Can GIFT City Replace Singapore, Mauritius As Preferred Financial Hub For Startups & Investors?

“There is $1 Bn-plus of deposits that Indian startups have in Silicon Valley Bank. As of this morning (March 16, 2023), about $200 Mn-odd of those deposits have moved to the GIFT IFSC,” Rajeev Chandrasekhar, MoS IT, Govt of India

India’s maiden IFSC (international financial services centre) at GIFT City, Gujarat, has lately created a lot of buzz as the newfound hub for alternative investment funds (AIFs), fintechs and a diverse range of international financial services.

Finance minister Nirmala Sitharaman also announced a series of measures in the Union Budget 2023 to accelerate the ecosystem’s growth. For instance, the IFSC banking units and foreign banks will now be able to provide acquisition financing, paving the path for strategic M&A deals for Indian startups and other corporate houses. Additionally, an EXIM bank subsidiary will be set up for trade refinancing.

During her Budget speech, Sitharaman further announced plans to set up data embassies in GIFT IFSC for countries “looking for digital continuity solutions”, which would enable a supportive legal, regulatory as well as a  robust digital infrastructure at GIFT IFSC.

As more and more national and global corporations come in, GIFT IFSC is rapidly emerging as a globally competitive financial platform operating under a special offshore status and attracting overseas capital. Its aim to ‘globalise’ the country’s fast-evolving financial sector may further boost India’s journey towards becoming a $5 Tn economy by 2026-27, as the International Monetary Fund forecasted.

But before we delve into the all-new growth narrative getting scripted at the offshore financial centre (OFC), a little recce will give us a fair idea of its evolution and benefits.

Located on the bank of the Sabarmati River, between the state’s industrial capital Ahmedabad (12 km) and political capital Gandhinagar (6 km), GIFT City currently spans an integrated development area of 3.6 sq km. Plans are also afoot to develop 5.76 sq km of built-up area comprising commercial zone (67%), residential area (22%) and social space (11%).

Initially developed under the Special Economic Zones Act of 2005, GIFT City was allowed to host the country’s first IFSC in 2019. Therefore, the city’s commercial activities remain under two distinctive zones – the GIFT SEZ (the non-IFSC area) and the GIFT IFSC. The latter became operational in 2020 after a bunch of favourable policy measures came into force to turn it into the new epicentre of AIFs and fintechs keen to tap into offshore markets without leaving Indian shores. (Read more about GIFT City, Gujarat, here.)

The government created a single-window regulatory structure for IFSCs via a 2019 Act to speed up operations and innovation. Since October 1, 2020, the International Financial Services Centres Authority (IFSCA) has worked as a ‘unified and agile’ financial regulator of GIFT IFSC and combined the power of the ‘big four’ – the RBI (India’s central bank), capital markets regulator SEBI, insurance regulator IRDAI and pension regulator PFRDAI – to iron out inter-regulatory issues.

Besides ensuring the ease of doing business at all levels, various fiscal incentives are granted to drive growth. Among these are zero Goods and Services Tax (GST) for GIFT IFSC-registered firms and a 100% tax holiday on profits for 10 straight years (out of 15).

In addition, a flexible regulatory framework is in place to encourage greenfield funds or tax-neutral relocation of funds from overseas jurisdictions to GIFT City IFSC.

Most importantly, provisions are there for foreign investors to transact in USD instead of dealing in INR. In the ordinary course of things, overseas investors need to book forex, fill in forms and do the conversion, a fairly cumbersome process. Add to that another 24-48 hours for due validation and approvals in India.

However, the IFSC has skipped this process and taken an investor-friendly route, making it a win-win for all stakeholders.

The outcome has been impressive. Thanks to growing transactions and renewed interests among international banks and investors, GIFT IFSC was ranked No. 1 on the Global Financial Centres Index (GFCI) in March 2022 among the 15 global centres likely to gain prominence in the next two to three years. Overall, it ranked 67th, while New York, London and Singapore claimed the top three slots, respectively.

“Tell me why you would go to Singapore, Mauritius, or elsewhere if you can access the same benefits here at the GIFT City IFSC,” queried Anil Joshi, managing partner at Unicorn India Ventures, a category 1 AIF.

Joshi has a point. Around 55 AIFs and 30 fintech companies have set up their subsidiaries at GIFT City IFSC in the past few years. Among them are some of the most active funds from India, including Blume Ventures, 3one4 Capital, Fireside Ventures, A91 Partners and Venture Catalysts.

