India’s aspiration to turn into a financial powerhouse is just a whisker away from becoming a reality. The International Financial Centre (IFC) project at the Gujarat International Finance Tec-City (GIFT) is evolving at a rapid pace and is all set to throw open its doors to Indian and global investors.
While many sceptical voices were raised when the project was announced in 2015, the past few months have shown that the Centre is serious about this. Not only are tax and other regulations in place, many institutions have begun making a beeline towards the GIFT City. This has implications for the economy and investors.
A brief background
An international financial centre is located within a country, but operates with a set of rules that are quite different from those applicable in the rest of the country. The idea is to attract global financial companies, investment bankers, fund houses, law and accounting firms and so on, to transact in this area.
The taxes applicable on transactions in this centre have to be made low enough to compete with other IFCs in places such as London and Dubai. The laws governing these companies have to be less rigid than rest of the country. Indian companies and financial institutions can also open subsidiaries in this centre and conduct business with international clients.
India’s first IFC is coming up on the banks of the Sabarmati river over a sprawling 886 acres. It plans to vie with globally established financial centres such as Shinjuku, Tokyo; Lujiazui, Shanghai; La Defense, Paris; and the London Docklands.
Laws in place
Stock market regulator, the Securities and Exchange Board of India, has issued guidelines for exchanges and market intermediaries wishing to set up a stock exchange platform or other outfits in the GIFT City.
Both Indian as well as foreign stock exchanges are allowed to set up exchanges within the IFSC. They can do this by forming a subsidiary in which the parent holds at least 51 per cent. Initial net worth of the exchanges should be ₹25 crore, which needs to increase to ₹100 crore in three years.
Similar rules are laid down for domestic and foreign depositories, and clearing corporations that offer ancillary services to stock exchanges.
These market infrastructure institutions have to follow the broad guidelines on governance laid down by the International Organisation of Securities Commissions (IOSCO). The RBI has similarly spelled out the rules for banks wanting to set up an arm in the Indian IFC.
The Union Budget of 2016 contained a slew of tax sops for units operating in the GIFT city. The most important of these was a tax holiday for the first five years and the requirement that only 50 per cent of the tax is payable in the next five years on profits made in these locations.
Further, there will be no security transaction tax or commodity transaction tax on trades conducted on exchanges set up in the GIFT city. This is likely to help promote exchanges in the IFC as these transaction taxes are a major deterrent for traders. High CTT is in fact one of the reasons why trading on Indian commodity bourses has declined drastically.
To further incentivise trading on the exchanges in the GIFT city, dividend distribution tax (DDT) is also abolished and these transactions will not be subject to long term capital gains either
According to news reports, around $650 million has been raised by Yes Bank and Federal Bank, which have functional offices at the GIFT city. Other prominent banks such as SBI, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Bank of Baroda, IDBI Bank, Corporation Bank and Syndicate Bank are also said to be in the process of beginning operations at the IFC.
The Bombay Stock Exchange has announced that it plans to open an international exchange at the GIFT City in January 2017. The National Stock Exchange, the NCDEX and ICEX have also signed agreements to set up trading platforms there.
With many global players expected to operate here, a strong dispute resolution mechanism is a primary requisite. This has been addressed with the announcement that Singapore International Arbitration Centre has signed an MOU with the GIFT City to act as an arbitrator for disputes.
Benefit to the economy
According to initial estimates, the GIFT City project is likely to entail an overall spend of around ₹70,000 crore. This will translate into healthy order for companies involved in constructing buildings and other infrastructure facilities.
Once the facilities are up and running, the business transacted in this area is expected to contribute to the overall GDP in a significant manner as well. Around 6 lakh direct and indirect jobs are expected to be created by 2020.
The trading in securities listed on the IFSC has to take place in currencies other than the rupee. If you are a resident Indian, you can invest in securities listed and traded on the exchanges set up in the IFSC to the extent allowed by the Liberalised Remittance Scheme of the Reserve Bank of India. Since Indian residents can currently spend up to $250,000 a year outside India under the LRS, this is the limit up to which you can invest in one year in securities on the IFSC platform.
If you are a non-resident Indian or a foreign national, there is no ceiling on the investment. Indian companies that wish to trade or invest here can do so to the extent to which they have obtained permission under FEMA.