GIFT City unveils exciting global investment opportunities for HNIs

GIFT City, an International Financial Services Centre (IFSC), is considered a jurisdiction separate from the rest of India and provides financial services in foreign currency. It has been envisioned as an international finance hub. The transition of SGX derivatives to GIFT City is one of the major developments in this direction later. Several portfolio management services (PMSes) are setting up shop here, offering both inbound and outbound investment services.

The global portfolio management services being offered by firms such as PhillipCapital and Marcellus have created a new international investing avenue for HNIs and ultra high net worth individuals. The market regulator has mandated a minimum investment amount of $150,000 in such funds. Note that these investments will also be subject to Liberalised Remittance Scheme (LRS) limit of $250,000 per annum.

To be sure, one can make international investments from India even now by opening an account with an international broker, or through mutual funds investing globally or ready-made portfolios managed by platforms such as Kristal.AI and Stockal, which are primarily registered outside India. They either have a tie-up with international brokers and managers or recommend portfolios based on advisory licenses. Some wealth managers in India have also been associated with external fund managers and recommend products on a distribution-commission model. But there have been limited options to avail of customized global fund management services from India.

However, Sebi regulations are not clear if a PMS manager can invest in global securities, the IFSC (International Financial Services Centre) fund management rules framed in 2022 allow such investments.

“Indians have underinvested internationally, whereas their liabilities at the global level are growing by the day for expenses including children’s education, vacations abroad, etc. There has been a demand to invest in global businesses. Hence, our choice has been to set up a unit in GIFT City that caters to international investment services for Indian nationals," said Pramod Gubbi of Marcellus.

The funds managed under GIFT City are not regulated by Sebi or the Reserve Bank of India but by IFSCA (Fund Management) Regulations, 2022.

If not for GIFT City, Indian managers might have had to set up a fund outside India, such as in Singapore or Dubai, which are regarded as financial hubs and offer global investment services. Parimal Deuskar, who heads compliance & legal function at Marcellus also highlighted that the license to start a fund from GIFT City can be obtained in a shorter period of time of 3-4 months.

This story delves into the global funds that are currently made available from GIFT City and the operational and tax aspects of investing in such funds for investors.

Pros and cons

Firstly, for portfolio managers rendering service in IFSC, there is a tax holiday on their profits. “They can claim deductions for 100% of the income (investment fee) earned for 10 years. The manager has the flexibility to select any 10 years out of a block of 15 years," said Kunal Savani, partner, Cyril Amarchand Mangaldas. This is a huge incentive to set up a unit in GIFT City. “From a regulatory standpoint, fund managers in GIFT City can obtain a single unified registration for multiple activities, and investment diversification norms do not apply to funds set up in the city," said Amit Gupta, managing director at SAG Infotech.

An investor, an Indian resident or not, doesn’t have to open a bank account in GIFT City. For the global investment fund, “the client becomes the client of the portfolio manager as well as the international brokers/custodian with a tripartite arrangement," added Deuskar.

When it comes to taxation, residents and non-residents are taxed differently for investments in outbound funds in GIFT City.

Any income by a non-resident from a PMS in GIFT City investing outside is exempt in India. “Currently, income from investments in foreign securities by non-residents through a foreign PMS is not chargeable to tax in India. With a view to providing a level playing field to such non-residents, a specific exemption from taxability in India has been provided on income earned by non-residents from investments in foreign securities through PMS in IFSC," said Punit Shah, partner, Dhruva Associates. Note that, such income will be taxed as per the tax rules applicable in the resident country for non-residents. Further, non-residents are not liable to pay GST (goods and services tax) in India on the services obtained from any fund in GIFT City.

For residents, no special exemptions are carved out for availing portfolio management services from GIFT City.

The money invested through a PMS is considered a direct investment and the tax will be charged at the capital gains tax of 20% with an indexation benefit for investments held for more than two years (36 months for investments in ETFs).

Note that the above tax treatment is beneficial compared to that of global mutual funds. As per Finance Act, 2023, the gains from mutual funds investing globally are taxed at the slab rate regardless of the holding period. For HNI investors, this tax rate could go up to 39-42% depending on the tax regime they opt for.

Having said that, the provision for tax collection at source (TCS) at 20% for foreign remittances, which will be applicable from July this year, could be a huge hurdle in the GIFT City PMS route.

There are contradictory views on whether Indian residents are liable to pay GST on services received from a global PMS in GIFT City. Industry experts say that if the PMS service provider renders any services to Indian residents then PMS service provider will be liable to pay GST under forward charge mechanism. Correspondingly, investors will not be liable under reverse charge.

Available funds

Phillip Ventures IFSC in GIFT City offers a range of offshore products that invest globally. The PMS is a part of the PhillipCapital group, an investment and wealth management firm headquartered in Singapore.The Global PMS strategies are open for both non-residents and Indian residents who want to invest outside India. On being asked about the USP of the above global strategies managed in GIFT City, Ankush Datar of PhillipCapital (India) says, “Our Global PMS team follows a comprehensive process of fundamental research coupled with in-house data-driven capabilities to monitor trends across businesses and countries. The team is also able to leverage the global reach of the PhillipCapital group by regularly engaging with peers operating in different regions." The Global PMS strategies are managed by Mihir Shirgaonkar, CFA who is a chartered accountant and an MBA-PGPX from the Indian Institute of Management Ahmedabad.

The other outbound PMS fund in GIFT City is Saurabh Mukherjea-backed—Marcellus ‘Global Compounders Portfolio’, which invests in overseas stocks. “The fund follows an investment philosophy that is identical to what we do domestically, which is buying high-quality companies listed in North America and developed Europe and holding on to them for long periods of time," added Gubbi. The manager for this fund is Arindam Mandal, who spent nearly a decade in the US working for Principal Global Investors, before joining Marcellus in 2022.

SBI Funds Management, a joint venture between SBI and Amundi (a European asset manager) is another PMS planning to set up a fund in GIFT City. The firm already has a branch in Mauritius, which it is planning to shift to GIFT City. The fund will offer products that will invest in both international and Indian securities. “We haven’t launched any funds yet. We will have a bouquet of products, once compliance procedures are in place," said DP Singh of SBI MF.

What do experts say?

Before investing in PMSes in GIFT City, it is important to check whether the fund manager has enough expertise in the international markets.

“As long as PMSes are attracting global investors into India funds, it is fine. But if they’re trying to mimic or become competitors to globally active fund managers, I believe it’d be very difficult. You may know the fund manager very well for many decades, but if he/she doesn’t have expertise in investing abroad, that’s not something that we look forward to," added Munish Randev, founder and chief executive of Cervin Family Office.

Even when investing globally through a wealth management firm (that works on a distribution model) or advisory model, Randev advises caution. “Just because they’re easily available and somebody sitting in India will open your account, do not ignore research. You need to understand the background of the managers as well as the products thoroughly," he added.