SETTING OF AIF IN GIFT CITY

Introduction

Gujarat International Fin-Tec City (GIFT City) is being built as a worldwide financial and IT services hub, similar to globally benchmarked financial centres. It features an International Finance Services Centre ("IFSC")-designated Special Economic Zone. The IFSC was established to handle financial services transactions now carried out outside of India by foreign financial institutions and Indian financial institutions' overseas branches and subsidiaries.

The regulatory framework controlling funds in the IFSC has undergone significant regulatory modifications as part of the broader regulatory effort to support the expansion of financial services intermediaries in the IFSC. As a result, the IFSC is quickly establishing itself as a viable alternative to well-known fund jurisdictions like as Singapore and Mauritius.

Under the Special Economic Zones Act of 2005, the Central Government established a framework for the establishment of an IFSC. The IFSC was created to allow financial service companies to offer foreign currency financial services and products to their consumers (i.e. non-INR currencies).

For the purposes of India's exchange control regulations, "units" and "entities" in an IFSC are considered as "persons resident outside India."

In Gandhinagar, Gujarat, GIFT City is being created as a worldwide financial and IT services hub to compete with globally benchmarked financial centres. It was designated as a Special Economic Zone ("SEZ") and is India's only certified IFSC. Because of its unique position, the IFSC is a desirable jurisdiction for pooling and managing global money.

AIF Establishment in GIFT City

The SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) also apply to AIFs in the IFSC. AIFs in IFSCs, on the other hand, have been granted specific dispensations to provide them with greater operational freedom while preserving tax efficiency. SEBI, India's capital markets regulator, which oversees AIF structures, has established special rules and restrictions for AIF formation in GIFT City. The Foreign Exchange Management (IFSC) Regulations, 2015, and the SEBI (IFSC) Guidelines, 2015, read with the Operating Guidelines, are the primary sources of regulation for AIFs in an IFSC. A fund must get registration from the IFSC Authority in order to operate as an AIF (as set up under the IFSC Authority Act, 2019).

The Securities and Exchange Board of India ("SEBI") published Operating Guidelines for Alternative Investment Funds in International Financial Services Centres on November 26, 2018 ("Operating Guidelines"), which stipulate the following requirements for AIFs in IFSCs:

1. a continuous, minimum sponsor commitment of the lowest of:

1. USD 0.75 million, or 2.5 percent of the fund's corpus for Category I and II AIFs;
2.  USD 1.5 million, or 5% of the fund's corpus for Category III AIFs;

2. a minimum scheme size of at least USD 3 million;
3.  minimum investment

(a) by investors – USD 150 thousand; and

(b) by employees/directors of the AIF's manager – USD 40 thousand.

Advantages of forming AIFs in the IFSC, GIFT City

Advantages of forming AIFs in the IFSC, GIFT City

1. Tax exemptions:

From a tax standpoint, IFSC provides appealing tax benefits such as a 100 percent tax exemption on business income for 10 consecutive years out of 15 years (“Tax Holiday”) and GST exemption for IFSC entities. AIF managers can take advantage of these benefits in relation to their fund management income.

2. Tax Exemption on transfer of specific securities:

For the transfer of specific securities [1], a 100 percent tax exemption has been granted to Category III AIFs in the IFSC where:

1. the consideration for the transfer is payable in a foreign currency;
2. all units of the AIF are held by non-residents (except those held by the sponsor and/or manager of the AIF)

3. No extra regulatory license for engaging international firms

AIFs established in an IFSC are considered non-resident Indians under India's current foreign exchange regulations; they are able to engage in international firms without obtaining extra regulatory licences.

4. Government Subsidies

Lower operating cost due to subsidies granted by the Gujarat government

5. Access to multiple markets from IFSC.

Process of Establishing AIFs in GIFT City

Process of Establishing AIFs in GIFT City

Setting up of GIFT Manager/Sponsor set-up

Setting up of GIFT Manager/Sponsor set-up