A GIFT, to be delivered

Standing by an under-construction check-post in Gujarat International Finance Tec-City (GIFT), 12km from the hustle and bustle of Ahmedabad, one can hear the winds blowing. The air is dry and the place is deserted but for a few labourers who mill around. A kilometre ahead and standing like giants are two buildings – GIFT1 and GIFT 2. The 29-storey towers, which house offices of public sector banks and government agencies, are the most visible part of a city that will eventually spread over 886 acres. Some of the basic infrastructure-roads, streetlights, drainage lines, power lines–is in place. The drainage pipeline is big enough for a truck to pass through.

But these are the only landmarks worth mentioning about a city that was first envisioned in 2007 by the then Gujarat Chief Minister Narendra Modi. During an official visit to Hong Kong, one of the biggest financial hubs in the world, Modi had spotted the opportunity to build a similar and India’s first international finance centre in his home State. The opportunity made sense. Though seen as an 'immature' and 'nascent', the Indian financial market has immense potential. The turnover of the equity derivatives market alone has grown three times from its 2006-level of ₹73,56,242 crore (approx $1,800 billion).

But GIFT’s slow pace of construction, which started in 2010, had given voice to its critics. Many were beginning to suspect that GIFT will turn into another ambitious but unviable and unfulfilled dream. But the results of 2014 General Elections changed all that. The man who envisioned GIFT was now the Prime Minister of the nation. And little under a year, in April, Modi’s right-hand man in the Union Cabinet and his Finance Minister, Arun Jaitley, launched the regulations on the International Financial Services Centre (IFSC) in Special Economic Zones (SEZs) specifically targeting the GIFT - India's first IFSC. The who's who of the financial sector in the country and the world flocked to Gandhinagar, Gujarat's capital within a fortnight to get a sense of the regulations that will shape the country's first smart city-cum-financial hub.

GIFT was back in business.

Of the city’s 886 acres, 261 acres are for a multi-SEZ, which has been accorded the IFSC status. Rest of the 625 acres will comprise of a Domestic Finance Centre and associated social infrastructure, which will include schools, hotels, exhibition centres, hospitals, training centres and affordable housing. GIFT, which was conferred as “Smart City of Future” by Cisco Technology Award 2014, will have state-of-the art transportation system - Metro rail, bus rapid transport service et al. Based on the employment projections for GIFT, it is estimated that it would require 62 million square feet of real estate office and residential space. Out of the total land required for GIFT project, 28 per cent of land utilisation will be for commercial, 34 per cent will be for green corridor and open space, 4 per cent will comprise of residential, 5 per cent each for social infrastructure and utilities, and 24 per cent for transportation. Some iconic buildings are being planned that will define the new city’s skyline, which will be 410-meters high.

"This is the landmark project after Independence. There is no project in the world where a single project has a potential to generate 1 million jobs, that too high-paying jobs. Also, it is not only a global financial centre but also a Smart City. This has established a benchmark when the smart city terminology was not known," says Ramakant Jha, Managing Director & Group CEO, GIFT.

But all of the above features are just add-ons. The real jewel of GIFT is the IFSC, which will operate as a foreign territory governed by the Indian laws - custom made for it - to attract global companies and financial institutions.

Framed by the financial services regulators - Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDA) and the Reserve Bank of India (RBI), the rules for IFSC have opened doors for many financial services that will be a first for the country. This will make investments possible in foreign securities such as currencies, stocks and debt instruments including bonds, subject to the limit set in the Liberalised Remittance Scheme of the RBI. Non-Resident Indians (NRIs) and foreign nationals do not face the limit.

In the insurance field, the reinsurance business is a huge untapped opportunity. As per IRDA estimates, about ₹7,300 crore worth of reinsurance business went to foreign reinsurers outside India in the 2015 fiscal. Changes in rules (biggest of them being that the IFSC will have only non-rupee transactions) and IFSC being an SEZ (with a tax structure condusive for business) will create a big opportunity.

Further, the RBI has opened the doors to Indian and those foreign banks that have operations in India to set up IFSC Banking Unit (IBU) in IFSC, thereby creating a condusive business environment for overseas companies and investors to operate. IBUs will transact in currencies other than rupee and they will deal with non-resident entities. As per the RBI regulations, a bank can set up an IBU with a minimum capital of $20 million or equivalent in any currency other than the rupee. For the convenience of business of these IBUs, they will be required to maintain minimum regulatory capital on on-going basis but will be exempt from adhering to the statutory requirements of Cash Reserve Ratio and Statutory Liquidity Ratio. Kotak Mahindra is expected to open its IBU within months.

