British hedge fund Qube Research & Tech first to set up shop in GIFT SEZ

High-frequency trading firm to get tax sops on derivative trades

London-headquartered high-frequency trader (HFT) Qube Research & Technologies (QRT) is setting up operations in GIFT City, providing a boost to the country’s only International Financial Services Centre (IFSC), which aims to position itself as a hub for global trading firms. 

The British fund — often described in market circles as a secretive hedge fund due to its low public profile and proprietary trading operations — has got in-principle approval from the IFSC Authority (IFSCA) to register as a fund management entity. It will be the first global HFT to set up in the special economic zone (SEZ). 

“In addition to our Mumbai office, we are in the process of establishing an office in GIFT City,” QRT confirmed, but did not provide further details. Emailed queries sent to the IFSCA remained unanswered at the time of publication. 

QRT is expected to launch a Category III fund, which allows undertaking sophisticated trading strategies. By registering in the international zone of GIFT-IFSC, QRT will be able to enjoy tax exemption on income from derivatives trading and benefits on securities transaction tax, said industry players. While some HFTs have set up office in GIFT City, they operate from the domestic tariff area (DTA), benefiting from refunds on stamp duty paid on share-broking transactions. Sources added that HFTs in the DTA register as stockbrokers and invest through their proprietary books. 

“So far, a few other HFT players have set up units in the domestic area and have enjoyed stamp duty refunds that become a significant portion of their cost. However, an HFT setup as an AIF in Gift City will be able to enjoy complete tax exemption on derivative gains,” said Rajesh Gandhi, partner, Deloitte India. 

On the growing HFT ecosystem at GIFT City, Sanjay Kaul, managing director and group chief executive officer of GIFT City, said: “The IFSC has also emerged as a hub for HFT and proprietary trading activity. Firms such as Jump Trading, Tower Research Capital, Graviton Research Capital, NK Securities, Mathysis, Quadeye, and Pluswealth operate from the DTA segment, while others participate in the IFSC ecosystem through remote trading.” 

While HFTs investing from Mauritius, Singapore, and Ireland can also avail themselves of tax exemptions on derivative gains, there is some uncertainty over the tax treatment of such income under India’s anti-avoidance rules and OECD norms, experts said. 

“A GIFT City setup offers better protection, albeit with the requirement of maintaining adequate substance and key managerial personnel (KMPs) based in GIFT City. For such structures, the usual norms applicable to alternative investment funds (AIFs) would be applicable, with certain key officials required to be based in GIFT-IFSC,” Gandhi said. 

“GIFT-IFSC offers a strong case for HFTs because it provides offshore-style tax treatment. It enables Category III AIFs to deploy leveraged, derivatives-led strategies with operational flexibility,” said Rohit Jain, managing partner at Singhania & Co. 

Jain added that the IFSC offers tax exemptions on certain income attributable to non-resident investors, including capital market transactions. Coupled with foreign currency operations and a globally aligned regulatory regime, this creates a more favourable alternative to domestic structures. 

HFTs have gained momentum in India in recent years because of high liquidity and trading opportunities. However, some firms have come under regulatory scrutiny over alleged market manipulation through trading strategies. 

Legal experts said setting up in GIFT-IFSC also provides greater regulatory predictability, especially amid growing scrutiny of offshore investment structures. 

“The Tiger Global tax controversy has heightened sensitivity among offshore funds regarding issues such as permanent establishment exposure, source-based taxation, and retrospective characterisation disputes,” said Kunal Sharma, managing partner at TARAksh Lawyers and Consultants. 

“Section 10(4D) of the Income-Tax Act provides exemptions for specified income earned by eligible Category III AIFs located in IFSCs and receiving income solely in convertible foreign exchange. In addition, transactions undertaken on recognised stock exchanges in the IFSC are exempt from securities transaction tax under the Finance Act, 2004,” he added. 

HFTs deploy algorithmic and quant strategies and have exceptionally high turnover. Savings on transaction cost and tax efficiency can materially improve the strategy economics in derivatives trading. 

Rajul Bohra, partner at JSA, said the tax benefits available to specified funds in GIFT-IFSC are explicitly codified in domestic law, making them inherently more certain from a tax perspective. 

“Unlike offshore fund structures that rely on treaty eligibility and are therefore exposed to GAAR-related challenges, specified funds in GIFT-IFSC derive their tax benefits directly from Indian domestic law,” she added.