By Accommodation Times News Service
By Avikshit Moral, Partner, Juris Corp, (Advocates and Solicitors)
Summary of the Article
This article discusses some of the regulatory issues in the wealth management industry in India such as regulatory overlap amongst the regulators, tax and exchange control laws and personal laws of the individual.
India has witnessed a steady growth in its high net worth population as a consequence of increasing globalization. As the economy is moving towards higher income levels and saving patterns, wealth management has become more essential and attractive. The wealth management industry in India is at a nascent stage with a potential to develop into a high-growth wealth management market.
India has the key ingredients to become a developed wealth management market namely a young and affluent mass, increase in the level of global wealth of Indians, the grow#ing need amongst the youth for financial literacy, the Governments effort to tightly regulate markets and an organised sector of market players. With the growing high net worth and institutional investor population, a need is felt to develop the regulatory environment around the wealth management industry in India.
The Indian regulatory environment is evolving and there is significant regulatory overlap among various regulators. The Reserve Bank of India (“RBI”) as the banking regulator, the Securities and Exchange Board of India (“SEBI”) as the capital markets regulator, the Insurance Regulatory Development Authority (“IRDA”) as the insurance regulator and the Foreign Investment Promotion Board (“FIPB”) as the foreign exchange control regulator have all codified laws in their respective domains covering certain aspects of wealth management. Currently we have laws in relation to investor protection, fund management, anti-money laundering and know your client norms, registration requirements and professional standards for intermediaries, overseas direct investments, standards for issue of mutual fund products, insurance products, units of real estate investment trusts etc. However it is essential to minimise the overlap between various regulators to avoid regulatory arbitrage. Further although each of these regulators, have codified laws in relation to aspects of wealth management and the RBI had in 2013 issued draft guidelines in relation to wealth management (not yet notified), a need is felt to codify a comprehensive legislation in relation to wealth management.
Wealth management requires an understanding of the investment objective and risk appetite of the individual and to achieve optimum returns a careful consideration of the tax laws in relation to the subject matter is essential. The tax environment in India is far more challenging today than it was earlier and the changing tax regime in every annual budget together with judicial tax pronouncements makes the whole structuring more complex. The tax treatment in relation to wealth management typically depends on a combination of factors such as the structure of investment, the nature of instrument, the entities involved, time frame of investment etc. In case of non-residents it would be important to consider the treaty benefits that can be availed from the double taxation avoidance treaty between India and the jurisdiction where such foreign investors are resident. The tax laws in India are evolving and are set to change. It is hoped that with the notification of the Direct Tax Code, which is set to replace the existing tax regime in India, the tax environment for wealth management becomes more conducive and investor friendly.
Another pertinent consideration as regards wealth management are the Indian exchange control laws that impact private wealth structuring for high net worth individuals who are likely to have multi-jurisdictional wealth. The exchange control regulations are a determinative factor for global wealth planning of Indian residents. For instance there are restrictions imposed on acquisition of immovable property outside India and limits on outflow of wealth by Indian residents. At present under the liberalised remittance scheme, the limit of overseas investment by resident individuals is USD 250,000/- and the limit for overseas direct investment by a body corporate under the automatic route is 400% of its net worth as per the body corporate’s latest balance sheet. Further there are restrictions on the manner in which non-residents can own/transfer Indian property. These conditions vary depending on whether the transfer is made to/by an Indian resident or another non-resident.
Wealth and estate management in India is complex and multi-layered as it requires simultaneous consideration of various laws including community specific succession laws. India being a secular country, the law governing substantive rights in relation to intestate and testamentary succession is based on the personal law of the individual. Laws in relation to testamentary and intestate succession are different for Hindus, Muslims, Christians and other religions like Parsis and Sikhs. For instance a Hindu may dispose of by will or other testamentary disposition any property which is capable of being disposed of by him. On the other hand under Muslim law, Muslims are permitted to dispose only one-third of their estate under a will. For disposal of more than one-third of their estate, consent of all the heirs is required. Further intestate succession also works differently depending on the religion and gender of the deceased person. The procedure on transmission of the estate on death is also different based on the personal law and jurisdiction of the deceased person. The disparity under community specific law combined with conflict of law principles applicable to family members dispersed across countries has lead to making wealth management complex and challenging.
With the increasing number of market players and modern day infrastructure, the overall outlook in India indicates a huge potential for wealth management in India. The trends in the wealth management industry indicate bright prospects and opportunities for the industry to boom. It is expected that the regulatory environment in India will evolve rapidly keeping pace with the market and investor needs to develop into a high-growth wealth management economy.