By Rupin Chopra and Shantam Sharma
Introduction
Gujarat International Finance Tec-City (GIFT City), is India’s first operational smart city and International Financial Services Center (IFSC), located on the banks of the Sabarmati River. GIFT city aims to become a global financial hub comparable to those in London, New York and Singapore. The IFSC within GIFT City provides a conducive environment for various financial services including banking, insurance, asset management, capital markets etc. It offers world-class infrastructure, regulatory framework and business friendly policies to attract domestic and international financial institutions, banks and companies. It was established as part of India’s vision to boost its financial services sector and attract foreign investment. Overall, GIFT City and IFSC represent a significant milestone in India’s journey towards becoming a leading global financial center, facilitating economic growth, job creation and technological advancement in the country.
Regulatory Authority in IFSC-GIFT City
In December, 2015, India inaugurated first IFSC within the GIFT City. Subsequently, in 2019, the Government of India enacted the International Financial Services Center Authority Act, 2019[1], establishing the regulatory framework for the flourishing IFSC ecosystem in India.
In April, 2020, the Government of India established the International Financial Services Authority (IFSCA) under the International Financial Services Center Authority Act, 2019 (hereinafter referred to as “IFSCA Act, 2019”). It represented a significant milestone in India’s progression towards becoming a global financial hub.
It functions as the unified regulator for the IFSC Gift City. It consolidates the regulatory authority of four key financial regulators in India such as Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI) and Pension Fund Regulatory Development Authority of India (PFRDA). The IFSCA is entrusted with responsibility to establish a favorable environment for conducting business within IFSC GIFT City and to provide a regulatory framework of international standards.
Business Activities in GIFT City
The IFSC at GIFT City offers a dynamic environment for a wide range of business activities. Positioned as a premier global financial hub, the IFSC Gift City provides a variety of opportunities for domestic and international businesses across various sectors such as:
- Banking: In banking sector, the IFSC GIFT City accommodates branches of both Indian and Foreign banks. Banking operations conducted through an IFSC Banking Unit (IBU) is categorized as offshore banking due to the international nature of the IFSC. Key business activities permissible for IBU are:
(a) Opening foreign currency accounts for residents in India and abroad.
(b) Accepting deposits from Qualified Individuals (QI) (a non-resident individual having net worth more than USD 1 million in the preceding financial year), Qualified Resident Individuals (QRI)(a resident individual having net worth more than USD 1 million in the preceding financial year)and other entities.
(c) Providing loans, trade finance services, guarantees, credit insurance, managing the sale and purchase of portfolios etc.
(d) Engaging in inter-bank borrowing and lending
(e) Making investment such as subscribing, acquiring, holding, underwriting or transferring securities or other specified instruments, either as principal or agent, as specified by the authority.
- Capital Market: GIFT City facilitates providing of financial solutions to the global clients, granting direct entry to the institutional and high-net-worth individuals seeking access to equity, commodities and currency derivatives market. Various intermediaries such as stock exchanges, commodity exchanges, clearing corporations, depositories, stockbrokers, portfolio managers etc. are authorized to operate and offer services within the GIFT City.
- Fund Management: It is one of the financial services available in the GIFT City. Depending upon the type of license held by the Fund Management Equity (FME), it can introduce various schemes such as Venture Capital Scheme, Restricted Schemes (Non- retail Schemes) which are offered through private placement, Retail Scheme with a minimum size exceeding USD 5 million and Special Situation Funds.
- Insurance: Indian insurance firms and foreign insurers after receiving No-Objection Certificate (NOC) from their respective insurance authorities can establish an insurance office in the IFSC GIFT City. These offices can offer direct insurance for offshore operations and including the coverage for global subsidiaries of Indian conglomerates and individuals situated in any offshore jurisdiction.
Additionally, they can engage in offshore reinsurance activities for insurer in offshore jurisdiction, IFSC based insurers and business originating from India, in accordance with the regulations of Insurance and Regulatory Development Authority of India (IRDAI).
- Finance Company: In GIFT City, the finance companies are authorized to conduct both core and non-core activities. Core activities include lending through various means such as loans, commitments, guarantees, sale and purchase of portfolios etc. Additionally, they can engage in factoring (it is a financial arrangement which allows the businesses to receive immediate cash in exchange of their receivables with the third party) and forfaiting of receivables (it is an export financial arrangement which allows the trader to receive immediate cash in exchange of trade receivables with forfeiter) etc. Non-core activities include merchant banking, registrar and share transfer agent services, investment advisory services, trusteeship services etc.
