Navigating GIFT City: Key Considerations For Investors

Introduction

An International Financial Service Centre (IFSC) is a specialized financial zone set up under the Special Economic Zones (SEZ) Act, 2005. It grants Indian entities access to global financial markets while offering overseas entities an entry point into the Indian market. This setup aims to encourage overseas investment and bolster India's position in global finance.

The Gujarat International Finance Tec-City (GIFT-City), situated near Gandhinagar, Gujarat, stands as India's first and only operational IFSC and provides a range of incentives, including a unique tax structure designed to attract businesses and individuals. These incentives, combined with a regulatory approach that facilitates ease of doing business and simplifies operations, make GIFT City an attractive prospect for overseas entities.

The GIFT-City permits a wide array of activities, from traditional banking and insurance to more specialised offerings like aircraft leasing and wealth management. The permitted financial products/services and ancillary services, include:

1. Financial Products¹: These include contracts of insurance², securities, deposits, credit arrangements, foreign currency contracts, aircraft and helicopter leasing³;
2. Financial Services⁴: This category encompasses activities related to permitted financial products. These include buying, selling, or subscribing to financial products, wealth and portfolio management, exercising rights associated with financial products, and making arrangements for any of these services.
3. Ancillary services: While not explicitly defined under the IFSCA Act, these are services which support the core financial services. Examples include, research and development, data processing, computer software (including information enabled services such as back-office operations), call centres, human, legal databases, educational services etc, which are permitted in the GIFT City.

Governing Authority and Regulatory Framework

Activities in the GIFT City are governed by the International Financial Service Centre Authority (IFSCA), a unified regulatory body which holds the regulatory powers previously held by India's 4 major financial regulators - the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority of India (PFRDA). This consolidated authority streamlines the regulatory process for entities operating within the GIFT City.

Setting Up an Entity in GIFT City

Any entity is required to obtain prior approval of the IFSCA in order to carry out business from the GIFT City. For this purpose, the IFSCA has issued specific norms based on the type of financial service proposed to be offered, which set out the relevant requirements governing their application and operations.

Broadly, the steps for setting up operations in the GIFT City are as follows:

1. Incorporation: If the entity is to be set up in an incorporated form, then the first step is to incorporate a new company on the Ministry of Corporate Affairs (MCA) online portal. This step does not apply if the entity proposes to set up as a branch or in an unincorporated form.
2. Office Space: Secure office space in the GIFT City and obtain a Provisional Letter of Allotment from the GIFT City Co-Developers.
3. Approvals: The entity must submit an SEZ Application to the Development Commissioner for Kandla SEZ, and obtain a Letter of Approval (LOA). At the same time, the entity should apply to the IFSCA for a Certificate of Registration (CoR). The specific application forms depend on the type of service the entity plans to offer. These forms are set out in the relevant IFSCA regulations/guidelines.

Upon submission of an application, the relevant department of the IFSCA may raise a first round of queries with 7 working days, and typically makes a final decision within 45 days. Once a unit is established under the GIFT City, it will be considered as a 'non-resident' under the applicable foreign exchange management norms.

Pre-Considerations before setting up of a unit in GIFT-City

Before making a decision on setting up of a unit/establishment in GIFT-City or in the Indian domestic tariff area, it may be relevant to consider the factors set out below:

1. Capital Requirements: The capital requirements imposed by the IFSCA vary for units/entities across different sectors, depending on the nature of the entity and proposed business activities.
   1. For instance, an IFSC Insurance Office (engaging in insurance/reinsurance activities) must maintain USD 1.5 million as assigned capital⁵ in freely convertible foreign currency. In contrast, please note that an entity setting up as an Insurance Company/Reinsurer in India otherwise requires at least USD 6 million⁶.
   2. Similarly, the Minimum Owned Fund requirement for an entity looking to engage in operating lease activities is USD 200,000, while for an entity looking to engage in finance leases, or a mix of finance and operating leases, this requirement is USD 3 million.
2. Regulatory Compliances: An entity in the GIFT City will be subject to a different set of regulations as compared to an entity in the Indian domestic tariff area, and these are generally more business-friendly as compared to the regulations in the rest of India (ie, the domestic tariff area). Compliance requirements vary across industries, for example, an entity looking to operate as a Lessor in the GIFT City must, in addition to adhering to the IFSCA's norms, adhere to the Cape Town Convention as well.
3. Financial Stability Metrics: An entity offering financial products in the Indian domestic tariff area (such as Insurance Companies, Banks etc) is required to comply with certain margins/ratios specified by the concerned regulatory entity (such as solvency margin, liquidity coverage ratio) which ensure that the financial health of the entity is sustained. On the other hand, the IFSCA regulatory framework allows certain Units set up in the GIFT City for such compliance to be carried out by its overseas parent entity.
   1. By way of illustration, while an Indian Insurance Company is required to maintain 150% solvency margin in India⁷, IFSC Insurance Office is permitted maintain solvency margin in its overseas parent entity's home country⁸.
   2. While banks are required to maintain a 100% liquidity coverage ratio⁹ in Indian domestic tariff area, Finance Companies in GIFT City may maintain such liquidity coverage ratio in its parent entity, subject to specific approval of the IFSCA¹⁰.
4. Tax Benefits: Units in the GIFT City are offered various tax benefits, in order to incentivise businesses and individuals to establish a presence there. These, inter alia, include:

