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On Aug 10, US-based short-seller Hindenburg Research released a report that said Sebi chairman Madhabi Puri Buch and her husband Dhaval had investments in offshore investment funds which were used by Vinod Adani, brother of billionaire Gautam Adani, to invest in Adani Group’s stocks. Here’s an explainer on offshore funds, their structure and tax implications:
What’s an offshore fund?
An offshore fund is like a mutual fund that collects money from people and invests the same abroad.Most Indians invest in offshore funds that are based in Cayman Islands, Bermuda and Cyprus, which offer huge advantages. Some funds are also based in finance hubs like Singapore and Mauritius.
Why invest in such funds?
These funds offer better returns than traditional investments, and diversification across asset classes and geographies. Tax havens also provide a high level of secrecy of investments and investors.
How do Indians invest?
There are specialised fund houses and wealth managers who help rich Indians invest in such funds. There is no minimum investment amount but usually, each person needs to invest at least $100,000 in these funds. A resident Indian can invest up to $250,000 per person per annum through RBI’s liberalised remittance scheme route. An NRI can invest money from abroad without any limit.
What are the fees like?
Most offshore funds charge fees in the 2-20 or similar models. This has two parts. The initial charge is 2% of the value of the assets on an annual basis. Then comes the 20% carry. Here, say the fund says it would generate an annual return of 10%. Anything above that 10% rate of return, 20% of that would be charged by the offshore fund, while the balance would remain with the investor. While the 2% annual fee is an industry standard, the 20% carry could vary depending upon the asset class, the investment region, among other factors.
The tax implications?
It depends upon the tax status of the investor. Also, on how the returns – capital gains and/or dividend – are taxed in the hands of the investor at his place of residence.
Can an investor influence fund’s decision-making?
In most pooled funds, in which there is a large number of investors, such influence is not allowed. However, such influence could be used in offshore funds that are investment holding companies in which there’s only one investor who could be an individual, an institution or a family office.
What’s an offshore fund?
An offshore fund is like a mutual fund that collects money from people and invests the same abroad.Most Indians invest in offshore funds that are based in Cayman Islands, Bermuda and Cyprus, which offer huge advantages. Some funds are also based in finance hubs like Singapore and Mauritius.
Why invest in such funds?
These funds offer better returns than traditional investments, and diversification across asset classes and geographies. Tax havens also provide a high level of secrecy of investments and investors.
How do Indians invest?
There are specialised fund houses and wealth managers who help rich Indians invest in such funds. There is no minimum investment amount but usually, each person needs to invest at least $100,000 in these funds. A resident Indian can invest up to $250,000 per person per annum through RBI’s liberalised remittance scheme route. An NRI can invest money from abroad without any limit.
What are the fees like?
Most offshore funds charge fees in the 2-20 or similar models. This has two parts. The initial charge is 2% of the value of the assets on an annual basis. Then comes the 20% carry. Here, say the fund says it would generate an annual return of 10%. Anything above that 10% rate of return, 20% of that would be charged by the offshore fund, while the balance would remain with the investor. While the 2% annual fee is an industry standard, the 20% carry could vary depending upon the asset class, the investment region, among other factors.
The tax implications?
It depends upon the tax status of the investor. Also, on how the returns – capital gains and/or dividend – are taxed in the hands of the investor at his place of residence.
Can an investor influence fund’s decision-making?
In most pooled funds, in which there is a large number of investors, such influence is not allowed. However, such influence could be used in offshore funds that are investment holding companies in which there’s only one investor who could be an individual, an institution or a family office.
