GIFT City is completely tax free,” said Ajay Vora, head - equities at Nuvama Asset Management, which launched a long-short fund in GIFT City six months ago.

 

Experts said that since investments are made in US dollars, there is lower currency risk.

 

Punit Shah, partner at Dhruva Advisors, noted that there has been a marked increase in interest and inquiries from domestic family offices to use broad-based AIF vehicles set up in GIFT City for overseas portfolio investments. “There are specific liberalised norms for such investments by Indian firms in the regulated funds (AIFs) established in GIFT City,” he said.

 

As of December 2024, total investment commitments in Category-III AIFs in GIFT City reached $4.7 billion, up from $1.67 billion a year earlier. Total investments amounted to $2 billion, up from $800 million in December 2023. Of the $2 billion invested, $157 million has been allocated to foreign jurisdictions.