[Editorial] GIFT City

What is GIFT City?

  • GIFT City or Gujarat International Finance Tec-City is a financial district, conceptualized as an alternative to financial hubs like London, Tokyo, Shanghai, Singapore, Paris and Dubai.
  • It is located between Ahmedabad and Gandhinagar, in Gujarat.
  • It was first mooted in 2007 and work on the physical infrastructure commenced in 2012. In 2015, business regulations were introduced and by 2017, an international exchange was established.

What are its features?

  • GIFT City is a smart city spread over an area of 886 acres. It consists of a 261 acre SEZ (Special Economic Zone) and a 625 acre exclusive DTA (Domestic Tariff Area).
  • The SEZ houses India’s 1st IFSC (International Financial Services Center).
  • The plan involves 62 million sq.ft. of built up area, of which
    • 67% will be commercial space
    • 22% will be residential space
    • 11% will be social space
  • It has social infrastructure such as a school, hospital, medical facilities, business club with sports facilities- both indoor and outdoor.
  • It has integrated housing projects to make it a ‘Walk to Work’ city.

What does it do?

  • The GIFT City defines its IFSC as a jurisdiction that provides financial services, to both residents and non-residents, in any currency except Indian Rupee.
  • The IFSC Authority is a unified regulator that oversees the IFSC. It covers realms overseen by other regulators- RBI, SEBI, PFRDA and IRDAI. This is because the nature of business in IFSC needs inter-regulatory coordination and businesses would be affected if they were to seek approval from each regulator.
  • The IFSC is to bring back financial transactions and other services that are currently being carried out by Indian corporate entities and overseas branches of financial institutions in offshore financial centers. It does this by offering an favourable regulatory and business environment comparable to global financial hubs.
  • It seeks to provide an easier access to global financial markets.
  • It provides services related to offshore insurance, capital markets, offshore banking and asset management, ship and aircraft leasing and ancillary services.
  • It has 2 international stock exchanges. The combines average daily trading volume of these exchanges is more than $11 billion.
  • The government recently allowed foreign universities to establish campuses in GIFT IFSC and these would be free from domestic regulations. Several universities, based in Australia, USA and UK have shown interest.

IIBX

  • Recently, the IIBX or India International Bullion Exchange was inaugurated at the IFSC.
  • IIBX was announced in the 2020 Union Budget.
  • It is India’s first bullion exchange i.e. a platform for trading gold and silver.
  • The GIFT City has planned a storage capacity for 125 tonnes of gold and 1,000 tonnes of silver.
  • Vaulting facilities have been set up by Indian and international vault service providers. These are to serve as spokes that feed bullion for manufacturers and exporters in India, while the IIBX will function as the trading hub.

Participants:     

  • Qualified jewellers would be able to import gold through this exchange. For an entity to be considered as qualified:
    1. Should have a minimum net worth of Rs 25 crore
    2. 90% of average annual turnover in last 3 financial years through deals in goods should be categorized as precious metals
  • Non-resident Indians (after registering with IFSCA)
  • Institutions, such as Funds for Gold ETF (also after registering with IFSCA)

Trading:

  • A jeweller would be able to transact as
    1. Trading member– after establishing a branch/ subsidiary in the IFSC
    2. Client of a trading member
    3. Limited purpose trading membership (for a qualified jeweller based in India but without physical presence in the IFSC)- such entities can trade only on its own account i.e. no client onboarding

Why is it significant?

  • It is the country’s first IFSC and features several first-in-the-country urban infrastructure initiatives.
  • The pro-business regulatory environment has made GIFT City a magnet for investments. For instance, doing business inside the IFSC has the benefit of a 10 year tax holiday without any security transaction tax, tax on long term gains or commodities transaction tax.
  • More than 300 units are already operational within the SEZ and DTA. About 12,000 people currently work here.
  • Some 17 banks have received license to operate. 5 of these are international banks.
  • Over a 100 units are offering depository, broking and clearing services.
  • With the inauguration of IIBX, jewellers will be able to directly import gold, for the first time since liberalization of gold imports in 1990s.
  • In March 2021, Global Financial Centers Index Report placed GIFT IFSC at the top among 15 global centers that are likely to gain significance in the subsequent 2-3 years.

What are some concerns?

  • In recent years, developments and regulations are incrementally being brought in to shape the FSC. However, investors have been slow to enter the field.
  • Much of the stock exchange trade inside the IFSC is propriety i.e. trading by companies for their own profit- rather than use of investor funds to generate profit for participants.
  • The fact that Indian currency is yet to become fully convertible is a major concern among institutional investors. This means that while Indian Rupee can be exchanged at market rates with freedom, approvals are necessary when larger amounts are involved.
  • A completely convertible currency doesn’t see authorities making market interventions to reign in volatility or exchange rate. However, in India, the RBI intervenes when the rupee weakens dramatically during major global events.
  • Another concern is the lack of consistency in tax laws and their interpretations.
  • The less than satisfactory speed of dispute resolution is another deterrent.
  • While the IBC did give a leg up with regards to insolvency, investors are being wary of the time taken in retrieving the funds due to the lenders and the significant haircuts involved.

What is the way ahead?

  • New trading jurisdictions generally allow benefits to encourage early participation and stock liquidity. However, the goal is to eventually stimulate genuine participation from retail investors.
  • India’s move to scrap retrospective taxation to bring closure in the cases against Cairn Energy and Vodafone is likely to be viewed favourably by investors.
  • With regards to dispute resolution, the 2022 Budget proposes an International Arbitration Center which will assurance with regards to corporate litigation in India.
  • Experts have been calling for cross-border insolvency norms that meet the requirements of IFSC. While there are some related provisions in the IBC, a stronger framework is needed to assure the investors.
  • In 2018, the Insolvency Law Committee recommended the adoption of UNCITRAL Model Law on Cross Border Insolvency. This UN Model Law was designed to aid states in developing a harmonized insolvency framework to effectively address cross-border proceedings.
  • India can learn from the experiences of Dubai International Financial Center and the Abu Dhabi Global Market which have adopted the UNCITRAL Model Law. Note, UAE doesn’t have a cross-border insolvency law as a nation. This shows how IFSC could set pace independently.

Conclusion:

India is one of the fast growing economies and it needs to expand its economic activities globally to realize its full potential. The GIFT City is an emerging global financial hub and is bound to have a pivotal role in achieving this vision.

Practice Question for Mains:

Discuss the challenges in GIFT City’s path to becoming a global financial hub. How can these be addressed? (250 words)

Subscribe
Notify of
guest
0 Comments
Inline Feedbacks
View all comments
0
Would love your thoughts, please comment.x