A large part of India's capital needs to be met via GIFT City: Ifsca Chair

K Rajaraman, chairman of the IFSCA, outlines how the IFSC is emerging as a hub for India Inc's foreign-currency needs

Five years after the International Financial Services Centres Authority (IFSCA) was set up as India’s unified financial-sector regulator, business activity at the GIFT City IFSC has accelerated sharply. Backed by regulatory initiatives, the country’s sole financial services centre has crossed key milestones — from registering more than 1,000 entities to facilitating over $100 billion in bank loan disbursements. K Rajaraman, chairman of the IFSCA, says the centre’s rise is inseparable from India’s own economic trajectory. In a conversation with Samie Modak in GIFT City, Gandhinagar, he outlines how the IFSC is emerging as a hub for India Inc’s foreign-currency needs. Edited excerpts:

 

Over the past 18-20 months, the centre has made significant progress. What has given a fillip to the IFSCA and GIFT City?

 

The biggest factor is the India growth story. India today has a tremendous requirement for capital across sectors such as advanced manufacturing, aircraft, semiconductors, electronics, telecom, defence, pharmaceuticals, batteries, and solar manufacturing. All of this requires large amounts of capital. While companies have their own cash reserves, many of these large projects will also require foreign capital. The idea is that GIFT City will provide the required foreign-currency debt, equity, and related financial services, including insurance, to support this growth.

 

Is it fair to say that a significant share of India’s need for foreign capital can now be met from GIFT City?

 

Foreign capital will continue to come directly into India, but companies have realised that GIFT City is a more cost-efficient way of channeling funds. Today, there are 35 bank branches in the IFSC, and the target is to reach at least 50 in the next one or two years. As more strong banks come in from across the globe, a large part of India’s capital requirements will be met through this route.

 

What is the role of GIFT City in external commercial borrowing (ECB) and foreign flows?

 

Over the past one year, around 36 per cent, or roughly $19 billion, of ECB ($61 billion in all) has come through GIFT City banks. The expectation is that this share will go up. Besides, about $8 billion of equity capital has also flowed into India through funds set up here. This capital is largely foreign money, including from global players such as the Lichtenstein family’s LGT and the Abu Dhabi Investment Authority. It is a mix of money from non-resident Indians and pure foreign capital, but predominantly foreign.

 

Is this mainly due to cost advantages, or are there other benefits?

 

There are five-six key advantages. The first is India’s growth story. The second is the human capital advantage — India’s skilled workforce. Third, the cost of living in and around GIFT City is relatively low. Fourth, there is a favourable tax policy. Finally, and most importantly, there is a regulatory ecosystem that is simple and inspires confidence among global and domestic players.

 

What new growth areas are you prioritising for GIFT City?

 

One major area identified is commodity trading. Most established international financial centres — Hong Kong, Singapore, and London — grew significantly on the back of trading activity. India is a large producer of commodities like aluminium, zinc and copper, but it does not yet punch its weight in global commodity markets because the ecosystem for trading is underdeveloped.

 

Is there any concern that GIFT City could be eroding India’s onshore tax collection or leading to tax arbitrage?

 

The regulations are designed to ensure there is no arbitrage. For example, if a technology company sets up in GIFT City, it is required to do foreign business and cannot provide services to the domestic India market. The IFSCA focuses on financial-market regulation and supervision. Income-tax assessments are carried out by the income-tax authorities, and other agencies such as the Financial Intelligence Unit oversee issues relating to money laundering and financing of terrorism. All relevant authorities are active, and there is a clear demarcation of roles.

 

Have you encountered instances of misuse or regulatory violations in the IFSC?

 

Supervision teams are constantly inspecting entities. Banks and funds, which are the largest entities in the centre, submit monthly, quarterly, and annual reports, and there are onsite inspections to verify that they are doing only licensed business. In cases where violations have been found, strong action has been taken, including the cancellation of licences. For instance, the licence of an insurance broker dealing with a country grey-listed by the Financial Action Task Force was cancelled.

 

As a unified regulator, how challenging is it to manage regulations that cut across what other regulators do in their own domains?

 

The staff of the IFSCA is drawn from all these regulators. There are officers from those and others who have joined either on deputation or through absorption. In addition, there are people from banks, insurance companies and bullion markets, so a broad range of expertise is available within the system. On top of this, people are sent for international training because this is a global financial centre and domestic knowledge alone is not sufficient.

 

Are there any impediments, given the potential size of domestic money?

 

Indian investors sitting in Mumbai have long been investing directly in markets like New York, and the Reserve Bank of India data shows that $2 billion-3 billion goes out every year under the category “investment abroad”. The idea now is to route at least part of this flow through GIFT City. If investors route this through the “Global Access” programme in GIFT City, it creates jobs and business for brokers here, and their money is placed with a regulated entity in India that is directly answerable to them. This is a clear advantage compared with sending money directly overseas.

 

Has GIFT City captured a meaningful share of this $2 billion–3 billion?

 

Part of it has begun to flow via GIFT City structures such as feeder funds. For example, there are feeder funds that invest in American stocks. Currently, about 95 per cent of the funds in GIFT City are inbound and about 5 per cent outbound, and this outbound segment caters to LRS (liberalised remittance scheme) investors and local family offices that want international exposure.

 

How are you looking at building the retail investor ecosystem?

 

The retail ecosystem is just beginning to take shape. Recently, assisted video KYC regulations were notified, making taking on board investors in a remote manner much easier. Just as domestic brokers can take on board investors in a couple of minutes, similar digital taking on board is now possible for GIFT City intermediaries. Over time, this is expected to scale up retail participation.

 

On listing, you had said earlier that one filing had been made. When can we expect to see the first initial public offering (IPO)?

 

An IPO is expected in the next couple of months. It is likely to be in the education space and may involve an exit for existing investors. This segment has been slow to start because issuers have to build marketing arrangements in multiple jurisdictions. Unlike a domestic IPO, where there are several merchant bankers and a ready ecosystem, GIFT City listing is more of a corporate and institutional market than a retail one.