Indians may soon be able to tap LRS route for MF, AIF play in Gujarat IFSC

A 7-member committee recommended a host of measures for enhancing retail participation in the IFSC

Resident individuals may soon be able to invest in listed securities on exchanges set up at Gujarat’s International Financial Services Centre (IFSC), if the recommendations of an IFSCA-appointed committee are accepted.

The securities include global depository receipts (GDRs), alternative investment funds (AIFs), mutual funds (MFs), and real estate investment trusts (REITs) and infrastructure investment trusts (InVITs), which are issued by foreign entities.

On Wednesday, the seven-member committee, set up three months ago, recommended a host of measures for enhancing retail participation at the IFSC.

Among the key recommendations was allowing resident individuals to invest in AIFs or MFs at the IFSC, via the Liberalised Remittance Scheme (LRS) route.

Under LRS, a resident individual may remit up to $250,000 every financial year to invest in securities such as GDRs, MFs, REITs and InVITs, or equity shares of foreign firms listed on overseas stock exchanges. This can provide resident individuals access to various avenues in offshore jurisdictions.

However, the Reserve Bank of India does not specifically permit resident individuals to utilise LRS remittances for investments at the IFSC.

Outward remittances under the LRS route stood at $13.8 billion and $18.8 billion in FY19 and FY20, respectively, shows RBI data.

LRS contributes a significant pool of money to investments in offshore jurisdictions and globally focussed funds, which are traditionally managed by fund managers operating from offshore financial centres like Singapore, Hong Kong, and London. This has led to fund management income, brokerage income, and other ancillary support services income shifting abroad, said experts.

“Permitting resident individuals to invest in AIFs or MFs will create a level-playing field for such funds set up at the IFSC. It will also assist Indian fund managers in the IFSC to handle a big pool of LRS money, thereby bringing fund management income and other ancillary support services income back to India,” said Suresh Swamy, partner at PwC India.

He added that appropriate checks and balances could be incorporated to curb the round-tripping of funds. “Such funds should be directed towards investing monies raised under the LRS route solely in securities issued by non-Indian entities, which are otherwise permitted for direct investment under the LRS route. Such monies should not be utilised to make investments back in India in any manner whatsoever,” Swamy said.

Current regulations do not allow the LRS route to be used for speculation activity — including trading in derivatives or any other financial instrument — or for funding margin calls. This can be a problem, as the majority of products to be traded on international exchanges — be it currency, commodity or equity — will be derivatives-based.

Participants in the derivatives markets are generally divided into hedgers, speculators, margin traders, and arbitrageurs. These often leverage or pay a fraction of the total value of their positions to trade.

“The RBI should allow remittances for margins or margin calls to the IFSC exchange under the LRS Scheme, thereby permitting resident individuals to trade in derivatives of foreign firms listed at the IFSC,” said Swamy.

On the agenda
 

> Enabling IFSC Banking Units (IBUs) to offer products, solutions to retail/individual clients

> Allowing IBUs to obtain FPI licence and invest in rupee-denominated G-Secs

> Permitting NRIs/PIOs to buy life insurance policies from firms set up at IFSC; pay premium in currency of choice

> Giving nod to insurers to set up subsidiaries at IFSC

> Encouraging foreign reinsurance brokers to set up base at IFSC

> Allowing wholly-owned subsidiaries of banks to operate as trading/clearing members without setting up a separate company

> Developing payment system for dollar and other foreign currency settlements