Tuesday, April 14, 2015

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 surbhi@vinodkothari.com.]

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

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