New York, London, Singapore and Hong Kong have something in common. Thanks to their strategic location, deep financial markets and business-friendly regulatory framework, these cities have emerged as the top global financial centres (GFCs). Global Financial Centres Index (GFCI) jointly published by Z/Yen Group in London and the China Development Institute in Shenzhen ranks the financial centres based on several competencies.
The image below shows the top GFCs out of 130 GFCs worldwide as per the latest edition, GFCI 33.
Source: Long Finance
Indian cities featured in the list were Mumbai, New Delhi and GIFT City.
GIFT City, ranked 67th in the world has made considerable strides in the world of finance in a short span of time since it became operational in 2015. We are going to discuss in detail how GIFT City is poised to take on the top GFCs of the world.
But first, we need to have a quick overview of International Financial Service Centres (IFSCs).
Table of Contents
What is an International Financial Services Centre (IFSC)?
An IFSC is a designated area in a country that acts as a global financial hub where financial services companies from across the globe can do business. In order to attract global institutions, IFSCs offer various tax and regulatory incentives and offer a conducive environment for conducting business. Both domestic and international companies can make use of the numerous benefits offered by the IFSCs in their operations.
The major services offered by IFSCs include:
Banking
Insurance
Fund/Asset Management
Capital Markets and Trading
IT and ITeS/BPO services.
What are the features of IFSCs?
Some of the unique features of IFSCs that make them a hub of global financial services are
Regulatory Framework - The regulations controlling the IFSCs are different from those applicable to the rest of the country. The rules would be more relaxed and friendly for business, both domestic and global.
Tax Incentives - IFSCs offer attractive tax benefits for businesses operating out of them
Currency Conversion - When companies across the globe function within an IFSC, easy currency convertibility becomes a prerequisite. This enables easier cross-border transactions between businesses.
World-class infrastructure - IFSCs need to provide excellent infrastructure and state-of-the-art technology and communication facilities to enable transactions across the globe. It also includes a superior standard of living for its inhabitants.
Strategic Location - Overlapping time zones, proximity to transportation hubs, access to the talent pool and a stable political environment help to Maximise the potential of IFSCs.
Gujarat International Finance Tec-City (GIFT City)
Gujarat International Finance Tec-City (GIFT City) is a Central Business District (CBD) under construction in the Gandhinagar district in Gujarat, India on the banks of the Sabarmati river. It is India’s first operational greenfield Smart City. The CBD is located between the political capital, Gandhinagar and the commercial capital Ahmedabad and is 12 km away from Sardar Vallabhai Patel International Airport.
The total area of Gift City is around 886 acres and it is divided into SEZ (Special Economic Zone) and DTA (Domestic Tariff Area).
Special Economic Zone caters to international businesses and is expected to promote exports and foreign investments with its attractive benefits and incentives. The area under SEZ is again bifurcated to SEZ PA (SEZ Processing Area) and SEZ NPA (SEZ Non -Processing Area). SEZ PA comprises commercial buildings and offers world-class infrastructure to international financial services companies. It houses IFSC units, commodity exchange, offshore banking units, etc.
SEZ NPA houses the residential complexes, schools, hospitals, etc. which support the SEZ PA.
Domestic Tariff Area houses domestic companies catering to the Indian market and is regulated by Indian laws. The companies can benefit from incentives offered by Govt, if any.
GIFT City Timeline
2007
Narendra Modi (the then, Gujarat CM) proposed an IFSC which could be a global financial hub.
GIFT Company Limited was incorporated as a joint venture between Company between the Government of Gujarat (GoG) represented by Gujarat Urban Development Company Limited (GUDC) and Infrastructure Leasing & Financial Services Limited (IL&FS).
2011
President Pranab Mukherjee and CM Narendra Modi laid the foundation for the GIFT City project with an initial investment outlay of INR 78 billion.
2013
Inauguration of GIFT One tower, the first infrastructural establishment for corporations
2015
Inauguration of the International Financial Services Centre as a global hub to provide world-class infrastructure to financial services companies across the globe. The first IFSC Banking Unit (IBU) of YES Bank became operational.
2017
The National Stock Exchange (NSE) set up its international exchange at GIFT City, providing a platform for trading various financial instruments. India International Exchange (India INX) launched operations in Gift City
The Singapore International Arbitration Centre (SIAC) opened a second representative office in India (after Mumbai) in GIFT IFSC.
2018
AIFs get approval from SEBI to operate out of GIFT City
2020
IL&FS sold its 50% stake to the Gujarat Government
IFSCA was formed under the International Financial Services Centre's Authority Act, 2019 as a unified regulator for IFSC units.
2022
India's first bullion exchange — the India International Bullion Exchange (IIBX) was launched. IBM has introduced the IBM Software Lab, which aims to harness the power of hybrid cloud and Artificial Intelligence technologies to deliver innovative solutions for the future.
