Wealthy Indians Investing Abroad Face Scrutiny Over Regulatory Missteps

The appeal of global investing has never been stronger for India’s wealthy. Strong returns from offshore markets over the past few years, children studying or settled abroad, and families with international footprints have all fuelled a surge in interest in overseas investment structures.

But the regulatory lines governing how Indians can legally move and deploy money abroad are far more nuanced than many advisers and their clients let on. The consequences of getting it wrong have become more and more tangible, with government agencies keeping a closer eye.

Global investing: 7 mistakes that can trigger regulatory scrutiny

More wealthy Indians are investing overseas, but not every route is equally safe.

1.Using Overseas Direct Investment (ODI) for investments instead of business expansion

2.Confusing ODI and Overseas Portfolio Investment (OPI)

Concern: Wrong classification can attract notices and compliance issues.

3.Failing to properly report overseas investments

Common triggers:

>Delayed reporting

> Non-reporting

> Incomplete disclosures

> Beneficial ownership gaps

4.Breaching Liberalised Remittance Scheme (LRS) limits

Concern: Exceeding limits or misusing remittances can invite scrutiny.

5.Creating structures that resemble round-tripping

Concern: Investments routed overseas and brought back into India through indirect structures are a major red flag.

6.Using overseas credit or leverage

Concern: Indians cannot take leverage abroad or directly hold F&O positions overseas.

7.Mismatch between remittances and tax disclosures

Concern: Any inconsistency can trigger questions from government authorities

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The three routes

The broad architecture of overseas investment for Indian residents rests on three main routes. The most widely used is the Liberalised Remittance Scheme (LRS), which allows individual residents to remit up to $250,000 per financial year for permitted purposes, including investments, education, travel and gifts. Beyond that is Overseas Portfolio Investment (OPI), which allows entities to hold overseas investment exposure of up to 50% of their net worth. Then there is Overseas Direct Investment (ODI), designed for Indian companies looking to set up subsidiaries, make acquisitions, or expand into new markets.

Vivek Rajaraman, Managing Director–Listed Investments at Waterfield Advisors, explains: “LRS has the widest use case. OPI can be used by entities to take overseas investment exposure for up to 50% of their net worth. Listed firms can take this exposure via any jurisdiction, whereas unlisted firms, including LLPs and partnership firms, are allowed to use this route only via GIFT City. The ODI route has been created for Indian companies to set up subsidiaries and take an exposure for up to four times their net worth, for establishing new operations, acquisitions and expansion into new markets.”

Within LRS, certain things are off the table. “Indians are not allowed to take leverage abroad or have any direct position in futures and options,” Rajaraman adds. “Indian investors can legally invest in funds that inherently have an F&O (futures and options) position, but not directly.”

The ODI trap

It is in the ODI route that some of the most consequential instances of misuse and misguidance have been playing out.

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Munish Randev, Founder and CEO of Cervin Family Office, has been watching the trend with alarm. “ODI was meant for business purposes and not for investing,” he says. “You can set up a subsidiary company for strategic business usage, expanding operational footprints, etc.”

The specific structure that is gaining momentum involves wealthy Indian families setting up private (Pte) companies in Singapore. The pitch is compelling: according to the ODI rules, an Indian entity can establish a subsidiary representing up to 400% of its net worth, and trading within such a company can attract significant tax relief under Section 13 of the Singapore tax authority rules.

“Many of the offshore experts started pushing Indian families to set up companies in Singapore, [especially] a Pte company, which is allowed under ODI, representing 400% of the net worth of the Indian entity,” according to Randev.

“They also apply for rebates under Section 13 of the Singapore Income Tax Act to get a tax rebate, so that even if you trade shares/ bonds inside that company, you will not be liable for any capital gains tax till the time you take money out of the company. This structure also has a minimum annual expenditure (not investments) that the company has to do in Singapore: around SGD 200,000 (around Rs.1.5 crore).”

The problem, as Randev sees it, is fundamental. “If you see the essence of the law, you can set up a subsidiary or expand your business outside India, not for investment purposes. The risk is for the Indian family. The Singapore private banker, or even an Indian lawyer, has no risk incidence.”

The relatively cleaner legal alternative for families seeking a fund-like structure abroad, Randev says, is the Singapore variable capital company (VCC).

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“If you have LRS money abroad or are sending money abroad, you can set up a small sub-VCC structure in Singapore. That also provides you tax relief under Section 13 and is run like a fund company and managed by a licenced Singapore fund manager. It comes under the Monetary Authority of Singapore (the nation’s central monetary authority) and is well regulated,” he adds.

Notices incoming

The enforcement landscape has also shifted sharply around Dubai real estate—another area where the line between permissible and impermissible keeps frequently blurring.

“Many Dubai property holders have been served notices by Indian authorities with questions about the source of capital etc.,” notes Randev. You need to show the source of capital for all these transactions in Dubai. There is possibly a sharing of information now across jurisdictions.”

From a legal standpoint, the categories of conduct attracting regulatory attention are well documented. “Regulatory notices have generally arisen in cases involving nonreporting or delayed reporting of overseas investments, incorrect classification between ODI and OPI, remittances exceeding permissible limits, undisclosed foreign assets or bank accounts, deficiencies in beneficial ownership disclosures, and structures perceived to be facilitating round-tripping,” says Sonam Chandwani, Managing Partner at KS Legal & Associates. “Proceedings have also been initiated where there were discrepancies between remittances and disclosures made in income tax returns. Enforcement actions in such cases are typically undertaken by the RBI (Reserve Bank of India), ED and income tax authorities for alleged contraventions of FEMA (Foreign Exchange Management Act) and related laws.”

Back to the basics

For ultra-high net worth families, the appetite for global diversification is reasonable. The legal channels to pursue it are real and fairly well developed. For instance, the GIFT City outbound fund route has seen multiple fund companies launching products that give Indian entities a way to gain global market exposure within a regulated framework.

Randev is clear that structural limit here matters too: “If you have invested via an LLP or a firm, when you redeem, the money has to come back to India, we are informed. You can’t redeem it anywhere outside India. The outbound vehicle became a vehicle only for increasing your exposure in global markets if you have fully utilised your LRS limits.”

The consistent theme across the regulatory risk landscape is the gap between the letter of the advice being given and the spirit of the law. “Investments in prohibited sectors, speculative structures intended to facilitate round-tripping of funds into India, and arrangements designed to circumvent exchange control regulations are not permissible,” Chandwani says. The families taking the most risk, it turns out, are often the ones who have paid the most for advice.

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