- Allied Services: Additionally GIFT City accommodates a variety of allied services, including Global In-House Centers, Aircraft Leasing & Financing, Ship Leasing etc.
Benefits of the GIFT City
The GIFT City provides a plethora of opportunities for the businesses seeking to thrive in the global financial landscape. Strategically located in Gujarat, India, GIFT City offers wide variety of benefits to the businesses such as:
- Income Tax Benefits:
(a) Entities have the opportunity to receive complete tax exemption for up to 10 years within a 15 year period, with the flexibility to select the specific 10 years.
(b) Within the IFSC, the Minimum Alternative Tax (MAT) (it is the minimum amount of tax which a company must pay to the Government of India) rate stands @9% of book profits (it is the profit which has been made but not yet received). It is applicable to the companies/LLPs working as a unit in the IFSC.
(c) Businesses opting for the new tax regime within the IFSC are exempted from MAT.
(d) Dividend received by the non-resident or foreign companies from an IFSC company will be taxable @10%.
- Investor Benefits:
(a) Interest earned on loans extended to IFSC units remains exempted from taxation.
(b) Interest derived from long term bonds & rupee denominated bonds (a debt instrument issued by an Indian entity in the foreign market to raise capital in Indian currency) listed on IFSC exchanges are taxable @4%.
(c) Profits generated from the sale of certain securities such as foreign currency denominated bond, unit of a mutual fund, unit of a business trust, rupee denominated bond of an Indian Company, etc.
- Good & Services Tax Benefits:
(a) No GST will be charged on services which are provided to the IFSC/SEZ unit or offshore clients.
(b)Transactions conducted on IFSC exchanges by the investor are exempted from GST.
(c) Services offered to the Domestic Tariff Area (DTA) are subject to GST.
Initiative taken by the Government of India
The Government of India (GOI) has undertaken a series of strategic initiatives for the growth and development of the IFSC-GIFT City such as:
The Hon’ble Minister of Finance, Mrs. Nirmala Sitharaman on February 1st, 2023, have introduced a set of strategic measures designed to enhance business operation in IFSC-GIFT City as part of the Union Budget FY 2023-24[2]:
(a) Granting the authority under the Special Economic Zone Act, 2005 (hereinafter referred to as “SEZ Act, 2005”), to IFSCA to prevent dual recognition.
(b) Establishing a unified IT system for streamlining the registration and approval processes involving IFSCA, Special Economic Zone Authorities (SEZ), Goods and Services Network (GSTN), Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI) and Insurance Regulatory and Development Authority of India (IRDAI).
(c) Allowing acquisition financing by IFSC Banking Units of foreign banks.
(d) Setting up a branch of Export-Import Bank of India (EXIM Bank) for trade refinancing purposes.
(e) Making amendments to the IFSCA Act, 2019 to incorporate statutory provisions for arbitration ancillary services and prevent overlapping regulation under the SEZ Act, 2005.
(f) Acknowledging offshore derivatives, instruments as legitimate contracts.
On January, 2024, the Hon’ble Finance Minister of India, Mrs. Nirmala Sitharaman announced the commencement of direct selling for Indian firms on IFSC-GIFT City exchanges as an initial step. This framework includes a unified regulatory structure enabling unlisted Indian companies to offer their shares on global exchanges. SEBI is currently in the process of formulating operational guidelines for listed public Indian companies. Other than allowing access to the Indian firms to both the domestic and international markets to raise capital in Indian National Rupees (INR) and foreign currencies respectively, this initiative is set boost the capital market ecosystem within the IFSC-GIFT City.[3]
Conclusion
In conclusion, the GIFT City and International Financial Services Center (IFSC) represent a significant milestone in India’s ambition to become a global financial hub. Through favorable regulatory framework and state of art infrastructure, these initiatives aim to attract international financial institutions, investors and businesses. By providing a conducive environment for capital market, banking, insurance etc. IFSC GIFT City are poised to contribute to the India’s economic growth, foster innovation and enhance its position in the global financing landscape. As the entities continue to grow and expand, they hold the potential to drive greater investment, create employment opportunities and facilitate cross-border financial transaction, thereby bolstering India’s standing as a leading player in the international financial arena.
Ritvik Kashyap, Intern at S.S. Rana & Co. has assisted in the research of this article.
[1] Available at: https://www.indiacode.nic.in/bitstream/123456789/14009/1/A2019_____50.pdf
[3]https://pib.gov.in/PressReleseDetailm.aspx?PRID=1999154
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