by Rohit Kapuria
India’s diaspora of some 25 million people is a force to be reckoned with. During colonial times, thousands of Indian laborers and traders were dispersed across the world. Between 1970 and 1990, as India’s economy faltered under Nehruism, a second wave of Indian traders headed for the booming economies of the Arabian Gulf and Southeast Asia. Simultaneously, a new class of educated Indians migrated to the west and assimilated therein.
India’s recent economic woes
The Economist recently declared that “India’s financial system is like a ramshackle engine lovingly maintained by a sect of oil-spattered engineers and wearily tolerated by most people who depend on it.” One such engineer is Raghuram Rajan who, on Sept. 4, 2013, took the helm as the 23rd governor of the Reserve Bank of India (RBI). His immediate task was to tackle India’s worst economic crisis since 1991. In the second quarter of 2013, the economy grew a measly 4.4 percent. The country’s banking system reeled.
As investors fled the market, Rajan was confronted with two options: a) raise interest rates in an effort to stabilize the rupee and risk crippling industries; or b) follow the free-market approach. Rajan took a calibrated stance by easing restrictions on the banks’ ability to borrow in dollars, and by backing moves to reform India’s structural problems, dodgy fiscal policies, and weak manufacturing base. Had he taken the free-market approach, he would have risked testing the market’s patience, and perhaps unleashed further instability through financial speculators.
India has not battled economic woes alone. After signals that the U.S. Federal Reserve (the Fed) would shift reins and adopt a tighter monetary policy, several other emerging markets were hit this year by the reversal of foreign investment inflows. The Fed’s announcement prompted global investors to shift billions of dollars out of emerging financial markets and erode the value of local currencies. The rupee shed close to 40 percent of its value.
The sell-off by global investors was further compounded by new capital controls introduced in August 2013. These controls curtailed the annual limits that firms and individuals could transfer out of the country, thus spooking foreign investors who feared the limits might impact their funds. Despite assurances from the Indian authorities that no such restrictions would be placed on foreign investors, the markets continued to slide.
Success in the face of dysfunction
Despite this recent financial trauma, according to the 2013 Credit Suisse Global Wealth Report, India currently boasts 182,000 “dollar millionaires.” The 2013 Wealth-X and UBS Billionaire Census has determined that, of the existing 2,170 billionaires, 103 hail from India. These ultra-high net worth individuals (UHNWI) seem to tolerate India’s economic and political dysfunction.
Given the Indian government’s tight regulation of its banks and debt markets, India’s actual center for investment banking is not Mumbai, but rather Singapore. Some analysts estimate that while half of all rupee trading is offshore, most financial disputes are arbitrated outside of India. Unlike China, which enjoys some control over the economic activity in Hong Kong, India is obviously unable to control similar activity in Dubai or Singapore. The UHNWIs understand these processes, and it seems they have long understood that they can safely park their investment funds in Mauritius and pay taxes at that island’s rate of effectively zero.
Political dynamics are an additional source of uncertainty for the Indian public. While India proudly proclaims its status as the world’s largest democracy, it also suffers from turmoil within its legislative body. There are effectively only two major national parties: the Indian National Congress (INC) and the Bharatiya Janata Party (BJP). Both domestic and foreign investors view the BJP as friendlier to business. Wealthy Indians anxiously await the next election results.
What does this mean for EB-5?
In spite of the many incentives EB-5 developers have to enter the Indian market, they must first tackle certain obstacles that I see in the process. First, India does not have a sophisticated network of migration agents that have ready access to EB-5 program information. While the EB-5 program is popular in China, very few Indians have heard of it. Second, Indian investors have access to a host of international immigration programs. Third, unlike Chinese investors who are keen on immigrating to the United States, wealthy Indian citizens are typically not anxious to move. Fourth, Indian investors are usually looking for a higher return on their investments than their Chinese counterparts. Fifth, there is currently a $75,000 cap on capital outflows. Lastly, EB-5 developers have difficulty tracking the source of funds. Yet, I think none of these hurdles spell doom for the Indian EB-5 market.
Migration agents and popularizing EB-5
While it may take some time to educate the few existing Indian migration agents about the EB-5 program, it should be simple to establish an EB-5 network. Concentrated EB-5 networks can be developed in areas such as New Delhi, Bangalore, Chennai, Chandigarh, and Mumbai. While Indian migration specialists are typically more knowledgeable about alternate U.S. visa programs, the EB-5 program should be a simple addition to their roster. In addition to working with existing migration agents, EB-5 developers can network with wealth managers, immigration attorneys, and multinational company representatives to expand their reach in India. Once these relationships are developed, it should be relatively easy to popularize the EB-5 program in India. A distinct advantage the Indian market offers over the Chinese one is that English is the lingua franca in India, making it easier to develop direct personal relationships.
International competition and investor reluctance
Many other countries offer investment immigration schemes that compete with the U.S. EB-5 program, and some are more popular in the Indian market. For example, Portugal, Ireland, and Macedonia all offer foreign investor residency programs. Cyprus and Austria offer full citizenship in exchange for an ap- propriate investment. The islands of St. Kitts and Nevis, Antigua and Barbuda, and Dominica all “sell” citizenships to foreign investors. Closer to India, the UAE and Singapore offer similar residency programs. The most notable EB-5 competitors are the programs of Canada, Australia, England, and New Zealand. The respective investment amounts of these four programs range from approximately $750,000 USD upwards to over $4.5 million. All of these exceed the minimum $500,000 amount for an EB-5 project located in a targeted employment area.
