Indian investors holding millions of dollars in SpaceX shares are seeking legal advice on compliance matters following recent developments. According to The Economic Times, these investors received SpaceX shares directly from offshore funds through the liberalised remittance scheme (LRS), which allows residents to spend up to $250,000 annually overseas. The investors subscribed to unlisted fund units under LRS to acquire SpaceX shares before the company's IPO in June, as there was no direct way to purchase tiny stock parcels from SpaceX.
The compliance issues have been triggered by fund managers making in-specie distributions of SpaceX shares to investors instead of providing cash after selling stocks. As reported by The Economic Times, this distribution strategy was implemented to avoid stock dumping - particularly with the stock price declining from $225 peak to $154 - and defer tax obligations for investors. Legal experts suggest that receipt of listed shares should not be viewed as a regulatory violation if Indian investors had no legal or operational control over the distribution or liquidation process.
Views on taxation implications differ significantly among experts. According to The Economic Times, while some believe there would be no tax until shares are sold, Vishal Gada from Aurtus suggests that fund units could be treated as transferred with fair market value of underlying listed shares as consideration received. The difference between an investor's original cost and such consideration would be subject to capital gains tax in India. Under LRS reinvestment rules, sale proceeds cannot be left idle beyond six months, though in-specie distribution may qualify as capital gains depending on fund structure.
Critical compliance issues arise from investments made after August 2022, when new regulations were introduced. As reported by The Economic Times, investors who invested through unregulated funds and vehicles after this date could face regulatory challenges. Additionally, those who disclosed unlisted units as 'overseas portfolio investment' (OPI) instead of 'overseas direct investments' (ODI) may encounter problems, as this was likely done to escape ODI compliance requirements. The June 2024 liberalisation of the ODI framework allows portfolio investment in funds regulated through their manager rather than the fund itself, creating additional compliance considerations for pre-2024 investments.