Asked about these unique measures, Sumir Verma, the head of Merisis Opportunities Fund (a Cat I AIF) and founder & managing director of Merisis Advisors, said, “The GIFT IFSC initiative is a robust endeavour to help startups and AIFs register in India. The government has recognised their significant contributions to job creation and capital circulation. So, this initiative seeks to bring back globally targeted funds to India, with the advantage of an Indian domicile. This will bolster our economy and raise global perception that India is a conducive business hub.”

GIFT IFSC: Will It Be A ‘Singapore’ For ‘Flipping’ Startups?

Lately, a large number of Indian startups have shifted their headquarters abroad, especially to locations like Dubai (the UAE), Singapore and Mauritius sporting less stringent regulatory and tax systems. Over 40 out of 108 Indian unicorns have their headquarters out of the country in search of fewer taxes, better valuation, easy funding and good listing/exit options.

Of course, global aspirations and greater proximity to target markets could be a critical reason for flipping (transferring the full ownership, IP and data of an Indian company to a foreign entity while the former becomes a 100% subsidiary of the new entity). But most industry experts put it to a ‘more conducive’ business environment and regulatory structure.

Interestingly, a few foreign funds like Y Combinator reportedly encourage their portfolio companies from India to relocate to the US so that investments can be done in USD and funders can avoid additional administrative and legal costs.

Sanjeev Bikhchandani, founder and executive vice-chairman of the digital behemoth Info Edge that owns Naukri, Jeevansathi, Shiksha and 99acres (the holding company is currently listed on the New York Stock Exchange), earlier tweeted that Y Combinator’s push to flip India-incorporated startups to the US is an “institutionalised transfer of wealth”. He also likened the flipping of headquarters to the exploitation of Indian intellectual property (IP) by YC, as it benefits from the IP created by Indian founders.

Taking note of this trend, The Economic Survey, 2022-23, called for solution-focussed strategies and regulatory measures to help startups shift domicile to India.

It successfully took place when Walmart-owned PhonePe’s holding company shifted base from Singapore in 2023, while Razorpay and Meesho are reportedly planning a similar move.

But so far, ‘reverse flipping’ is a rare occurrence.

Nevertheless, India aims to speed up reverse flipping through various incentives offered at GIFT IFSC. It enables investors and startups to manage their financials in USD, provides a slew of tax benefits and fintech schemes, and helps tie up with global financial centres to support the global market base at the OFC.

Asked if the ‘startup brain drain’ can be reversed, Vaibhav Gupta, partner at the tax regulatory firm Dhruva Advisors, said, “With the withdrawal of treaty benefits in Mauritius and Singapore and availability of a 10-year tax holiday and other regulatory advantages, GIFT IFSC has become an attractive destination for setting up PE/VC funds. The finance minister has also announced a single-window clearance system. When implemented, it will go a long way.”

For a fund to set up a subsidiary at GIFT IFSC is now as easy as it is in Singapore or Mauritius, says Siddarth Pai, partner at 3one4 Capital. He has already set up a fund at the IFSC and is also a member of the GIFT IFSC expert committee.

“IFSCA will soon club all the required forms into one. Take the fund managers, for instance. Earlier, they were required to fill out three separate forms – one for the GIFT SEZ (for permission to set up the entity), one for the GIFT IFSCA (for recognition and approval of the same) and another for the capital markets regulator SEBI (for permission to operate as an AIF). Soon, you will only need to fill out one form and submit all necessary documents, which will automatically be sent to the concerned authorities. IFSCA is a dedicated authority for handling everything promptly, similar to how it is done in foreign jurisdictions like Mauritius or Singapore. The entire process will be on a par with those places, and it will only improve over time,” said Pai.

Also, the business landscape has changed significantly in those jurisdictions after the Covid-19 pandemic, according to Pai and Gupta (of Dhruva Advisors).

For instance, Mauritius and India signed a Comprehensive Economic Cooperation and Partnership Agreement in 2021 (CECPA was the first free trade agreement between the two nations). The former has implemented more stringent compliance measures ever since and witnessed a subsequent rise in costs. Therefore, it no longer enjoys the earlier status quo as a tax haven of choice.

“Singapore, too, has undergone considerable changes since Covid. It is now looking for investors of a certain calibre. If you are a large investor setting up a base in Singapore, it can be easier for you. Otherwise, GIFT provides Indian VCs the advantage of one local flight,” said Pai.

“At the least, the IFSCA is committed to offering all the features and benefits available across the IFSCs worldwide, including the ease of doing business and tax benefits like 0% GST, 0% capital gains tax and more,” he added.

