Regulatory Alert: Remittance to International Financial Services Centres in India under Liberalized Remittance Scheme

Background

Under the extant Liberalized Remittance Scheme (LRS), all resident individuals are entitled to freely remit up to USD 2,50,000 every financial year (April to March) for permitted current or capital account transaction or a combination of both. However, remittances to International Financial Services Centres (IFSCs) established in India was not provided.

To deepen the financial markets in IFSCs and provide an opportunity to resident individuals to diversify their portfolio, the Reserve Bank of India (RBI) issued A.P. (DIR Series) Circular No. 11 dated 16 February 2021, to permit resident individuals under LRS, to make remittances to IFSCs established in India under the Special Economic Zone (SEZ) Act, 2005 subject to conditions mentioned here under:

• The remittance to be made only for making investments in securities of IFSCs, other than those issued by entities/companies’ resident (outside IFSC) in India.
• A non-interest-bearing Foreign Currency Account (FCAs) in IFSCs can also be opened by resident individuals to make the above allowable investments under LRS.
• Any funds lying idle in the FCA for period up to 15 days from the date of their receipt into the account, shall be repatriated immediately to the investor's domestic account in India.
• Resident Individuals shall not settle any domestic transactions with other residents through these FCAs held in IFSC.
• All other terms and conditions and reporting requirements given in the extant LRS must be strictly complied.
• Any person resident in India (outside IFSC) entering any transaction with a person/entity in IFSC shall only be governed by the rules and regulations of RBI and the Government of India under Foreign Exchange Management Act (FEMA), 1999. Further, contravention of any FEMA provision by such person shall be dealt by RBI in accordance with extant provisions. 

BDO Comments

In the Budget pronounced in February 2021, the Hon’ble Finance Minister has laid significant emphasis on making IFSC a global financial hub through various tax incentives. In a step to encourage retail investment in IFSC, the RBI has brought about this notification with adequate safeguard to discourage round tripping. However, this would mean that funds which are looking at raising money from offshore as well as onshore investors for India investments, may still need to follow either a dual structure model or having an Alternative Investment Fund (AIF) outside of IFSC.