GIFT City (Gujarat International Finance Tech) is strategically positioned to emerge as a leading worldwide financial and IT services hub, mirroring globally benchmarked financial centers. The establishment of the International Financial Services Centre (IFSC) was a pivotal move to manage financial service transactions conducted outside India by foreign and Indian financial institutions through overseas branches and subsidiaries.
The Special Economic Zones Act of 2005 laid the foundation for the IFSC, providing a framework for its establishment. Essentially, the IFSC facilitates financial service companies in offering foreign currency financial services and products to consumers. Under Indian exchange control regulations, entities within the IFSC, including 'units,' are considered residents outside India. This unique positioning makes the IFSC an attractive jurisdiction for effectively pooling and managing global financial resources.
The Securities and Exchange Board of India (SEBI) played a crucial role by publishing operating guidelines for Alternative Investment Funds (AIFs) in IFSCs on November 26, 2018. These guidelines outline specific requirements for AIFs in IFSCs:
I. A minimum scheme size of at least USD 3 million.
II. Minimum investments:
A. By employees/directors of AIFs manager – USD 40,000.
B. By investors – USD 150,000.
III. A continuous, minimum sponsor commitment, determined as the lower of:
A. USD 1.5 million or 0.5% of the fund corpus for category III AIFs.
B. USD 0.75 million or 2.5% of the fund corpus for category I and II AIFs.
Simplified regulatory Framework
In 2022, the regulatory framework within the International Financial Services Centre (IFSC) underwent further simplification through the introduction of the IFSCA (Fund Management) Regulations. The International Financial Services Centre Authority (IFSCA) emerged as the central regulator, consolidating the powers of various regulatory bodies such as the Reserve Bank of India, Securities and Exchange Board of India, Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority of India.
This regulatory evolution signifies a paradigm shift by directing its focus towards fund managers rather than the investment vehicles and funds they manage. Aligning with international norms, the IFSCA mandates registration for a fund management entity as per International Financial Services Centres Authority (Fund Management) Regulations, 2022, categorizing them as:
Registered FME (Non-Retail): Invests in securities, financial products, and other permitted asset classes through restricted schemes. It can also undertake portfolio management services.
Registered EME (Retail): Invests in securities and financial products through retail or restricted schemes.
Authorized FME: Invests through venture capital schemes.
This regulatory streamlining introduces a more efficient process for fund managers, allowing them to submit a single application encompassing all intended activities. This not only expedites fund launches but also fosters a business-friendly environment.
To enhance the competitive edge of funds established in the IFSC against their foreign counterparts, the fund regulations bring about key provisions:
Borrowing and Leverage: Funds established in the IFSC have the flexibility to borrow and leverage without limitations.
Co-Investment: Funds can engage in co-investment in permissible investments using special purpose vehicles or segregated portfolios, issuing a separate class of units.
However, despite these advantages, funds established in India often face challenges in competing with their foreign counterparts. Indian funds are typically restricted from borrowing and leveraging, and they encounter limitations on co-investment, resulting in access to a comparatively smaller pool of assets. This regulatory adjustment aims to level the playing field and position IFSC as a more attractive destination for fund establishments.
ADVANTAGES OF ESTABLISHING AIFS IN GIFT CITY
1. Tax Exemptions on Specific Securities Transfers:
Category III AIFs in the IFSC enjoy a 100 percent tax exemption on the transfer of specific securities under certain conditions:
a) All AIF units are held by non-residents, excluding those held by the sponsor or AIF manager.
b) The consideration for the transfer is payable in a foreign currency.
2. Government Subsidies:
Gujarat government provides subsidies to AIFs in GIFT City, reducing operating costs for entities established in this financial hub.
3. Access to Multiple Markets from IFSC:
AIFs operating in GIFT City have the advantage of easy access to various markets, enhancing their reach and potential for diverse investment opportunities.
4. No Extra Regulatory License for Engaging International Firms:
AIFs established in the IFSC are treated as nonresident Indians under India’s current foreign exchange regulations. This allows them to engage with international firms without the need for additional regulatory licenses, streamlining cross-border transactions.
5. Tax Exemptions:
IFSC offers attractive tax benefits, including a 100 percent tax exemption on business income for ten consecutive years out of fifteen (Tax Holiday). Additionally, entities in IFSC benefit from Goods and Services Tax (GST) exemptions.
Establishing AIFs in GIFT City not only provides a favorable tax environment but also ensures cost-effectiveness through government subsidies. The strategic location in the IFSC facilitates seamless access to diverse markets, and the regulatory framework allows international engagements without cumbersome additional licenses. Furthermore, the extended tax benefits contribute to a conducive business environment, making GIFT City an appealing destination for Alternative Investment Funds.
ELIGIBLE INVESTORS FOR AIFS IN GIFT CITY
1. Foreign Investors:
Nonresident individuals or entities interested in investing in AIFs within GIFT City. This category encompasses foreign portfolio investors, other foreign investors, and qualified foreign investors meeting specific eligibility criteria.
2. Institutional Investors:
Institutions such as insurance companies, banks, pension funds, and other financial entities complying with regulatory requirements are eligible to invest in AIFs in GIFT City.
3. Family Offices:
Wealth management advisory firms catering to high-net-worth individuals and families can invest in AIFs in GIFT City on behalf of their clients.
4. High Net Worth Individuals (HNIs):
Individuals with substantial personal wealth who meet the minimum investment requirements are eligible to invest in AIFs in GIFT City.
5. Important Considerations:
Before making any investment decisions, it is crucial to consult with a financial advisor or legal expert to determine eligibility and ensure compliance with regulations.
Regulatory Framework and Infrastructure Development:
- While the regulatory framework for the IFSC has been simplified, GIFT City lacks a separate court system to address disputes, distinguishing it from financial centers like DIFC. The government should consider adopting a similar approach to establish a dedicated court system for GIFT City.
- Fund regulations mandate that Fund Management Entities (FMEs) must have a physical office in the IFSC. Ensuring efficient connectivity to and from GIFT City, developing residential and recreational areas, healthcare facilities, and other amenities are essential for enhancing the quality of life for residents and workers. These factors play a crucial role in the overall success of GIFT City in India.
LOOKING AHEAD: Charting the Future of IFSC in GIFT City
While the International Financial Services Centre (IFSC) has already secured the 3rd position in the Global Financial Centers Index as one of the 15 centers poised for increased significance in the coming years, Singapore remains a preferred choice for foreign investors seeking a base in South Asia. It is imperative for the government to recognize that the IFSC competes not only with its Indian counterparts but also with efficient regulators in other international financial hubs.
Key Considerations for Unlocking the Potential:
1. Competing Globally:
Although the IFSC shows tremendous potential for growth, it faces competition from global financial centers. Recognizing this competition is crucial for strategic planning and positioning in the international financial landscape.
2. India's Economic Momentum:
India boasts the status of being the world's fastest-growing major economy. Capitalizing on this momentum is vital for leveraging the IFSC's potential as a prominent global financial hub.
3. Addressing Structural and Infrastructure Challenges:
Realizing the full potential of the IFSC requires addressing issues related to fund structures and enhancing social and commercial infrastructure. These challenges must be adequately tackled to create a conducive environment for sustained growth.
In conclusion, while the IFSC in GIFT City holds promising prospects, proactive measures and strategic interventions are essential to overcome challenges and position it as a formidable player in the international financial arena. Recognizing the competitive landscape and focusing on comprehensive solutions will be instrumental in shaping the future success of IFSC in GIFT City.
AIF GIFT CITY REgistration- Read More
Article by Manish Sharma - Intern at Corpzo
