GIFT IFSC – Paving The Way For A Global Financial Powerhouse In India

India set up its first international financial services centre in the Gujarat International Finance Tech City, to achieve the government’s vision of onshoring offshore financial services and products and for India to have its own financial centre.

The International Financial Services Centre Authority, set up in mid-2020 has emerged as a regulator focusing on principle-based rulemaking that ensures fast-paced legislation. This has made the introduction of innovative and complex products easier and faster. A presence in the GIFT IFSC provides foreign and domestic financial services entities, a jurisdiction to introduce new financial services and products benchmarked against global financial centres from within India.

Entities set up within GIFT IFSC are treated as ‘persons resident outside India’ for the purposes of the foreign exchange regime and can undertake transactions in freely convertible currencies. There have been many interesting developments in the GIFT IFSC including but not limited to funds, a fintech sandbox, bullion exchange, leasing, foreign education etc.

The framework recognises alternate investment funds, special situation funds, family investment funds, retail fund schemes such as mutual funds, ESG-focused funds as well as fund labs to encourage innovation and give an impetus to the asset management sector in GIFT IFSC. The framework permits a single registration for multiple fund activities by regulating the fund manager instead of the domestic approach of regulating the funds, thus allowing fund managers to undertake multiple fund activities. A fund management entity registered with IFSCA will be eligible to manage an array of schemes as well as funds and avail multitude of tax relaxations provided to such entities, subject to meeting the eligibility criteria.

The IFSC has also thrown open opportunities to develop new technologies and products through incentive schemes and regulatory sandboxes allowed in GIFT IFSC pursuant to the IFSCA Fintech Regulations, 2022. These sandboxes allow testing of innovative hybrid financial products and platforms while giving access to foreign markets and innovation grants and has generated a lot of interest from offshore investors. This framework can also lead to cross-border fintech corridors to grant incumbents in each market access to the other cross-border regulatory sandboxes. Providing a regulatory framework for fintech and tech-fin entities is a welcome move towards legitimising innovation. Necessary infrastructure to operationalise an innovation-backed eco-system and foster adoption of new technologies in IFSC, akin to what Singapore’s financial services regulator Monetary Authority of Singapore has done over the past decade, should also be provided. Secondly, clarity in respect of the applicability of SEBI and RBI laws to such products, oversight by domestic regulators, clarity on whether Indian entities can establish in the IFSC and offer products etc have to be provided to sustain the interest and growth of the sector.

Onshoring Overseas Nifty Contracts

GIFT IFSC is also home to India’s only international stock exchanges (NSE ISFC and INX) allowing trading of over 140 products at competitive prices with India as well as other international hubs. If permitted, it will provide Indian investors with the opportunity to diversify their portfolios by investing in cross-border markets and products. Whilst most of the trades on the international exchanges situated in GIFT IFSC are proprietary in nature, the NSE and the Singapore Exchange, in late 2021 agreed to establish a data connect vide IFSC, which aims to allow members of the SGX to place orders and trade in Nifty products vide the NSE IFSC. This is the first step towards migrating Nifty futures trades that have historically been on the SGX, to the NSE IFSC. As a result, investor participation in the exchanges in IFSC will also increase and offshore investors will have more access to Indian capital markets. Further, the liquidity pool is expected to move from SGX to GIFT IFSC. However, the contracts will be settled at the SGX as a result of which in the initial years the revenue from these trades will mostly go to SGX.

On the topic of capital markets, the introduction of innovative products such as unsponsored depository receipts in GIFT IFSC allows Indian retail investors to trade in overseas listed stocks through the GIFT IFSC exchanges providing operational ease and the benefit of lower remittance costs as opposed to investing in such stocks through an international broker.

The IT & ITES policy of the Government of Gujarat will certainly add impetus to such centres.

The International Bullion Exchange is also slated to commence operations in July 2022 making GIFT IFSC a major centre for the import of gold and discovering its prices per international benchmarks. Trading on the exchange may be done by way of a bullion spot delivery contract, or bullion depository receipt with underlying bullion. The operating guidelines for a bullion exchange specify that IBX shall have products in gold, silver or such other precious metal backed by physical bullion. The bullion exchange will also enable the trading of bullion vide BDRs issued in an electronic form by a bullion depository. A vault manager shall deliver the physical bullion referred to in a BDR, to the BDR holder upon demand made by the holder after satisfying the vaulting lien. Banking units at IFSC may be suppliers/owners of the bullion purchased from overseas and they may transfer the bullion into vaults empanelled by the depository for allocation of BDRs to trade as trading members on the International Bullion Exchange. RBI has now permitted banks to also act as clearing members on exchanges situated in IFSC.

Recently, the regulator also released draft guidelines viz., IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022 (Draft Regulations), which will enable foreign universities to offer specialised courses in financial management, fintech, science, technology, engineering and mathematics from and in the GIFT IFSC. The draft regulations set out an overall framework for establishing an international branch campus or foreign educational institution in IFSC by a foreign university independently or jointly with other foreign universities or in ‘collaboration’ or ‘consortium basis with an Indian university/deemed university/institution of national importance. The draft regulations also contemplate that the said IBC/FEI established in the IFSC shall offer identical courses and degrees within the IFSC as offered from its home jurisdiction. From the investor’s perspective, whilst the draft regulations are a welcome move, further clarifications are required from the IFSCA inter alia on the basis on which such a foreign university’s application will be approved, the forms and modalities vis-à-vis the Indian partner which may wish to jointly set up the IBC/FEI, clarity on remittance etc.

As we continue to see a series of regulatory announcements from the IFSCA for the development and governance of financial services and products in IFSC, more participation in the regime is likely to increase as the ecosystem evolves and clarity is provided vis-à-vis larger concerns such as the applicable dispute resolution regime, insolvency and bankruptcy regime as well as developing operational infrastructure conducive for a financial ecosystem. Further, the impact of the Development (Enterprises and Services) Hubs Bill, 2022, once tabled and passed by the parliament, which aims to overhaul the SEZ regime in India, on the IFSC has to be examined given that IFSCs by their very nature are only permitted to be set up within an SEZ situated in India. The many steps taken by the unified regulator and the central government to develop the GIFT IFSC into a world-class financial hub in the two years since its inception are commendable and take us closer to the dreams of making India a vibrant and preferred destination for international financial services and products.

Leena Chacko is Partner; and Devanshi Dalal is Senior Associate, at Cyril Amarchand Mangaldas.

The views expressed here are those of the author’s and do not necessarily represent the views of BQ Prime or its editorial team.