So then why are most wealthy Indians not as keen to immigrate to the United States? Their apparent rationale is that they enjoy a standard of luxury and status in their home country that far outweighs what they might be able to afford in the United States. There may also be a generalized reluctance to be subject to the jurisdiction of the Internal Revenue Service. Even so, I think these concerns are surmountable, as the United States is the most desired education destination for wealthy Indian children.
Following their graduation from Western or European colleges, many of these students prefer to gain work experience in the host country, and perhaps become residents. For U.S.-educated international students, the EB-5 program can be a positive alternative to seeking H-1B visas. If wealthy Indian parents “gift” their children EB-5 funds prior to sending them to college, not only would they pay lower tuition fees as U.S. residents, but the post-graduation visa concerns would be eliminated. Furthermore, only the children would be subject to the IRS.
Return on investment
In my experience, it seems that a key difference between Indian and Chinese investors is that, while most Chinese investors are content both with a low return on their EB-5 investments and passive managerial roles in EB-5 projects, Indian investors typically value a higher return on investments, and sometimes greater managerial roles in EB-5 projects. In addition to various lucrative investment opportunities in India, these investors have access to high-yielding savings accounts in India. Indian banks currently offer certificates of deposit carrying interest rates as high as 8-11 percent annually for rupee-denominated accounts. Given such investment alternatives, the investor must esteem U.S. residency in order to apply for the EB-5 program. EB-5 developers should consider marketing direct and pooled-direct EB-5 projects, since they typically carry higher returns on in- vestments and are structured as equity deals. Similarly, as EB-5 developers are not obligated to compete for marketing agents’ attention, as in China, they are not subject to high agent fees. Therefore, EB-5 developers may have greater economic capacity to provide higher returns on investments to Indian investors. Ultimately, if a target EB-5 market can be established, then regional center projects can likewise enter the Indian market.
Capital outflow limits
Even if migration agents are properly educated about EB- 5, and projects are successfully marketed to Indian investors, Indian nationals face fundamental obstacles to internation- al investment. Earlier this year, in an effort to stem the bal- ance-of-payments crisis and prevent the incipient signs of capital flight, the RBI capped annual remittances at $75,000 from a previous high of $200,000. Somewhat similar measures were placed on Indian firms. India’s current finance minister, P. Chidambaram, publicly stated that the RBI measures were “temporary” and would be revisited “at an appropriate time.” In the meantime, how should potential EB-5 investors handle this issue? Generally, the initial response is to turn to friends and family for assistance in remitting these funds. Additionally, many Indian UHNWIs already maintain bank accounts in Singapore, the Gulf, or Mauritius. As such, any transfers from their foreign bank accounts will not be subject to the RBI cap.
Documenting source of funds
This leads into the last obstacle: how to tackle the “white paper” vs. “black money” issue. In 2012, the Indian Ministry of Finance defined “black money” as “assets or resources that have neither been reported to the public authorities at the time of their generation nor disclosed at any point of time during their possession.” In order to escape Indian tax jurisdiction, many Indians underreport gains made in asset transactions or income earnings. While many EB-5 practitioners familiar with the Chinese EB-5 market may not be surprised to learn of this issue, it is important to account for some amnesty provisions, government investigatory bodies, and parliamentary bills that have been created to tackle this issue in India. Although the black money economy is an enormous challenge in many countries, Friedrich Georg Schneider, a German economist, suggested in 2006 that the size of India’s black money economy was below average in relation to its GDP (contrasted with the average Asian, African, or Latin American economy). As the trajectory becomes more contentious, EB-5 developers should be cautious when reviewing an investor’s source and path of investment funds. However, I feel this should not be a deterrent to exploiting the Indian market.
Is the Indian EB-5 market worth the effort?
The ever-looming Chinese quota retrogression is forecasted to take effect in the coming fiscal year. As a result, there is an understandable level of anxiety within the EB-5 community. There are also doubts regarding the sustainability of the real estate boom in China, which accounts for a majority of Chinese EB-5 investment funds. While it is clear that the Indian share of the EB-5 market will not soon overtake the Chinese investor market share (currently 80 percent of the annual EB-5 usage), I think it does have the capacity to jump 20-30 percent in the next few years. Given how underdeveloped the Indian EB-5 market is, EB-5 developers would be wise to explore this untapped market.
Rohit Kapuria
Rohit Kapuria, vice chair and partner of Saul Ewing Arnstein & Lehr LLP’s Global Immigration and Foreign Investment Practice, handles private offerings under the EB-5 investor visa program. Kapuria regularly represents EB-5 lenders, EB-5 borrowers, banks, regional centers, real estate developers, investors working on direct EB-5 projects, and migration brokers. He has worked on over 500 EB-5 transactions, with a combined capital development cost in excess of $7.5 billion. He has received regular recognition for all of his efforts from the EB-5 industry at large and was also named Top 40 Illinois Attorney Under 40 to Watch in 2021.
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