IFSCA Tightens Scrutiny on Wealthy Indian Families Using GIFT City AIFs for Offshore Investments

Ultra-wealthy Indian families reportedly seeking to route capital overseas through investment structures based in GIFT City, Gujarat, are now facing heightened regulatory scrutiny, according to industry sources. The International Financial Services Centres Authority (IFSCA), which oversees operations at Gujarat International Finance Tech-City, has reportedly asked fund managers to provide undertakings confirming that their Alternative Investment Funds (AIFs) are not structured for single-family use.

Rising Trend of Family Offices Using GIFT City AIFs

The regulatory intervention comes amid a growing trend of Indian family offices using Category-III AIFs established in Gujarat's GIFT IFSC to reportedly circumvent overseas investment restrictions, sources familiar with the matter have indicated.

Why Family Offices Are Eyeing GIFT City

Family offices—privately held entities managing the wealth of High Net Worth Individuals—are increasingly seeking geographic and currency diversification following the COVID-19 pandemic, industry observers note. However, these entities face significant restrictions on overseas investments under the current Overseas Portfolio Investment (OPI) and Overseas Direct Investment (ODI) regulatory frameworks.

According to regulatory guidelines, OPI restricts direct investments by domestic entities in foreign listed and unlisted securities. Meanwhile, ODI requires substantial regulatory compliance and is only permitted under specific conditions.

However, investing through an AIF located in GIFT City—which is designated as a foreign territory under the Foreign Exchange Management Act (FEMA)—reportedly allows Indian family offices to legally bypass these restrictions, according to financial experts.

How the GIFT City Route Works

Regulator Pushes Back on Single-Family Structures

Despite technical compliance with existing frameworks, the IFSCA reportedly appears increasingly concerned that these AIFs are becoming quasi-family investment vehicles—a role they were not intended to fulfill, according to regulatory sources.

Dipesh Shah, Executive Director of the IFSC Authority, was quoted as saying that AIFs are pooled investment vehicles and should ideally have multiple investors, emphasizing that AIFs should not act as an investment arm for a single family.

In recent weeks, fund managers have reportedly been asked to explicitly declare that their funds are not created for or dominated by a single family, sources indicate.

What's Fueling Regulatory Concern

Capital Concentration: A single family investing up to 50% of its net worth into one fund reportedly opens up large-scale discretionary outflows, raising concerns among regulators about capital movement patterns.

Regulatory Arbitrage: Families are effectively using AIFs to gain exposure to foreign assets—including Limited Liability Partnerships, gold, and international real estate—that would otherwise be prohibited under LRS or restricted under ODI rules, according to financial analysts.

Policy Priorities Misaligned: The IFSC framework was designed to attract foreign capital inflows, not facilitate domestic capital outflows, regulatory experts explain. Regulators are now reportedly inclined to prioritize Family Investment Funds (FIFs) for NRIs and non-residents, which align better with FEMA objectives.

Tejesh Chitlangi, Managing Partner at IC RegFin Legal, was quoted as saying that while there is no legal restriction yet, regulators seem intent on limiting AIF use by Indian families for offshore exposure.

Awaiting Clarity: The FIF Dilemma

The Family Investment Fund (FIF) model—designed specifically for Indian High Net Worth Individuals to set up offshore structures in GIFT City—is still reportedly awaiting final clearance from the Reserve Bank of India and Finance Ministry, according to industry sources.

Meanwhile, Category-III AIFs have emerged as a stop-gap solution, but the regulator's recent intervention indicates that this window may soon narrow, financial experts suggest.

India's Outbound Wealth Strategy Under Scrutiny

Richie Sancheti, Founder of Richie Sancheti Associates, was quoted as stating that the IFSC was created to attract foreign capital and was not intended to enable domestic family offices to channel funds abroad through backdoor structures.

Many wealthy Indian families are reportedly motivated by diversification of assets and currencies, relocation of younger generations abroad, and the desire to hold international real estate or business assets.

However, with the lack of a unified policy on how Indian HNIs can hold offshore assets compliantly, regulatory grey areas have prompted creative and now controversial structuring approaches, according to legal experts.

What Happens Next

Conclusion

While GIFT City continues to evolve as a premier international finance hub, regulators are now reportedly reining in practices that exploit structural loopholes, especially where domestic capital outflow bypasses intended controls. The pressure on family offices to stay compliant while seeking overseas exposure may ultimately hinge on the timely rollout of clear, structured FIF guidelines—and a more uniform overseas investment policy for Indian HNIs, according to financial regulatory experts.

Disclaimer: This article is based on information reported from various sources. Readers are advised to conduct their own research and consult with qualified financial advisors and legal professionals before making any investment decisions. The regulatory landscape surrounding offshore investments and Alternative Investment Funds is subject to change. The information provided in this article should not be considered as financial, legal, or investment advice.