Mumbai: Many Indians holding millions of dollars of SpaceX shares, are grappling with multiple questions in preserving the fortune.




Well before the company's IPO in June, they had bought unlisted shares through specially-created offshore fund and vehicles as there was no way to tap SpaceX for acquiring tiny stock parcels.




They subscribed to unlisted fund units under (LRS) that allows a resident individual spend and invest up to $250,000 a year overseas subject to conditions that have become more complex.













This has been triggered by fund managers making in-specie distribution of SpaceX shares to investors: instead of giving cash after selling stocks, funds extinguished units and transferred SpaceX shares to investors' overseas demat accounts.




Why did they do this? To avoid stock dumping - particularly with the scrip down to $154 from its peak of $225 - and defer tax for investors. Some funds wound up with investors wanting to either hold the stock directly or cash out.




But, can receipt of shares throw a regulatory hurdle? "One may question whether in-specie distribution requires prior RBI approval. It should not where Indian investor had no legal or operational control over either distribution or liquidation. In such circumstances, receipt of listed shares should not be viewed as regulatory violation," said Vishal Gada, founder & CEO of Aurtus, a firm specialising in tax, regulatory and transactions.




Under LRS, swap of one asset with another (unit to shares) is allowed in M&As or liquidation. But will it be construed as genuine liquidation when a fund set up to hold a stock is dismantled soon after listing?




According to Harshal Bhuta, partner at CA firm P. R. Bhuta & Co, "Under LRS reinvestment rule sale proceeds can't be left idle beyond six months. Though in-specie distribution may qualify as capital gains depending on fund structure, there's no forex realisation. So, there's no obligation to liquidate SpaceX shares received in exchange for units to meet reinvestment rule."




However, the mode of reinvestment should be evaluated on a case-to-case basis, said Moin Ladha, partner, Khaitan & Co. This would depend on a fund's terms and how it has been implemented, he said.



When, How?




What's also crucial is when and how the investment happened. Those who invested through unregulated funds and vehicles after August 2022 (when new dos and don'ts were added) could be in a spot.




Investors who disclosed such unlisted units as 'overseas portfolio investment' (OPI) instead of 'overseas direct investments' (ODI) may run into problems. This was probably done to escape ODI compliance and sharing with RBI the SpaceX valuation report which was beyond their reach. Also, investments in 'deemed regulated' funds between August 2022 and June 2024 could also cause regulatory hassles.




"The RBI's June 2024 liberalisation of the ODI framework allows portfolio investment in funds regulated through their manager rather than the fund itself, which covers jurisdictions like Singapore. Investors who came in through unregulated structures before this amendment would need to specifically test whether their fund or its manager actually met the regulatory threshold at the time," said Moin Ladha.




Views differ on taxation too. While some think there would be no tax till shares are sold, Gada said the fund units could be regarded as having been transferred, with fair market value of underlying listed shares treated as consideration received. The difference between an investor's original cost and such a consideration would be subject to capital gains tax in India, he said.