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Tuesday,April14,2015

GIFTCity:ANewChapterintheIndianFinancialSector:
Part1

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[ThefollowingguestpostiscontributedbySurbhiJaiswalofVinodKothari&Co.Theauthor
canbecontactedatsurbhi@vinodkothari.com.]
TheInternationalFinancialServiceCentre(IFSC)isahuboffinancialserviceswithinacountry,which
haslawsandregulationsthataredifferentfromtherestofthecountry.Usuallythesecentreshavelow
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
flowofmoney,financialproductandservicesacrossborders.
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 TecCity (GIFT), near Ahmedabad. Finally, on
Friday,April10,2015,GIFTwasofficiallylaunchedbythefinanceministerandabookletcontainingall
the rules and guidelines issued by the various regulators with regard to the governing of these IFSC
centrewasalsoreleased.ThisisindeedanewchapterintheIndiafinancialservicesector
GlobalPresenceofIFSC
Globally,theIFSCisnotanewconcept.Internationalfinancialservicesarebeingprovidedbyvarious
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
betweenlate19thcenturyandearly20thcenturyandalsoduetothepersistentAmericaninnovationin
thefieldoffinance.IFCsinDubaiandSingaporearerelativelyrecent.
IndianScenario
ThisconceptisnotnewinIndiabecausein2007thePercyMistryCommitteeReporthadexploredthe
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
suggestedthatIndiahadthepotentialofcompetingwiththelikesofLondon,andNewYork.However,
theplanwassubsequentlyabandonedduetothe2008globalfinancialcrisis.

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Further,aconceptpaperontheestablishmentoffinanceSEZs,submittedbytheNationalInstituteof
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
combatthis,itadvocatedontheestablishmentofanewfinancialregulatoryframeworkeitherthrough
enactingandenforcinga`FinanceSEZAct',oranIFSC.FurthertheMinistryofFinanceisworkingon
thepolicyframeworkforFinanceSEZwhichwillhavefeaturessuchascapitalaccountconvertibility,
modernregulatoryframeworkandresidentbasedtaxationandseekspubliccommentsontheconcept
paper,whichwasmadeavailabletothepubliconFebruary27,2015.
Recently, in Budget 2015, while announcing the establishment of the GIFT City, the Minister of
Financeinhisbudgetspeech(20152016)stated:
WhileIndiaproducessomeofthefinestfinancialminds,includingininternational
finance, they have few avenues in India to fully exhibit and exploit their strength to the
countrys advantage. GIFT in Gujarat was envisaged as International Finance Centre that
wouldactuallybecomeasgoodanInternationalFinanceCentreasSingaporeorDubai,which,
incidentally,arelargelymannedbyIndians.Theproposalhaslanguishedforyears.Iamglad
toannouncethatthefirstphaseofGIFTwillsoonbecomeareality.
GIFT is a globallybenchmarked international financial centre that will target 810 percent of financial
serviceson84millionsquarefeetofspaceandcreateonemillionemploymentopportunities.Itscore
operations will include offshore banking insurance, assurance and reinsurance regional financial
exchangesandbackoffices.[1]

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ImpactofsettingupanIFSC
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
countrybycapturingapproximatelyRs.1,334croreperdayorRs.2lakhcroreperyearworthoftrading
in rupee derivatives that presently goes to places outside India.[2] Further, it will help the country
attractglobalfinancialservicebusinesswhichisotherwiselosttoothercountriesduetotheabsence
ofanIFSC.
Theexistingregulatorystructureandtaxregimeinthecountrydonotcreateaconduciveenvironment
forforeigninvestmentandhavethuscausedahugeamountoftradinginrupeeandNiftytogooutof
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.

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Establishing IFSC with sound regulatory framework would aid in bringing back the revenue stream to
thecountry.
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
Indiancompaniesareunabletogetnoticed.Now,giventhecurrentscenario,whenanIFSCwillbeset
upinIndia,foreignentitiesworkinginit,willhaveaccesstomanymoreIndiancompaniesandwillalso
getengagedintheIndianeconomyinabetterway.Further,theseentitieswillbeabletoinvestinthe
equityanddebtofalargenumberofIndiancompanies.
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.
SalaryandtaxwithrespecttothesamearepaidoutsideIndia.Therefore,ifentitiessetupinanIFSC
globally compete to provide these services, we would be able to prevent the abovementioned
paymentsfromgoingoutofIndia.
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,thisinturnwouldcreateemploymentopportunitieswithinthecountry.

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IFSCwillbesetupundertheSpecialEconomicZone(SEZ)Actof2005

LawinPerspective

An IFSC will be set up under Section 18(1) of Special Economic Zones Act, 2005. Section 18(1)
provides:

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18(1) The Central Government may approve the setting up of Setting up of an International
FinancialServicesCentreinaSpecialEconomicZoneandmayprescribetherequirementsfor
settingupandoperationofsuchCenter:
ProvidedthattheCentralGovernmentshallapproveonlyoneInternationalFinancialServices
CentreinaSpecialEconomicZone.
EstablishmentofanIFSCinSEZmeansthatseparateregulationsshallbeformedforanIFSC,which
shallbedifferentfromtherestofIndia.Section49SEZActstates:
49. (1) The Central Government may, by notification, direct that any of the provisions of this
Act(otherthansections54and56)oranyotherCentralActoranyrulesorregulationsmade
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
EconomicZonesor
(b) shall apply to a Special Economic Zone or a class of Special Economic Zones or all
SpecialEconomicZonesonlywithsuchexceptions,modificationsandadaptation,asmaybe
specifiedinthenotification.
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
entirenation.
Asfarasthetaximplicationsareconcerned,itshallbeonthelinesoftheSEZ.SThakur,Chairman
ofthePolicyMakingCommitteeofInternationalFinancialCentreinaninterviewwithCNBCTV18said,
The tax also we are recommending that whatever the tax implication available for the special
economiczone(SEZ)sectors,thesamewillbeapplicableinthisinternationalfinancialcentrealso.[3]
(Tobecontinued)

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[1]http://giftgujarat.in/documents/BriefonGIFTProjectFeb2013.pdf
[2]http://profit.ndtv.com/news/market/articlesebiboardnodforinternationalfinancialservicescentre
guidelines748680
[3]http://www.moneycontrol.com/news/economy/whatittakestocreateindiasfirstintlfinance
centre_1335960.html

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PostedbyUmakanthVarottilat3:38PM
Labels:FinancialMarkets,ForeignExchangeRegulation,SEBI,SecuritiesRegulation

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