Relief for GIFT City as Modi's election win allays relocation fears

A fourth of India-focused Singapore and Mauritius funds may potentially migrate to IFSC over time

The National Democratic Alliance’s (NDA) win in the Lok Sabha elections has come as a relief for market participants planning to kickstart operations
 
at the International Financial Services Centre (IFSC), set up at the Gujarat International Finance Tec-City (GIFT City).
 
Industry observers were earlier of the opinion that a new party at the Centre could potentially impede the progress at IFSC. Some also believed that the IFSC could be shifted to Mumbai, in place of Gujarat.
 
In December 2015, the Maharashtra government had set up a task force under Union Minister of State for Finance, Jayant Sinha, for setting up an IFSC in Mumbai.
 
Several fund industry consultants, including top law and advisory firms, are preparing for roadshows to showcase benefits of setting up alternative investment funds (AIFs) at GIFT to investors. About a fourth of India-focused funds based in Singapore and Mauritius may potentially migrate to IFSC over time.
 
“For the last 5-6 months, market participants were holding back their investment decisions regarding IFSC. The incumbent government returning to power has brought in a lot more certainty,” said V Balasubramaniam, managing director and CEO of India International Exchange. While 50-75 domestic brokerages have shifted to the IFSC, foreign brokerages and custodians are yet to set up shop. A unified regulator for IFSC, announced in last year’s Budget, has not seen the light of day, either.
 
In February, the Centre introduced the IFSC Bill in Rajya Sabha to enable the setting up of a unified authority for regulating financial transactions carried out of IFSC.
 
At present, IFSC regulation is overseen by the RBI, Sebi and Irdai.
 
Last week, the Khan committee recommended that entities established at IFSC be allowed to use their IFSC location to seek an FPI licence.
 
Once implemented, the GIFT City will act like any other eligible foreign jurisdiction for setting up a pooling vehicle for inbound investments in India through an FPI licence.
 
Sebi had last year brought out guidelines allowing alternative investment funds to register at GIFT City and garner funds from abroad, enabling Indian managers to directly sponsor and manage offshore AIFs set up at IFSC.
 
“If fund managers have to shift to GIFT, the infrastructure needs to be spruced up, not just in terms of office buildings but also arbitration centres, schools and colleges, F&B facilities, entertainment and housing,” said Alok Churiwala, a broker.
 
Trading at IFSC has seen a gradual pick-up following the easing of regulations. For instance, India INX saw an all-time high turnover of over $3.3 billion on its derivative segment in daily trading turnover on Thursday.
 

The Centre has already announced concessions for IFSC investors, including exemption from paying the securities transaction tax, commodities transaction tax and stamp duty. Last year’s Budget allowed transactions in derivatives, bonds, global depository receipts and rupee bonds on an IFSC exchange to be exempt from capital gains tax.
 
While several sops have been announced for trading out of IFSC, niggling issues remain. For instance, there are concerns that a portion of the dividend to be declared by firms operating out of IFSC could come under the tax net. Similarly, income earned by eligible foreign investors not classified as foreign portfolio investors may face a tax outgo of 40 per cent plus surcharge and tax on income earned.
 
Any income earned by FPIs from trading on the IFSC is regarded as capital gains and is exempt from tax.
 
For example, the tax on short-term gains on derivatives trades is nil.