Hedging your bets with the liberalised remittance scheme

The Liberalised Remittance Scheme (LRS) under the forex control framework is a boon for Indian nationals, as it permits annual forex spending of up to USD250,000 with expectations that this threshold will be raised further.

The LRS is a simple and non-bureaucratic way of using forex. The process is executed through a bank with a certificate from a chartered accountant. It is mandatory that the remitter is an individual Indian national (including a minor) possessing a permanent account number (PAN) from the income tax office. Corporate bodies or trust structures cannot use this scheme. While there are many permitted purposes, the most frequently used are the purchase of real estate, the setting up of forex accounts outside India, investment in listed and unlisted companies, mutual funds and debt instruments, and, most importantly, for setting up joint ventures or wholly owned subsidiaries.

The LRS permits a maximum investment of USD250,000 annually by an individual. This gives a four-member family an outward investment allowance of USD1 million a year. For the forward-looking, this can be invested to build up an Indian entrepreneur-owned multinational corporation. The best way to do this is to set up a forex account in a country of choice that has a favourable tax treaty with India. Such countries include Malta, Austria, Cyprus and the Netherlands in the EU. Outside the EU, the United Kingdom offers many favourable options, and in North America, the US state of Delaware and many parts of Canada provide good opportunities to open international financial channels.

A second, optional, step is to obtain a golden visa that allows long term and multiple visits from countries such as Greece and Portugal. Germany and Austria grant long term and residency visas merely on the submission of a business plan that assures economic self-sufficiency for the applicant and generates employment in those countries. The US and Canada also have very attractive schemes. Such residency options can require between EUR250,000 and EUR400,000 worth of investment in the EU and between USD150,000 and USD1 million in the US.

Lastly, after the country of business and operation is chosen, the individual can develop their business model, keeping it integrated with their business in India. The investor can also consider a new, diverse area of business to hedge sectoral or regional business risks.

Indian businesses have yet to unlock the value of integration with the developed parts of the world that have rich capital markets and ecosystems that can drive excellence. With an LRS-propelled investment, businesses have many advantages such as access to local bank funding. Once they set up a company in the EU, UK, US or Canada, such funding comes at a fraction of the cost of capital in India. Private equity players and funds in any of these regions are more confident about investing in a local business with a subsidiary in India, instead of directly investing into India. A similar view is taken when funds are raised for a holding company with an Indian subsidiary.

Another attractive scheme that is available for a company in an EU country like Austria, offers state sponsorship for international business expansion. Once an LRS-based investment is used to set up an Austrian company, the Indian business owner becomes eligible to use that holding company for expansion of the business in India. The local state government in Austria makes an equity contribution to such expansion. Further grants and subsidies are readily available to those companies that have been set up with adequate capital, such as that derived from the LRS, in all the above-mentioned regions.

The LRS permits investments in other sectors such as real estate and equity. Such funding provides an excellent way to hedge investments in such a way that they do not lose value due to the high inflation and currency depreciation in India. Further, these investments become valuable assets to pledge when raising international finance. The LRS can be used to support an individual wishing to emigrate for any form of long term employment. For persons of Indian origin the LRS can also be used for medical treatment, overseas education, organising large, international conferences, making donations and even providing assistance to relatives overseas.

Gautam Khurana is the managing partner at India Law Offices