It is worth noting that the GST exemption of 18% on all expenses helps save a lot for fund managers, considering that a regular fund has to go up 1.33x to return merely the principal to everyone.

GIFT IFSC also levies a 0% tax on capital gains if investments are done through IFSC stock exchanges. This is in sync with Singapore and New York, where there’s no capital gains tax for non-resident investors.

India currently charges a 20% tax on capital gains.

“If I put my money in a holding entity at GIFT IFSC, which invests in the stock exchange there, I won’t have to pay any tax on the resulting capital gains. It is an innovative way of attracting funds and retaining the capital at GIFT IFSC,” explained Pai.

Who Should Shift Base To GIFT IFSC

Which AIFs or investors should consider opening an office at GIFT IFSC?

According to Pai, the IFSC is looking to attract two types of investors.

There are people keen to invest overseas. For example, one has a family investment fund (FIF) and may want to invest in the US or elsewhere. In that case, they may consider a domicile of a foreign subsidiary and make downstream investments thereafter. Singapore has long been a popular choice for this. But GIFT IFSC has now emerged as a strong alternative with competitive advantages.

Secondly, foreign investors keen to invest in India may find GIFT IFSC suitable, especially if they prefer to hold a USD account.

Again, there are two ways to set up a base here. One can either open a branch or start a subsidiary at the IFSC.

“While opening a branch is easy, operating a subsidiary is much easier in the long run. That’s why we opted for a subsidiary instead of a branch,” said Pai.

Advantage Fintechs

Much like the investor community, fintech startups can also leverage the guidance, mentorship and financial support on offer. In a bid to build the OFC as a world-class fintech hub, the IFSCA has announced various grants for homegrown fintech startups recognised by DPIIT and seeking access to overseas markets. Besides, it will provide an inter-operable regulatory sandbox (IoRS) to enable the testing of innovative financial products and services. Foreign fintech companies keen to explore the Indian market can also approach the super regulator for approval and product/service testing.

Sitharaman had earlier urged the Gujarat state government to explore whether leading startups could relocate outside the IFSC but within the GIFT City to leverage additional advantages.

Of Opportunities & Relatable Growth: A New Landscape Unfolds

With more than 400 businesses registered at GIFT IFSC, it has seen significant growth across all financial sub-sectors in the past two years, including BFSI, fintechs and capital markets. The ecosystem also caters to IT/ITeS, aircraft & ship leasing, ancillary service providers and other related business units.

However, AIFs stand to gain the most as the OFC provides access to a competitive global market, along with other benefits, says Verma of Merisis Fund.

Funds in this jurisdiction enjoy various advantages, including a business-friendly tax regime, low operating costs, zero cap on outbound investment, no diversification limits and access to local fund administrators and custodians. Most importantly, reporting to a unified financial regulator has boosted the ease of doing business. While several large AIFs have already registered here to capitalise on these opportunities, new players can also reap the benefits of these advantages.

According to Joshi of Unicorn India, GIFT IFSC may not make a big difference for startups as they are more bothered about from where their capital comes, whether it comes from domestic shore or offshore. “But it is certainly going to make a big difference in the VC industry,” he observed.

“As fund managers, we are required to set up funds in Singapore, Mauritius or the Cayman Islands to attract investments in dollars and minimise compliance [costs]. If similar facilities and flexibility are available within the country [read GIFT IFSC], and the regulators understand our problems, our life will be much easier.”

Besides, GIFT IFSC has dedicated teams to look into the issues and resolve them. Therefore, AIFs, fintechs and all other industry stakeholders know exactly whom to approach instead of running round in circles.

This will save time, money and effort, thus enhancing business efficiency.

According to the IFSC’s latest annual report, out of the 24 AIFs registered till March 31, 2022, 10 were from Cat I and II, with total committed funds of $4,081 Mn. The remaining 14 were Cat III AIFs, with total committed funds of $1,072 Mn.

“IFSC will primarily attract Cat I and Cat II AIFs,” said Joshi. “Cat III AIFs are usually big, mostly hedge and realty funds. Hence, these will be fewer.”

The total number of AIFs has now gone past 55, with an overall commitment of more than $11 Bn. Moreover, there has been a consistent push to strengthen the IFSC ecosystem in every Union Budget since 2015.

Gupta of Dhruva Advisors said that the regulation regarding fund management under the IFSC framework has provisions for various fund types. Besides AIFs, FIF is another popular format for setting up single-family offices in GIFT City.

