These ultra-high net worth individuals are using a non-banking finance company – preferably an existing local entity – to sponsor an overseas investment company, a wholly-owned subsidiary, in a financial centre like Dubai. The funds used to capitalise this foreign arm is invested in securities and assets abroad, including cryptos sold on trading platforms outside India.
“Unlike the LRS Scheme which restricts direct investment in the financial services sector overseas, the ODI scheme permits regulated financial services companies to invest in the financial services sector under approval route. Such investment is subject to prior approval from the relevant financial regulators in India and overseas. Once a duly approved overseas direct investment is made in a financial services company overseas, such entity should be able to undertake business in accordance with the laws applicable in the relevant overseas jurisdiction,” said Moin Ladha, partner at the law firm Khaitan & Co.
Sensing Reserve ‘s strong reservations about crypto, large private and foreign banks have been asking investors remitting funds under LRS to give an undertaking that the money would not be used to purchase cryptos. (This followed the local payment systems barring fund transfers for crypto trades amid an unofficial, shadow ban imposed by RBI).
In these circumstances, ODI has emerged as a convenient avenue to larger investors who can handle the paperwork. The foreign subsidiary – which can receive investment up to four times the net worth of the local NBFC promoting it – is governed by the laws of the country it’s incorporated in (and not Indian regulations).
“Technically, it may not go down well with RBI if investment by the foreign investment company is largely into cryptos. But the central bank may never get to know of it from the annual information which the RBI receives…RBI typically doesn’t ask for their balance-sheets,” said a consultant specialising on foreign exchange regulations.
Finding New Ways
Every year, overseas investment companies (set up under the ODI route) submit basic information like address, capital, turnover, divided and profit to the designated bank (handling remittances), which in turn uploads the data with RBI.
Thanks to the clampdown on crypto trading in India, many are figuring out ways to hold cryptos abroad. For instance, some of the consultants and software professionals are receiving fees from foreign clients in comparatively stronger cryptocurrencies like Ethereum. Some, even after signing the LRS undertaking to banks, are subsequently investing the money transferred to an overseas bank account into cryptos – a transaction that can later put them under regulatory scrutiny. Another transaction being pursued by some involves transferring funds as ‘gift’ to children before they travel abroad to study, and later drawing as much $1 million a year from the latter’s NRO (non-resident ordinary) account. (The local account in which funds are transferred is converted into NRO account after the family member, i.e, the account holder, moves overseas.)
Besides blocking payment channels and imposing high income tax on profits from crypto trades, come July, the local crypto community has to deal with the 1% tax-deducted-at-source on every crypto sale (irrespective of whether money is made). The combination of these factors is driving investors having the wherewithal to foreign crypto markets, despite the risks. More so, since most investors believe it would be impossible for the Indian government to collect TDS on trades cut on foreign exchanges.