Banks embrace offshore funds for wealthy Indians
Introduction
Wealthy Indians are now being provided with the opportunity to invest in offshore funds located in financial centers such as Singapore. In recent months, several ultra-high net worth individuals have gained permission to remit funds to foreign funds, specifically those managed by regulated managers. This development has garnered significant attention from private wealth managers and financial experts who cater to affluent clients.
The growing interest in offshore funds among wealthy Indians also reflects their desire for international diversification. By allocating a portion of their investment portfolio to offshore funds, they can mitigate risks associated with concentrated exposure to the domestic market. Furthermore, offshore funds provide access to alternative investment strategies and specialized sectors, supplementing traditional asset classes.
Rationalizing Regulations for Offshore Investments
Banks are adopting a more rational approach to regulations, allowing wealthy Indians to invest in offshore funds based in financial centers like Singapore. In the past month, around four ultra-high net worth individuals have been allowed to remit money to foreign funds managed by regulated managers, marking a shift in the banking landscape. Private wealth managers and financial experts who serve affluent clients closely monitor this progression, as wealthy individuals typically allocate a portion of their wealth to overseas securities, art, properties, and funds with different investment themes.
Overcoming Regulatory Challenges
A diversified investment strategy faced a hurdle a year ago when the Reserve Bank of India (RBI) introduced new regulations regarding overseas investments. Some of these restrictions included bringing back idle funds within six months. Additionally, the regulations emphasized that investments in overseas funds should only be made in “regulated funds.” This posed challenges as funds, which are primarily pooled vehicles, are not direct regulatory entities in many jurisdictions. As a result, banks, acting as authorized dealers (ADs) responsible for remittance of payments and foreign exchange, tightened regulations on several investments.
A Realistic Interpretation of Central Bank Guidelines
To facilitate investments in offshore funds, some banks are now adopting a more flexible and realistic interpretation of the central bank’s guidelines. They approve investments in offshore funds as long as the fund’s manager, or the asset management company, is a regulated entity. This approach acknowledges that in jurisdictions like Singapore, the manager of the fund is often regulated instead of the fund itself. With this interpretation, the ultimate goal of ensuring investor protection and risk management can still be achieved.
Leveraging the Liberalized Remittance Scheme (LRS) and Family Pooling
Under the RBI’s liberalized remittance scheme (LRS), a resident individual can invest up to $250,000 per year abroad. Many families also pool money together, allowing each member to make separate remittances for acquiring properties worth millions abroad. However, it’s important to note that idle funds cannot be retained for longer than 180 days according to the amended LRS rules. Therefore, individuals need to invest or deploy the funds already available in their LRS accounts.
Seeking Clarity and Approaching Regulators
Moin Ladha, a partner at the law firm Khaitan & Co, suggests seeking clarification or amendments before proceeding with offshore investment plans. As of now, only two banks – a European bank and a local private lender – have facilitated such transactions. Ladha advises individuals to approach the regulator through the authorized dealer (AD) bank to ensure compliance and obtain necessary guidance for their investment plans.
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