“As we all know, family offices have emerged as an alternative source of longer-term capital for startups and VC funds. FIFs will help professionalise those capital resources and raise more capital for VCs and startups,” he added.

The IFSCA signed two multilateral memorandums of understanding (MMoUs) and seven bilateral MoUs (BMoUs) with foreign regulators to strengthen its global reach. These will ensure a mutual exchange of information for product and service development at the Indian offshore centre.

The Indian regulator inked an MMoU with the International Organization of Securities Commissions (IOSCO) and another with the International Association of Insurance Supervisors (IAIS).

It signed the BMoUs with Dubai Financial Services Authority (DFSA), Qatar Financial Services Authority (QFCA), Abu Dhabi Global Market (ADGM), Financial Services Regulatory Authority (FSRA), Autorité des Marchés Financiers (AMF, France), Commission de Surveillance du Secteur Financier (CSSF, Luxembourg) and Finansinspektionen (FI, Sweden).

Additionally, it has partnered with the Monetary Authority of Singapore to fuel the next phase of fintech growth. The agreement will facilitate a joint regulatory sandbox for leveraging the existing ones to encourage tech experimentation. The tie-up will also allow fintech firms from one jurisdiction to enter other locations through a regulatory referral system.

The NSE IFSC-SGX Connect, a planned collaboration in trading stock index-based products, will likely be fully operational by June 2023. It will be pivotal in onshoring derivatives trading in Nifty products from Singapore Exchange to GIFT City IFSC and create a larger liquidity pool for the ecosystem.

Can GIFT IFSC Deliver On Promises, Grow Sustainably?

Despite the current achievements and global potential of India’s brand new IFSC, its parent project has been a ‘work in progress’ for 15 years. Regulatory hurdles and allegations of rampant corruption related to infrastructure projects had previously shaken up GIFT City. So much so that setting up shop in the country’s first and only smart city was no longer deemed lucrative by many enterprises and their employees.

Those dark days may well be over now. Launching an offshore financial centre that can compete with global powerhouses and lead fintech innovation is no mean accomplishment. This is bound to drive the entire project, but how long will this momentum continue?

Will GIFT IFSC continue to benefit from fiscal incentives for years to come, even when there is a change in the union government or drastic policy upheavals at the centre?

It is worth noting that the IFSC is still under construction, while the GIFT City project, scheduled to be completed by 2012, is not likely to end before 2030. Moreover, there were plans to connect GIFT IFSC with India’s financial capital Mumbai via a bullet train. This, too, has been pushed back to 2027 from the original timeline of 2023.

“Given that context, the stability of the IFSC regime is critical here. One can’t help wondering whether abrupt changes by future governments can disrupt the ecosystem,” said Gupta of Dhruva Advisors.

Opinions varied, though. Most investors think that the IFSC is too big to fail, and everything will be done to maintain India’s global reputation. A regime change may lead to building more IFSCs across the country, but there will be no backtracking on the current project.

Verma of Merisis concurred. “GIFT IFSC has been successful so far and will continue to be, given it’s a new enterprise. But certain issues must be addressed to provide better clarity to AIFs and boost the project’s overall impact in promoting economic growth. There can be challenges galore such as inadequate [physical] infrastructure, difficulty in INR conversion, long settlement periods or stringent rules around certain overseas transactions. Again, meeting all regulatory requirements may take time and delay operations.”

All these are valid points, but the elephant in the room must not elude us, either. GIFT City has never been the first choice for setting up an IFSC; it was always Mumbai’s iconic Bandra Kurla Complex (BKC). Had BKC been the coveted location, India could have skipped the INR 1 Lakh Cr bullet train project to ensure the seamless connectivity that has become the need of the hour, believe experts.

In fact, Mumbai would have been an excellent backup option for an OFC of global stature. Think of its top-notch physical and digital infra, diverse talent pool and luxury lifestyle offerings that inevitably attract the modern workforce. Neither Ahmedabad nor Gandhinagar can be compared with the city that never sleeps.

Also, GIFT IFSC is located in Gujarat, which is still a dry state. This does not sync well with the foreigners visiting there. “Discussions are on to keep GIFT City off local regulations. But nothing has been decided yet,” said Pai.

GIFT IFSC is currently subject to many such local laws. The authorities are still working to resolve some glaring conflicts, but this is bound to be a time-consuming process. But in spite of these glitches, big and small, can it be a game changer for Indian startups and investors and trigger more ‘ghar wapsi’ to drive long-term growth?

[Edited by Sanghamitra Mandal]