2023
Deakin University, University in Australia is granted approval by the International Financial Services Centres Authority (IFSCA) to set up an International Branch Campus (IBC) in GIFT-IFSC
As of July 2023, there were 545 registered units in the IFSC across various industries. The IFSC housed 20 banking units during the fiscal year ’22 – ‘23 and two more units are expected to be operational in the year ’23 – ‘24. The total banking assets were $41.2 billion as of July, ‘23. GIFT City is also home to two international stock exchanges (Bombay Stock Exchange International Exchange (BSX) and India International Exchange (India INX)). The city also has India’s first International Bullion Exchange with 75 onboarded jewellers.
Bombay Stock Exchange International Exchange (BSX) - The Bombay Stock Exchange International Exchange (BSX) is a wholly-owned subsidiary of the Bombay Stock Exchange (BSE) and offers trading in various products such as equities, currencies, and interest rate derivatives.
India International Exchange (India INX) - This is India’s first international stock exchange that lets investors invest in global securities. The exchange works 22 hours/ day, 6 days of the week letting international and NRI investors trade according to their convenience. India INX helps Indian investors invest in global securities in 135 exchanges across 33 countries and 23 different currencies.
Indian International Bullion Exchange (IIBX) - A bullion exchange is a place where precious metals like gold, silver and associated derivatives are traded. Being the 2nd biggest consumer of gold, India was not in the global scenario when it came to price discovery. IIBX is expected to help India regain its rightful place in the global bullion market.
Who regulates Gift City IFSC?
For ease of doing business, GIFT City is regulated by a unified regulator, the International Financial Services Centre Authority (IFSCA). IFSCA vests the powers of 4 regulators - the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority of India (PFRDA).
What are the special benefits enjoyed by units in IFSC?
Income tax Incentives
100% tax exemption for companies for any 10 consecutive years (as per the choice of the unit) out of a block of 15 years from the year in which sanction for operations of the unit is given.
Lower Minimum Alternate Tax (MAT) at 9% (vs 15%) for units in IFSC that generate revenue exclusively in foreign currency. MAT is not applicable to companies opting the New Tax Regime
Dividend Income distributed by companies in IFSC to be taxed in the hands of shareholders.
Zero tax on interest received on money lent to IFSC units. Long Term Bonds and Rupee Denominated Bonds listed on IFSC exchanges are taxable at a lower rate of 4%.
Zero tax on capital gain arising from the sale of securities in a recognised Stock Exchange in IFSC for NRIs. The exemption applies only if the purchase and sale are in foreign currency.
GST Incentives
Zero GST on services received by units in IFSC or services provided to IFSC/SEZ units or offshore clients
No GST on transactions carried out in IFSC-recognised exchanges
Tax incentives for Alternative Investment Funds (AIF) and fund managers
Non-resident investors are exempted from obtaining PAN and filing return of income in India
For category I & II AIF, income received by Non-Resident investors from their offshore funds is not taxable in India
Exemption to certain specified income accruing to Category III AIF of which all units are held by non-residents other than units held by sponsor/manager
Managers of AIF
100% corporate tax exemption for 10 consecutive years out of a block of 15 years.
The dividend distributed by the Manager is to be taxed in the hands of the shareholder
Services offered by Managers of AIF within IFSC are exempt from GST
Other incentives across sectors
IBUs (IFSC Banking Units) are not required to maintain Statutory Liquidity Ratio or Capital Reserve Ratio
Zero capital requirement prescribed for Global In-house Centres (GIC)
Exemption from certain eligibility norms in relation to registration of FPIs for applicants incorporated and established in IFSC.
For the trades executed on Commodity Stock Exchanges in IFSC, commodities transaction tax is not levied.
For transactions in recognized stock exchanges and depositories in IFSC, stamp duty is not charged.
For aircraft leasing companies, several tax breaks are provided comparable to some of the overseas jurisdictions
How is GIFT City playing a key role in economic growth?
Attract Foreign Investment - Policies and frameworks that are conducive for businesses, SEZ status and state-of-the-art infrastructure, GIFT city acts as a perfect investment destination for foreign investors.
Employment Opportunities - GIFT City which houses financial institutions, ITes, etc. gives employment opportunities for the huge talent pool available in India
Support startups - GIFT City is aimed at providing a business-friendly environment for attracting innovation in the fields of fintech, ESG, ship leasing, aircraft, etc. Startups often find regulatory hurdles in registration, transfer of foreign currency funds seamlessly, taxation, etc. IFSC is working towards making the CBD a space that is business-friendly to entrepreneurs.
Global access to Indian entities - Indian companies can raise funds at competitive rates from global institutions. This can create job opportunities and in turn, promote economic growth.
Closing thoughts
GIFT City has indeed made a mark on the global financial space and the world can no longer ignore its presence. That said, there is significant potential for enhancing both the city's infrastructure and regulatory framework to position it as a formidable contender among the leading financial hubs.
The State Govt has already announced the expansion of the city to another 3,000 acres. Moreover, the metro network within GIFT City connecting to both the cities of Gandhinagar and Ahmedabad is scheduled to be commissioned in the year 2024. Furthermore, the city is currently undergoing infrastructure development in line with the requirements of a smart city. Many regulatory policies are being reviewed by the authorities to attract entrepreneurs.
By taking the appropriate measures, India has the potential to emerge as a prominent global financial Centre, aligning with its status as the world's fifth-largest economy.