Cost of overseas equity investments goes up for India’s wealthy

Sebi’s March 24 circular directed Indian asset managers to stop accepting fresh inflows into schemes that invest in foreign shares or ETFs since the industry-wide limit of $1 billion has almost been breached.

The cost of buying foreign securities by family offices of India’s ultra-rich is set to rise after the markets regulator Securities and Exchange Board of India (Sebi) directed mutual funds to halt fresh inflows into schemes that invest in overseas shares with effect from April 1.

Market participants say the so-called multi-family offices will now be forced to take the Liberalised Remittance Scheme (LRS) route where 20% Tax Collection at Source (TCS) is applicable.

On March 24, Sebi issued a circular asking Indian fund houses to stop accepting any fresh inflows into schemes that invest in foreign shares or exchange-traded funds(ETFs) since the industry limit of $1 billion has almost breached.

Multi-family offices refer to wealthy families with net worth in the range of Rs 100 crore to Rs 1,000 crore. Until now, they had three routes to take exposure to global equities: through the Liberalised Remittance Scheme(LRS), through mutual funds and via IFSC, Gift City.

“Going forward, the UHNIs or multi-family offices must either use the LRS route or the gift city route to build their overseas portfolio. Else they will have to make fresh allocations restricted to domestic markets,” said Himanshu Kohli, co-founder of Client Associates, a firm that works with family offices.

“While the UHNIs or multi-family offices are exploring the gift city option as they are not too happy with the 20% TCS applicable in LRS, not many investments have happened through the gift city route so far,” he added.

Until last year, Indians could freely trade in foreign equities through the LRS route. However, with effect from October 2024, the central government introduced a 20% TCS on LRS remittances used to buy foreign shares. This means that if an individual sends Rs 1 crore into an overseas account for buying shares, the authorised dealer bank will deduct Rs 20 lakh upfront as tax, and only Rs 80 lakh would be available for trading. This tweak prompted multi-family offices to shun the LRS route for buying shares. Instead, they shifted to Indian MFs, offering exposure to global shares.

“In an apparent attempt to conserve and track forex, as well as to promote domestic investments, the government has slowly plugged both the investment routes,” said Vishwas Panijar, partner, Nangia Andersen India.

“This sudden shift in government’s outward remittance policy necessitates family offices to carefully review their investment policy (for example, look at non-LRS structures for making overseas investments) in light of the risk appetite and make suitable adjustments therein to prevent funds from remaining idle,” Panijar added.

Family offices were hoping they would be able to use the International Financial Services Centre (IFSC) Gift City route to create Family Investment Funds(FIFs). Last year, IFSCA introduced the rules for the creation of FIFs in Gift City. However, the scheme has not taken off as the Reserve Bank of India(RBI) has expressed certain concerns over the potential misuse of the route to remit funds overseas.

To be sure, the amount deducted under TCS is not a final tax. During the assessment of income tax returns, the individual can reclaim any additional tax that was deducted in advance. However, the problem is it locks up the capital of an individual to the extent of TCS paid.

“The 20% TCS requires the investor to arrange for such additional funds while making the investment under the LRS route. While TCS is akin to taxes paid, for the short term, the funds are locked, and in case the remitter doesn’t have a tax liability to absorb the TCS, then a refund can be obtained only after filing the tax return,” said Vijay Gilda, partner of tax & regulatory services, BDO India.

According to current regulations, resident Indians can invest in shares of foreign companies listed on overseas stock exchanges with less than 10% stake and must not have control over the foreign entity in which the investment is being made.

Indian residents who are not keen on investing directly in shares of foreign entities can alternatively look at investing in international mutual funds which have exposure to global markets. There are several international exchange-traded funds (ETFs) available that allow access to Nasdaq and other leading global indices. The investments would be under the overall limit of LRS.

Source:- Moneycontrol