Towards the end of 2018, when the results of the Lok Sabha elections were still in the realms of speculation, a financial market intermediary let it slip inadvertently that he was surreptitiously planning to move the infrastructure installed in Gujarat’s GIFT (Gujarat International Finance TecCity) to Mumbai.
It’s not hard to guess why the intermediary wanted to do that. The GIFT, one of Prime Minister Modi’s pet projects, rolled out in 2015, would have had no future if the election results had been adverse for the ruling NDA. Most financial market intermediaries who are already well ensconced in Mumbai, the financial capital of India, are not too happy about being asked to shift to an IFSC in Gujarat. They would have been happier if the IFSC was set up in their backyard, in the Bandra Kurla complex.
But now that the NDA is in its second term, it has made the GIFT IFSC one of its key focus areas. A number of key regulatory changes have been pushed through since May to enable greater participation on these exchanges.
Two major changes, in particular, are likely to be a game-changer for the Indian IFSC, and could set it well on its way to sustainable growth.
The NSE-SGX connect
One of the primary objectives behind setting up the GIFT IFSC was to bring offshore trades based on Indian stocks and currencies to trading platforms in the Indian IFSC. The Centre has been especially worried about migration of volumes in Nifty futures to the Singapore Stock Exchange (SGX); they currently account for 30-40 per cent of the daily turnover in Nifty futures.
Indian bourses had upped the ante last year, deciding to stop providing data feed to the SGX for enabling the trading of the SGX Nifty and other India-based stock derivatives. The SGX had retaliated by constructing an index mimicking the Nifty 50, and had threatened to continue trading these new products. With the entire issue going in to arbitration, both parties seem to have come to a decision that ultimately favours the GIFT IFSC greatly.
They plan to shift the entire trading in Nifty 50 futures as well as other India-specific derivatives to the GIFT IFSC through a jointly promoted platform, the NSE IFSC-SGX Connect. While the implementation could take another 18 months, this is likely to give a large fillip to the traded volume on the GIFT IFSC exchanges. Daily traded volume of SGX Nifty futures are currently around $4-5 billion while the daily turnover of exchanges on the GIFT is currently $1.8 billion.
It is likely that the large pool of liquidity in the NSE-SGX Connect could make some FPIs registered with SEBI for trading in domestic exchanges begin trading on the IFSC too.
Trading in rupee derivatives
Another major development that can help the GIFT IFSC is the recommendation of the RBI Task Force on Offshore Rupee Markets. This committee looked in to the manner in which rupee trades overseas are beginning to bloat to significant levels, almost matching the level of transaction in the inter-bank OTC market.
This migration of volumes to Non Deliverable Forwards (NDF) markets overseas not only results in significant loss to the revenue, it also leads to higher possibility of distortions in rupee value due to speculative forces.
The task force has recommended that non-deliverable rupee derivatives (with settlement in foreign currency) may be allowed on the GIFT IFSC. It is proposed that exchange-traded currency derivatives involving the rupee may be introduced initially and non-deliverable OTC currency derivatives involving the rupee may be allowed subsequently.
The committee is also allowing positions without underlying exposure $100 million in OTC as well as the exchange-traded currency derivative market.
The Bank of England estimates the size of rupee offshore trades at $23 billion, while RBI sources estimate deliverable daily onshore forwards at $21 billion for 2019. Shifting these revenue to GIFT City will clearly make business boom in the GIFT City.
Relocation not easy
It is clear that the red carpet for FPIs is almost ready. Company Law exemptions were provided in January 2017 and the International Dispute Resolution Mechanism through the Singapore International Arbitration Centre was set up at the GIFT in August 2017.
A slew of tax incentives are available for units operating in the IFSC. Exchange-traded transactions on the GIFT City do not attract securities transaction tax or commodity transaction tax. Capital gains made on transaction executed on GIFT exchanges are not taxed, making the GIFT City comparable to other offshore financial centres.
Services offered in this zone do not face an additional levy of the Goods and Services Tax and the Minimum Alternate Tax of 9 per cent is levied on book profits. The Government of Gujarat has further exempted stamp duty on entities having a registered office in the GIFT for capital market activities. Companies and mutual funds operating in the IFSC have also been exempted from dividend distribution tax from current and accumulated incomes.
The Budget 2019 allowed profit-linked deductions of 100 per cent of net income for any 10 consecutive years out of 15, beginning with the year in which the necessary permission was obtained, for companies registered in the GIFT City.
Further, the transaction cost and the cost of rentals is purported to be much lower in the GIFT City compared to Singapore, Dubai and other offshore financial centres.
The major problem currently facing the IFSC is making intermediaries and market participants shift physical offices to the IFSC. There is a perception that the location of the GIFT is in the middle of nowhere; in “Modi’s boondocks”; or in “wilderness”, as one columnist derogatorily referred to it. But people who have taken the pain to visit the GIFT City would realise that it is very close to both Ahmedabad and Gandhinagar, and the commute from either of these cities to the IFSC will take less than half the time most Mumbaiites spend in commuting. With the drive to Gandhinangar from the GIFT taking just 20 minutes, those working in GIFT can easily find comfortable locale for settling their families. Of course, if you are not a teetotaller, then you have a valid reason to be grouchy.
There are also few more regulatory hitches that can be sorted out. Individuals still cannot open a bank account in the GIFT City. While a via media has been found recently, it will be good to ease this rule.
Rules governing eligible foreign investors also need more clarity. Allowing listing of stocks, bonds and depository receipts on GIFT Exchanges can enable domestic retail investors to also route the funds under the Liberalised Remittance Scheme to GIFT exchanges.