a. Corporate Income Tax: 100% tax exemption for any 10 consecutive years within their first 15 years of operations¹¹. This offers flexibility in choosing the most beneficial tax holiday period.

b. Dividend Distribution Tax: Dividends received by non-residents from a unit in the GIFT City are taxed at a concessional rate of 10% plus applicable surcharge and cess.

c. Goods and Services Tax (GST): No GST on services received by a unit in the GIFT City from another IFSC/SEZ unit or offshore client. However, GST applies to services provided to entities within the Indian domestic market.

d. State Subsidies: Units in GIFT City are eligible for state subsidies, which can further reduce operational costs, including subsidies on lease rent, provident fund contributions, and electricity charges

In addition to these, units are also offered exemptions on withholding tax, capital gains tax, and stamp duty for specific services. For instances, a 100% exemption from stamp duty applies to all activities related to setting up an aircraft leasing entity and acquiring movable or immovable property (including aircraft) in GIFT City.

There are also sector specific relaxations offered for operations in the GIFT City, such as relaxation of the moratorium provisions under the Insolvency and Bankruptcy Code (IBC) for recovery of leased aircrafts and a simplified repossession process for lessors in GIFT City, allowing lessors to lease to other Indian operators without re-registration and skip obtaining import permits, reducing time and administrative burdens.

Concluding Remarks

With its business-friendly regulatory environment, attractive tax incentives, and access to global markets, GIFT City is increasingly emerging as an appealing proposition for businesses. As the city is still in relatively nascent stages of development, both Indian and international companies have the potential to gain a first-mover advantage by establishing their market presence ahead of competitors.

Nonetheless, several critical factors—such as capital requirements, regulatory compliance, financial stability metrics, and tax benefits—must be considered before committing to operations in GIFT City. Whether the city will emerge as a premier destination remains to be seen and if successful, it could potentially serve as a model for establishing similar financial hubs in India in the future.

Ultimately, the success of GIFT City in positioning itself as a premier destination for international financial services will depend on the collaborative efforts of policymakers, regulators, and industry stakeholders.

Footnotes

1 The term “Financial Products” is defined under §3(d) of the International Financial Services Centres Authority Act 2019 (“IFSCA Act”) which, inter alia, includes securities, contracts of insurance, deposits, credit arrangements, aircraft and helicopters leasing.

2 The IFSC permits a range of insurance-related activities, including direct insurance, reinsurance, and insurance intermediary services.

3 The Government of India in 2020, recognized operating leases, financial leases, and hybrid leases of aircraft and helicopters, including their engines and parts, as eligible “financial products”. The IFSCA further clarified that leasing ground support and ramp handling equipment falls under this framework.

4 The term “Financial Services” is defined under §3(e) of the IFSCA Act:

(e) “financial service” means—

(i) buying, selling, or subscribing to a financial product or agreeing to do so;

(ii) acceptance of deposits;

(iii) safeguarding and administering assets consisting of financial products, belonging to another person, or agreeing to do so;

(iv) effecting contracts of insurance;

(v) offering, managing or agreeing to manage assets consisting of financial products belonging to another person;

(vi) exercising any right associated with a financial product or financial service;

(vii) establishing or operating an investment scheme;

(viii) maintaining or transferring records of ownership of a financial product;

(ix) underwriting the issuance or subscription of a financial product;

(x) providing information about a person's financial standing or creditworthiness;

<em>(xi) selling, providing, or issuing stored value or payment instruments or providing payment services;

(xii) making arrangements for carrying on any of the services in sub-clauses (i) to (xi); (…)”

5 R17(2) of the IFSCA (Registration of Insurance Business) Regulations 2021.

6 R4(g) of the IRDAI (Registration and Operations of FRBs and Lloyd's India) Regulations 2024.

7 §64VA of the Insurance Act 1938.

8 R17(4) of the IIO Regulations.

9 ¶4 under RBI's notification on “Basel III Framework on Liquidity Standards – Liquidity Coverage Ratio” of 17 April 2020, which can be accessed at: “https://www.rbi.org.in/commonperson/English/Scripts/Notification.aspx?Id=3237”.

10 R4(3) of the IFSCA (Finance Company) Regulations 2021.

11 §80LA(1A) of the Income Tax Act 1961.

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.