GIFT City: A New Chapter in the Indian Financial Sector: Part 1

[The
following guest post is contributed by Surbhi
Jaiswal
of Vinod Kothari & Co. The author can be contacted at [email protected]]
The International Financial Service Centre
(IFSC) is a hub of financial services within a country, which has laws and
regulations that are different from the rest of the country. Usually these
centres have low tax rates and flexible regulations for securities and currency
trading, banking and insurance, which makes them attractive for foreign
investment. It can be said that these centres deal mainly with the flow of money,
financial product and services across borders.
Recently, in Budget 2015 Finance Minister Arun
Jaitley had announced that the first IFSC centre in India shall be set up in
Gujarat International Finance Tec-City (GIFT), near Ahmedabad. Finally, on
Friday, April 10, 2015, GIFT was officially launched by the finance minister
and a booklet containing all the rules and guidelines issued by the various
regulators with regard to the governing of these IFSC centre was also released.
This is indeed a new chapter in the India financial service sector

Global
Presence of IFSC
Globally,
the IFSC is not a new concept. International financial services are being
provided by various International Financial Centres (IFC) worldwide, amongst
which centres located in London, New York, Singapore and Dubai are the
prominent ones. London has been a significant IFC for over three centuries now,
whereas New York rose to eminence with the growing importance of the US economy
between late 19th century and early 20th century and also
due to the persistent American innovation in the field of finance. IFCs in
Dubai and Singapore are relatively recent.
Indian
Scenario
This concept is not new in India because in 2007
the Percy Mistry Committee Report
had explored the idea of setting up an IFSC in India and had suggested the
setting up of an International Financial Centre in Mumbai. The report
recommended for the reform of the Indian financial system and suggested that
India had the potential of competing with the likes of London, and New York. However,
the plan was subsequently abandoned due to the 2008 global financial crisis.
Further, a concept
paper
on the establishment of finance SEZs, submitted by the National
Institute of Public Finance and Policy to the Ministry of Finance, also
recognized that the existing financial and taxation regimes are the main reasons
which have caused the global business to shift from India to countries like Singapore
and Dubai, which provide a beneficial business environment. In order to combat
this, it advocated on the establishment of a new financial regulatory framework
either through enacting and enforcing a `Finance SEZ Act’, or an IFSC. Further
the Ministry of Finance is working on the policy framework for Finance SEZ
which will have features such as capital account convertibility, modern
regulatory framework and resident based taxation and seeks public comments on
the concept paper, which was made available to the public on February 27, 2015.
Recently, in Budget 2015, while announcing the
establishment of the GIFT City, the Minister of Finance in his budget speech
(2015-2016) stated:
“While India produces some of the finest
financial minds, including in international
finance, they have few avenues in India to
fully exhibit and exploit their strength to the country’s advantage. GIFT in
Gujarat was envisaged as International Finance Centre that would actually
become as good an International Finance Centre as Singapore or Dubai, which,
incidentally, are largely manned by Indians. The proposal has languished for
years. I am glad to announce that the first phase of GIFT will soon become a
reality.”
GIFT is a globally-benchmarked international
financial centre that will target 8-10 percent of financial services on 84
million square feet of space and create one million employment opportunities.
Its core operations will include offshore banking; insurance, assurance and
reinsurance; regional financial exchanges and back offices.[1]

Impact
of setting up an IFSC
Establishment
of an IFSC in India is necessary for the growth of the Indian
financial sector. The impact of this establishment is far reaching. The move is
expected to increase the revenue of the country by capturing approximately
Rs.1,334 crore per day or Rs. 2 lakh crore per year worth of trading in rupee
derivatives that presently goes to places outside India.[2] Further, it will help the
country attract global financial service business which is otherwise lost to
other countries due to the absence of an IFSC.
The
existing regulatory structure and tax regime in the country do not create a
conducive environment for foreign investment and have thus caused a huge amount
of trading in rupee and Nifty to go out of the country. Presently, global
trading in rupee and Nifty takes place in Singapore and Dubai because they
provide a sound regulatory framework with regard to financial regulations and
taxation. This has an adverse effect on the Indian economy as it causes a drain
on the revenue of the country. Establishing IFSC with sound regulatory framework
would aid in bringing back the revenue stream to the country.
Further,
only large Indian companies having international presence are able to attract
global fund managers to invest in them and are able to go to London or New York
to raise money. Various other Indian companies are unable to get noticed. Now,
given the current scenario, when an IFSC will be set up in India, foreign
entities working in it, will have access to many more Indian companies and will
also get engaged in the Indian economy in a better way. Further, these entities
will be able to invest in the equity and debt of a large number of Indian
companies.
Moreover,
when Indian companies raise equity and debt capital outside India, revenues
pertaining to the financial services performed for these activities accrue in
places where such capital was raised. Salary and tax with respect to the same
are paid outside India. Therefore, if entities set up in an IFSC globally compete
to provide these services, we would be able to prevent the abovementioned
payments from going out of India.
The
most important impact of setting up an IFSC is that it will be able to generate
employment opportunities in the country. Branches or subsidiaries of stock
exchanges, banks, clearing corporations and depository set up in an IFSC would
definitely require work force to manage their operations, this in turn would
create employment opportunities within the country.
IFSC will be set up under the
Special Economic Zone (SEZ) Act of 2005
An IFSC will be set up under Section
18(1) of Special Economic Zones Act, 2005. Section 18(1) provides:
18(1) The Central
Government may approve the setting up of Setting up of an International
Financial Services Centre in a Special Economic Zone and may prescribe the
requirements for setting up and operation of such Center:
Provided that the
Central Government shall approve only one International Financial Services
Centre in a Special Economic Zone.
Establishment of an IFSC in SEZ means that separate
regulations shall be formed for an IFSC, which shall be different from the rest
of India. Section 49 SEZ Act states:
49. (1) The Central Government may, by notification, direct
that any of the provisions of this Act (other than sections 54 and 56) or any
other Central Act or any rules or regulations made thereunder or any
notification or order issued or direction given thereunder (other than the
provisions relating to making of the rules or regulations) specified in the
notification (a) shall not apply to a Special Economic Zone or a class of
Special Economic Zones or all Special Economic Zones; or
(b) shall apply to a Special Economic Zone or a class of
Special Economic Zones or all Special Economic Zones only with such exceptions,
modifications and adaptation, as may be specified in the notification.
Furthermore, India has several
constraints in the financial sector, such as, partial capital account
convertibility and foreign investment restrictions, and the establishment of an
IFSC in an SEZ can serve as an experimental ground for financial sector reforms
before they are made applicable to the entire nation.
As far as the tax implications are concerned,
it shall be on the lines of the SEZ. S Thakur, Chairman of the Policy Making
Committee of International Financial Centre in an interview with CNBC-TV18 said,
“The tax also we are recommending that
whatever the tax implication available for the special economic zone (SEZ)
sectors, the same will be applicable in this international financial centre
also.”
[3]
(To be continued)

 

– Surbhi Jaiswal

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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