India: A GIFT For India: Better Late Than Never?

Last Updated: 26 April 2017
Article by Yogesh Chande and Gaurav Malhotra

Gujarat International Finance Tec-City (GIFT) is located in Gandhinagar and is developed by Government of Gujarat through a joint venture between its undertaking Gujarat Urban Development Company Limited and IL&FS. The project took shape in the year 2007 when the importance of international financial centres was realized because of t heir contribution (a) to the overall growth of the economy of the countries which had adopted them and (b) job creation. With the vision of then Gujarat Chief Minster, Mr. Narendra Modi to create a wo rld class finance and information technology zone, to provide services not only in India but to the entire world, the idea of setting up GIFT was conceptualized as a global financial and information technology hub, designed to be above or at par with the already exiting international financial centres in the world. After the project being languished for years, Mr. Arun Jaitley, the Finance Minister, in Union Budget 2015 announced setting up of India's first International Financial Services Centre (IFSC) in GIFT.

What is an IFSC?

For the readers who are less familiar with the concept of an IFSC, it is a place wherein international financial services (IFS) will be provided to both residents and non-residents in any currency except Indian Rupee on Indian mainland. By setting up the IFSC at GIFT, the intention is to bring IFS transactions that are currently carried out abroad by overseas financial institutions, Indian financial institutions/ entities and overseas branches/ subsidiaries of Indian financial institutions to India, by offering the same ecosystem as the offshore location. The government's efforts of establishing an IFSC in India is commendable and perhaps justified. According to the World Economic Forum: "In the absence of an IFSC in India, it is estimated that India is losing around $50 billion per year (data as of 2015), which is likely to grow to $120 billion by 2025, according to India's Ministry of Finance. The development of an IFSC in India therefore will be a major game changer for the country."

Core regulators

Pursuant to the announcement regarding setting up of IFSC in GIFT, the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI) and Insurance Regulatory and Development Authority of India (IRDAI) have issued relevant guidelines and schemes to regulate financial services relating to securities market, banking and insurance in the IFSC. SEBI has relaxed the requirements for setting up stock exchanges, clearing corporations and depositories in the IFSC. SEBI guidelines restrict the intermediaries operating within the IFSC to provide financial services only to (a) non-residents; (b) non-resident Indians; (c) Indian resident financial institutions which are eligible to invest offshore under the Foreign Exchange Management Act, 1999 (FEMA); and (d) Indian residents who are eligible to invest offshore to the extent allowed in Liberalized Remittance Scheme of RBI, subject to the minimum investment norms specified by SEBI. Further, mutual funds and alternative investment funds operating within the IFSC are restricted to invest only in (a) securities which are listed in the IFSC; (b) securities issued by companies incorporated in the IFSC; and (c) securities issued by companies incorporated in foreign jurisdictions.

RBI, in its efforts to facilitate IFS transactions in the IFSC, issued a scheme for setting up of IFSC Banking Units (IBUs) in the IFSC. Only (a) public and private sector banks which are authorized to deal in foreign exchange and (b) foreign banks which already have presence in India, are eligible to set up IBUs in the IFSC. The eligible banks are required to obtain the prior approval of the RBI for opening an IBU. The scheme requires the IBUs to operate and maintain their balance sheets only in foreign currency and are not allowed to deal in Indian Rupee except for having a Special Rupee Account out of convertible fund to defray their administrative and statutory expense.

IRDAI issued guidelines allowing entities to undertake business of reinsurance and/ or specified direct insurance business in the IFSC. As per IRDAI's guidelines, to carry out reinsurance business, both the domestic and foreign companies are required to establish an IFSC Insurance Office (IIO) in the IFSC. Such IIOs are permitted to (a) accept reinsurance business of all classes of business within the IFSC and from outside the country; (b) accept re-insurance business from the insurers operating in the Domestic Tariff Area in accordance with IRDAI regulations on reinsurance. The IRDAI guidelines also provide that an Indian insurer (except a statutory body) may establish an IIO to transact specified direct insurance business within the IFSC. Such IIOs may also underwrite specified direct insurance businesses established in foreign jurisdictions.


An institution which is established is not the same as one thriving. If the GIFT has to thrive and compete with its counterparts such as Dubai, Hong Kong or Singapore, it may have to consider ironing certain wrinkles, and fast. To begin with, the first challenge appears to be attracting full-fledged teams comprising of foreign market professionals (who are accustomed to centres in Dubai, Hong Kong or Singapore) to settle at GIFT – this will require the infrastructure at GIFT to be par excellence in terms of not only offices and residences, but ancillary infrastructure such as schools and communities for the families of the foreign market professionals, and increasing the number/ frequency of international flights plying at the nearest airport to GIFT. While the Modi government has announced various concessions on income taxes (payable by entities operating in the IFSC), transactions taxes and stamp duty; making salaries paid to foreign market professionals settled at the GIFT (and perhaps even Indian nationals) tax free or payable in their home jurisdictions without any taxation consequences in India, is something the government can consider and work towards. Changing the general perception of India as a tax-hostile country, especially after the Vodafone debacle, is key. Be that as it may, on a related tangent, because of the tax breaks, garnering trading volumes is a given; however, this may result in revenue seepage for the government.

Another general perception of India not being an easy country to do business in – evidenced by the World Bank's Doing Business survey 2016-16 ranking India 130th out of the 190 nations in the world – needs to be dealt with. The survey reveals that due to improvements in other economies, India's ranking in several areas fell this year. On the ease of starting a business, it slipped to 155th from 151st; on dealing with construction permits, it stumbled to 185th from 184th; on paying taxes, it held steady at 172nd. Establishing a speedy single-window clearance comprising permissions required from authorities such as the Ministry of Corporate Affairs, the SEBI, the RBI, IRDAI and the SEZ (Special Economic Zone) Authority, is perhaps the need of the hour, to not only cajole foreign firms into setting up shop at the GIFT but also scale notches in the next World Bank's Doing Business survey. Further, the time limit for grant of approval by the concerned authority should be reasonable and strictly adhered to. Setting up of a unified financial market regulator on the similar lines as suggested by Financial Sector Legislative Reforms Commission perhaps warrants consideration. To provide a smooth business ecosystem, close coordination between various agencies and regulators is of paramount importance. Another major challenge which IFSC at GIFT faces is partial capital account convertibility and foreign investment restrictions. Given that dealing in GIFT will happen in any currency other than Indian Rupee, the Indian Rupee should be fully convertible on capital account. The exchange control rules should be relaxed in order to facilitate market players to be able to decide on how much money to invest. Further, to ensure that GIFT is at par with other such financial service centres around the world, the regulatory framework need not be restrictive and hence the stricter requirements should be carved out for entities operating in GIFT.

* Yogesh Chande is a partner and Gaurav Malhotra is an associate at Shardul Amarchand Mangaldas & Co. Views are personal.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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