IFSC at GIFT City: unpacking key factors driving investor attraction

IFSC at GIFT City provides a realm of simplified regulations, tax advantages, and an inviting ecosystem tailored to entice both local and global financial giants.

In brief

•  Recognized as a crucial component in India's pursuit of a $5 trillion economy, GIFT IFSC has garnered interest from notable Indian and global corporations.
• The tax holiday of 10 years for banks in GIFT IFSC translates to reduced borrowing costs for Indian borrowers.

GIFT City is India's first operational greenfield smart city, focusing specifically on financial services. It aims to offer ease of doing business through simplified regulations, tax concessions, and a conducive landscape to attract domestic and foreign financial institutions, banks, insurance companies, and other financial service providers. HDFC Bank, HSBC, and SBI, among others, have established operations within GIFT IFSC. Google and Capgemini announced their intentions to operate from GIFT IFSC. GIFT IFSC houses 545+¹ registered entities as of July 2023.

Key features of GIFT IFSC include:

• Dedicated financial services zone within India (capital convertibility)
• Limited applicability of exchange control provisions
• Lower cost of operations
• Progressive tax regime

Recent developments and growing popularity in GIFT IFSC

GIFT NIFTY – onshoring the offshore

The trading of SGX Nifty, previously on the Singapore Exchange's platform, has shifted to NSE's International Exchange (NSE IX) within GIFT IFSC w. e. f. 03 July 2023. This creates a gateway for more global securities to be listed on GIFT-NIFTY. The current daily turnover is $10 billion. Capital gains from derivatives listed on NSE IX are exempt from Indian income tax. As the platform grows, its influence on global and local markets will shape financial activities in and beyond India.

Banks: matured lending platforms

The original IFSC banking framework, which only permitted branches to be set up, has expanded to include subsidiaries (i.e., a company). Recently in July and August 2023, a few banks have obtained a license to undertake banking operations; 5 of the top 10 global banks and all top 10 Indian banks operate in GIFT IFSC. As of July 2023, the total banking asset size is US$41.20 billion² and a cumulative value of banking transactions is US$508 billion.

Indian Income-tax law provides for a concessional tax regime of 5% on interest on external commercial borrowing (ECB) by Indian borrowers.  Post 1 July 2023, the tax rate applicable is 20% or as per tax treaties, whichever is lower. Reduced tax holiday of 10 years for banks in GIFT IFSC translates to reduced borrowing costs, which may attract additional business for banks in GIFT IFSC given that borrowers will always tend to reduce borrowing cost and therefore borrow from banks in GIFT IFSC.

Importantly, foreign banks are now allowed to undertake acquisition financing and issue P-notes basis underling Indian securities. This could create new opportunities for foreign banks and help Indian companies get funding for local acquisitions.

Family investment funds (FIF): emerging area of interest

GIFT IFSC houses over 50 Alternate Investment Funds (AIFs) with a corpus exceeding US $17.8 Billion.  A framework under the fund regime has been enabled for Family Investment Funds (FIFs), which allows Indian residents to set up overseas investment vehicles, with specific conditions as mentioned below.

• Obtain a license from IFSCA
• Minimum corpus – US$10 million over a period of three years
• Minimum one Principal Officer is required 

Considering that the revised RBI overseas investment regulations carve out specific relaxation to IFSC investment vehicles, this IFSC framework can be evaluated by Indian family offices that intend to make overseas investments. While currently, there are certain clarifications sought from IFSCA and RBI, looking ahead, the realm of FIFs is poised to emerge as a compelling area of interest within the financial landscape of GIFT IFSC

Finance companies/corporate treasury activities:

GIFT IFSC facilitates the setup of Finance companies for borrowing, lending, and corporate treasury operations. Within the Finance company framework, one of the permitted activities is corporate treasury, which authorizes set up of units in GIFT IFSC by global players (i.e., entities outside India) and Indian players with global operations. The key benefits of treasury centers are:

• Dealing in foreign currency without applicability of FEMA for transactions undertaken outside India
• 10-year tax holiday for business income
• Interest payments to lenders of financial institutions outside India are exempt from tax

Non-financial services entities can also set up corporate treasury units. Setting up of corporate treasury centers in the GIFT IFSC may create plenty of opportunities for Indian and global MNCs to centralize treasury operations and effectively manage liquidity, along with tax benefits and reduced operational costs, which are added advantage.