Shifting dynamics

Monday, 01 July 2013
Sean Costello looks at the shifts in wealth distribution and growth in India.

Against a backdrop of global economic instability, international financial centres (IFCs) have to remain flexible and innovative, both in the services they offer and in the markets they reach out to. Jersey is no different. While London and other key European cities remain primary markets for Jersey, the potential for new business from fast-growing economies, such as India, is significant. As global volatility persists, understanding cultural subtleties and remaining alert to the demographic, political and economic trends that drive shifts in wealth distribution and growth in India is paramount.

Trends

Wealth continues to migrate east. With the global population of high-net-worth individuals (HNWIs) increasing to 11 million, for the first time Asia Pacific has overtaken North America to become the largest home to HNWIs, with their numbers expanding to 3.37 million.1

India’s economy has doubled in the past five years to reach USD2 trillion, and wealthy individuals in India and non-resident Indians around the world are looking for support in managing their individual and family wealth. This creates opportunities – and challenges – for jurisdictions offering trust and private client expertise.

In the medium term, the middle class in India is projected to more than double from 250 million people to 550 million people. This will affect wealth management in India. Although nascent compared to some markets, the private wealth environment in India is growing in sophistication. It is estimated that of India’s 1.2 billion population, around 30 million are taxpayers. With the Indian authorities looking at ways to bolster the tax regime, professional tax and estate-planning advice is becoming more important.

The strengthening of India’s position on foreign-asset declaration in tax returns, and the extension of tax-reporting responsibility to include declarations of beneficial ownership, for instance, are all things that the burgeoning middle class and high-net-worth sector have to consider. India is also expected to pursue its own Foreign Account Tax Compliance Act-type arrangement.

Diversity

In terms of asset and investment allocation, diversity remains a watchword for Indians. On the one hand, Indian investors are looking at opportunities close to home, unimpressed by returns in Western markets. With competitive domestic interest rates, Indians are contemplating increasing their exposure to Indian banks, which are shoring up their US dollar or sterling reserves to offer higher returns and attract more deposits. With this in mind, developing wealth-management capabilities in the domestic banking sector in India is a real opportunity for Jersey.

In the current economy, wealthy Indians seek stability and, as a result, are looking beyond India for support

On the other hand – and not surprisingly in the current volatile economy – wealthy Indians are also seeking stability and, as a result, are looking beyond India for support. This is reinforced by the recent relaxation of the rules relating to the value of assets resident Indians are permitted to place outside India, which has created interest in opportunities outside India for a wider cross- section of Indians.

Just as the stability of global financial institutions is now important when deciding where to place assets, the value and attractiveness of IFCs has become more readily understood in India.

In addition to historically tax-neutral jurisdictions such as Mauritius and Singapore, there is increased awareness among wealthy Indians of other substance-based whitelisted jurisdictions, such as Jersey. For instance, a growing number of wealthy families are using the USD200,000 liberalised remittance scheme to invest in the property market in the UK and Europe. This is increasingly being done by drawing on trust and holding structures, private client expertise and specialist legal support in IFCs. Meanwhile, the unpredictable tax environment and recent changes in India’s overseas income declaration are encouraging Indian HNWIs to consider becoming non-resident Indians (NRIs), with an increasing number of Indian high-net-worth families taking professional advice on their tax residence status.

Supporting this growing global NRI community remains firmly on Jersey’s radar. As well as growing numbers of NRIs choosing Jersey trust structures as appropriate vehicles for holding property investments, the stability and robust nature of Jersey’s trust legislation is an attraction. Many members of the Indian diaspora are spread far and wide, including in some locations that are perceived as being high-risk, politically. For them, seeking a secure, stable jurisdiction to reduce risk and safely manage their family’s wealth is vital.

Evolution

The wealth-management landscape in India is complex and evolving, requiring an in-depth understanding of the cultural values that govern the financial decision-making process. This is why Jersey has invested so much time in forming robust long-term bonds with the country.

Despite India’s strong current and projected economic growth, the financial crisis has created considerable uncertainty there. Many Indians see the importance of looking carefully at how they manage their own and their family’s wealth, both domestically and internationally, with an emphasis on diversity, and drawing on the expertise and experience of a safe IFC.

NRIs in particular are attracted by the close connection Jersey has with the UK, with many NRIs having existing links to Britain through business interests, family connections or education. In addition, the UK is perceived as a positive business environment by NRIs, and they take further reassurance from the close links Jersey maintains with the City of London.

With bailouts and austerity measures across Europe, Jersey’s position outside the EU is also seen as a benefit. Indian clients are showing a preference for diversifying their assets and safeguarding their wealth outside the EU, relying on currencies such as US dollars and sterling.

Responding quickly, innovatively and appropriately to wealth-management trends in India is vital. The introduction of Jersey foundations in 2009 is one example of where an ability to do this has been fruitful. More than 200 foundations have now been registered in Jersey, and takeup has been particularly strong in Asia.

Having a positive reputation as a well regulated, cooperative jurisdiction is also important in the Indian market, so communicating high standards of transparency, a robust regulatory framework and a commitment to fighting tax evasion, money-laundering and fraud is critical for IFCs building a relationship with India. For this reason, signing a tax information exchange agreement with India in 2011 was a milestone for Jersey.

In a world where stability, transparency and tax planning are all hot topics, wealthy individuals and families in India are seeking certainty. In addition, with India’s ruling coalition still fragile, the country has interesting political times ahead. In the past, India has shown an ability to move forward just when the economic situation seems to be most threatening. Jersey’s political and fiscal stability is now well recognised in India and it intends to be part of India’s successful future. 

  • 1. Capgemini  world wealth Report 2012, which defines an HNwI as anyone ‘with uSD1 million or more at their disposal for investing’
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Sean Costello

Sean Costello is Chief Representative Officer in India for Jersey Finance. 

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