India: Gift City – The Financial Hub Of The Future

This article examines the progress of the GIFT City, and its shortcoming, and suggests steps that may be taken to realise the vision for GIFT City.

Gujarat International Finance Tec-City (GIFT City) is a planned business district in Gujarat, India. The Indian government has set up India's first International Financial Services Centre (IFSC) in a special economic zone (SEZ) within GIFT City. There are many such enclaves across the world which are considered hubs of financial activities, such as the Dubai International Financial Centre, the Marina Bay Financial Centre in Singapore, the City of London in London, and Wall Street in New York. Given that India is highly regulated, and has a controlled economy, it was important to create a regime with minimal regulatory impediments where new structures could be explored.

While the IFSC is geographically located in India, under the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 (FEMA (IFSC) Regulations), all financial institutions or branches of financial institutions set up in the IFSC, and permitted or recognised as such by the Government of India or a regulatory authority, are treated as persons resident outside India. Therefore, foreign investors investing in companies registered in the IFSC can forego compliance with India's foreign exchange regulations. This is paired with special tax breaks and incentives to further encourage participation in the IFSC at GIFT City. Further, subject to discretion of the relevant regulatory authority, the financial institution or branch of the financial institution, is required to conduct business in a foreign currency (and not in INR), whether such business is with a resident or otherwise¹. This allows Indian general partners (GPs) to pool funds in foreign currency and manage them in India, rather than set up operations in a foreign jurisdiction like Singapore.

The goal of establishing GIFT City was to make India more attractive to foreign investors. However, GIFT City is currently ranked at 75 out of 119 in the Global Financial Centres Index,² with Singapore remaining a favourite for foreign investors seeking a base in South Asia. In order to be an alternative to Singapore, GIFT City will need to improve on multiple fronts.

The infrastructure, setup, and maintenance, costs of GIFT City are high. Development is still underway, and several plots remain vacant.³ While this may be partly due to the COVID-19 pandemic, certain regulatory changes will go a long way in making GIFT City a sought-after financial centre.

Regulatory considerations

Initially, financial regulators, such as the Reserve Bank of India, Securities and Exchange Board of India (SEBI), Pension Fund Regulatory and Development Authority and Insurance Regulatory Development Authority (IRDAI) exercised control over businesses in IFSC. The International Financial Services Centres Authority (IFSCA) was later established under the International Financial Services Centres Authority Act (IFSCA Act), 2019 as a one stop shop consolidating the powers of those regulators in respect of financial services, financial products and financial institutions in the IFSC. While this is a step in the right direction, the regulatory regime of the GIFT City IFSC is spread across multiple circulars and regulations issued by Indian regulators. In the interest of 'ease of doing business', the Government should consider consolidating all rules governing IFSC entities and create a single code, creating a unique legal system for the IFSC and authorising the IFSCA to be the sole regulator. Given that IFSCA is a new regulator, with no past practices to adhere to, it can carve out a niche for itself by being progressive, adopting technology and becoming a regulator that is in tune with the needs of the stakeholders.

Earlier, alternative investment funds (AIFs) set up in the IFSC could invest in Indian companies under the FPI route only. However, SEBI has since clarified that an IFSC AIF can invest in India under the foreign venture capital investment (FVCI) route, foreign portfolio investor (FPI) route, or foreign direct investment (FDI) routes.⁴ While this was a progressive change, these AIFs are considered foreign owned or controlled from an exchange control perspective and are required to comply with FDI restrictions such as pricing and sectoral caps when investing in India. It might be worthwhile to consider that AIFs managed by fund managers that meet the test of being Indian owned and controlled are treated at par with domestic funds.

The current regime requires fund managers to have a physical presence in the IFSC by setting up a branch in the IFSC or being incorporated in the IFSC.⁵ This requirement may not be cost efficient and logistically feasible for new funds who are interested in exploring GIFT City. The rise in the work-from-home model compounds this issue. Accordingly, it may be useful to consider adopting a more lenient approach and exempting new fund managers from this requirement for a short duration until they have established sufficient operations which justify a physical relocation.

GIFT City IFSC should also focus its attention on start-ups. Many financial centres such as Singapore were able to attract investors since it was a sought-after jurisdiction to register start-ups. Promoting Indian start-ups has always been on the agenda for the Prime Minister Narendra Modi led Government. Regulatory leeway, and tax incentives, for start-ups in the GIFT City IFSC will both encourage start-ups to set up shop there, and attract investors.

As a general principle, the regulations governing funds in the GIFT City IFSC should be aligned with global practices to the extent possible. The restrictions on Category I and Category II AIFs engaging in leverage, such as the 30-day and 10% caps⁶ should be done away with, since global funds often participate in leverage. The diversification restriction, i.e. that no more than 25% of investible funds should be invested in a company directly or through investment in the units of other AIFs⁷ is also inconsistent with global practices. Funds in the GIFT City IFSC should be permitted to determine the contours of their functioning via the private placement memorandum, and should not be bound by such regulatory considerations.

Next Steps

The GIFT City IFSC has massive potential which could be realised with the continued support of the Government of India. In her speech presenting the Union Budget for the financial year 2023-24, the Finance Minister set out a number of measures that the Government intends to implement to enhance business activities in the GIFT City IFSC, including: (i) the delegation of powers under the Special Economic Zones Act, 2005 to the IFSCA to avoid dual regulation; (ii) establishing a single portal for registration and approval from authorities such as the IFSCA, SEZ authorities, RBI, SEBI and IRDAI; and (iii) amending the IFSCA Act to include statutory provisions for arbitration, ancillary services.⁸ These are commendable actions and will go a long way in achieving the vision with which GIFT City was created. It has world class amenities and a lot of promise. Certain proactive regulatory measures such as those mentioned above will help fill in the gaps and improve its image among the global financial community.

Footnotes

1. Regulation 4 of FEMA (IFSC) Regulations.

2. The Global Financial Centres Index, available at (https://www.longfinance.net/programmes/financial-centre-futures/global-financial-centres-index/gfci-32-explore-the-data/gfci-32-rank/) and last accessed at 1500 hrs on 13 February 2023.

3. Planned as the next Singapore in 2012, Gujarat's Gift city still remains a work in progress, The Print, 28 April 2021, available at (https://theprint.in/economy/planned-as-the-next-singapore-in-2012-gujarats-gift-city-still-remains-a-work-in-progress/647021/) and last accessed at 1500 hrs on 13 February 2023.

4. SEBI Circular dated 26 November 2018, SEBI/HO/IMD/DF1/CIR/P/143/2018.

5. SEBI Circular dated 26 November 2018, SEBI/HO/IMD/DF1/CIR/P/143/2018.

6. Regulation 16(b) and 17(c) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (AIF Regulations).

7. Regulation 15(c) of AIF Regulations.

8. Paragraph 101 – Budget 2023-24, Speech of Nirmala Sitharaman, Minster of Finance, 1 February 2023 – available at (https://www.indiabudget.gov.in/doc/budget_speech.pdf) and last accessed at 1500 hrs on 13 February 2023.

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