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GIFT City: An over ambitious dream?

by Tavaga Invest

“Active in the mornings but a complete ghost town by the evening”. That is how Singapore’s high commissioner described Gujarat International Finance Tec-City or more popularly known as the Gift City. 

Built with the idea of creating a financial hub like Singapore in India, GIFT City is being built on the banks of the Sabarmati river. This dream is, however, still a work in progress. Construction started in 2012, with the idea of having more than a thousand skyscrapers and a million jobs. 9 years since the first foundation stone was laid, the project is still just a patchwork of facilities and incomplete, under-construction structures. 

The only saving grace is that Singapore Stock Exchange (SGX) opened its offices last October and plans to start operations this July in collaboration with the NSE IFSC. The delay has been due to pending regulatory clearances and a delay with the technology supplier, TCS.

What is an IFSC?

An International Finance Service Centre (IFSC) is a foreign jurisdiction that enjoys several tax benefits and exemptions and facilitates the smooth flow of #, money, and services across borders. 

IFSC’s main USP is that despite being located in India, it enjoys an offshore jurisdiction for most regulatory purposes. This means that most of the local laws like tariffs and other regulations will not apply to this centre. Special set of laws has been designed for this centre for facilitating capital flows without any restrictions.

Gift City is India’s first such centre. Some of the popular IFSC centres around the world in Singapore, Hong Kong, and Dubai were set up almost 15-20 years ago

Why IFSC in India?

The main rationale behind an IFSC is to make India a price setter for Indian securities and commodities. It will also reduce Índia’s dependence on foreign funds to finance its current account deficit which weakens its economy.

The IFSC aims to relocate financial sector decisions and ensure that trades in Indian stocks and commodities will take place only through a center situated in India. Currently, the investors sitting in foreign countries can trade in Indian securities listed on other stock exchanges.

Fund managers are keen on setting up subsidiary funds to the main fund, to encourage international capital to be set up in India. Previously such funds were set up in countries like Mauritius and Singapore. 

The Indian government has tried to make the Gift city more attractive to investors by removing the tax incidence costs in case funds wished to migrate from other offshore jurisdictions like Dubai to Gift city. These migrations are yet to happen and most funds being set up are new.

Benefits of an Indian IFSC

Reality far from the promises

Gift City has two zones, GIFT City and the Gift IFSC.  The city is spread across 883 acres and is set to have offices, residences, and all amenities required for the smooth functioning of a metro city. 

The IFSC’s two exchanges NSE IFSC and the BSE subsidiary India International Exchange (INX) have low trading volumes and are loss-making. NSE IFSC’s loss for the last year stood at about Rs 1 crore and it has a cumulative loss of Rs 8.5 crore since its inception in 2017. The INX is not better off, with its cumulative losses at Rs 7.6 crore including the last year’s figure at Rs 2.2 crores

Trading volumes are expected to go up when the investors of SGX start to trade in Nifty companies through the NSE IFSC-SGX technology, banks have made commitments but the offices and funds are yet to come in. The central clearing party SBI has not become operational and the project is behind the plan.

Why is it yet to take off ?

The GIFT City promises to offer a wide range of services like capital market transactions, banking services, offshore asset management and other financial transactions. But the city has failed to deliver and is miles away from being another Singapore. 

Despite formation of IFSCA as a single window for all regulatory activities, there are several issues which has questioned its attractiveness. Some of them are:

Indian rupee is not freely convertible – Restrictions exist on certain overseas transactions that are imposed on Indian companies and individuals which reduces the attractiveness of GIFT City. 

Regulatory approvals still required for some financial products like for eg. to operate within the IFSC a broker needs to set up a separate company

LRS Scheme not at par – RBI has extended its Liberalised Remittance Scheme (LRS) for entities operating in the IFSC, allowing Indian residents to send up to USD 250,000 abroad in a financial year which is not at par with other developed countries

Transactions are not instantaneous – All transactions that are currently deployed in the IFSC are SWIFT transactions and have a settlement period of T+2 days. IFSC needs a central clearing bank to reduce delays which was to be set up by SBI but has still not happened

Restrictions on pledging – The Banking Regulation Act does not allow foreign banks to pledge 100% of their shares of Indian companies in case of External Commercial Borrowings (ECBs) and can pledge up to 30% of their holdings only

Will it ever become another Singapore?

The Gift City project has had a very slow start. From bring first conceived in 2007, land allotment took 4 years. Work started in 2012, business regulations were given in 2015, and an international exchange was established in 2017. However, it was only in 2020, that an IFSCA chairman was appointed. 

Even though GIFT City offers advantages unparalleled in the country, it has failed to attract businesses and investments. 

During this last decade, the City has registered about 300 entities as of now most of which are proprietary, its investment banking assets stand at USD 30.7 billion and its investments are at USD 1.5 billion, this includes both committed and realized investments. It is yet to have any primary listed company. Many financial institutions, law, and consultancy firms have just taken token offices while the majority of their operations are still being carried out from Mumbai. About 20 Alternate Investment Funds, licensed by the IFSC, are also yet to start operations. 

GIFT city is an audacious idea of the Indian government and has a lot to offer, but it needs a lot of work and support in the form of filling infrastructure and regulatory gaps. This ambitious project has witnessed the 2008 subprime crisis, pandemic, as well as the current global turmoil and only time will tell how much enthusiasm is still left for this financial globalization. 

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