According to experts, an IFSC in India will boost financial activity in currency and derivatives trading mainly in index and interest-rate derivatives. "We can expect to see greater use of quasi-equity or mezzanine capital, greater use of loans with floating-rates linked to the cost of capital, instead of a fixed rate. This will allow banks to provide long-term debt funding for early stage infrastructure ventures, similar to what Silicon Valley Bank - which provides diversified financial services to emerging companies in the US – does," says Pradip Shah, Chairman of IndAsia Fund Advisors Pvt. Ltd.

But it isn't an easy sailing ahead. To get big businesses and investments, GIFT will have to compete with the best of the financial centres in the world. In the close vicinity of GIFT are at least three thriving and well-established international financial centres - Labuan International Business and Finance Centre (LIBFC) in Malaysia, Dubai International Finance Centre (DIFC) and International Finance Centre at Hong Kong. There are others as well such as those in Singapore, Sydney and Tokyo, where billions of dollars worth financial trades take place every day. Research and financial advisory firm Ernst & Young LLP (E&Y) has categorised financial services centres into five different categories.

Global Financial Services Centres : These are financial centres that have sufficient critical mass of financial services institutions to dispense with intermediaries and to connect international, national and regional financial services participants directly. Example - London and New York.

International Financial Centres : They conduct high volume of cross-border transactions involving at least two locations in different jurisdictions. For example, Hong Kong is an international financial centre that is involved in a significant proportion of Asian financial transactions.

Niche Financial Centres: NFCs operate in their respective niche sectors such as Zurich for private banking or Hamilton (Bermuda) for reinsurance.

National Financial Centres : They conduct a significant proportion of their respective country’s financial business. In India, Mumbai would be a national financial centre. Similarly, Toronto is a national financial centre of Canada.

Regional Financial Centres : RFCs conduct a large proportion of regional business within a country. Chicago, apart from being an international centre, is also a regional centre for the mid–west of the US.

As per an E&Y study, mature financial services centres make significant contributions to the Gross Domestic Product (GDP) of their countries. In Japan, the Tokyo Financial Centre contributes about 20 per cent to GDP, similarly for Hong Kong it is 13 per cent, in Singapore it's 12 per cent, Dubai's 11 per cent and in Sydney, 8 per cent of the GDP comes from its financial services centres.

The Indian scenario is incomparable. The financial services sector in India contributes only 5 per cent to GDP. Mumbai may be a National Financial Centre, but lacks a demarcated area to conduct financial transactions. It is a gap that can be filled by GIFT, which aims to become the International Financial Centre focusing on cross-border transactions, similar to Hong Kong.

Anish Thacker, Partner, Tax & Regulatory Services, Ernst & Young LLP, identifies two key aspects that could make or break GIFT’s IFSC tax structure and the disputes resolution mechanism. According to him, three international financial centres in the vicinity of India – in Dubai, Malaysia and Hong Kong- would be close competition for GIFT-IFSC. "The DIFC has zero tax on income or profit, while at Labuan International Business and Financial Centre and Hong Kong IFC, there are advantages like easy incorporation, conducive laws and lower taxation," says Thacker. Also, these international finance centres have several sweeteners. At the Hong Kong IFC, there are no restrictions on foreigners being shareholders or directors of a Hong Kong company. At Malaysia’s Labuan IBFC, there is no share capital requirement to incorporate a company. And Dubai, whose IFC is geographically closest to GIFT-IFSC, has an obvious advantage of being an open or free economy. It allows 100 per cent foreign ownership and has zero tax on income and profits, which is guaranteed for a period of 50 years.

If GIFT wants to attract a business that will be worth $50 billion annually, then Modi’s Government has its task cut out. At present, consultations are on to prepare a draft with GIFT officials regularly making Delhi trips to make representations to the Law Ministry.

If GIFT suffered from a heavy-footed Congress-led UPA Government, Modi is keen to show his seriousness in the project. The IFSC rules were framed within a month of its announcement in the Budget speech by the Finance Minister.

But a bigger challenge lies in the formation of the taxation structure and legal regulations.

"Our demand is, make it almost tax-free. We will get a lot of indirect benefits like employee's income tax and purchase of house or car. These revenues are not available at present. These will be new sources of revenue for the government," says Jha, who is credited with developing Navi Mumbai - a planned township in Mumbai suburbs. His team has made several presentations to the Finance Ministry, pushing for tax advantage. They might have to wait till the next Union Budget for an announcement from the government.

For the legal system, GIFT-IFSC looks to adopt a framework on the lines of Dubai and Singapore, where there is a separate appellate body that is mandated to resolve the issues within a stipulated time. "We need to make dispute resolution mechanism that is fast and economical. The current disputes mechanism is time-consuming and also involves un-ending costs of lawyers," adds Jha.

The Ministry of Law is looking into the formation of law at IFSC, where criminal laws will be uniform as under the Indian Penal Code.

Meanwhile, as the government frames laws and tax structure, inquiries have flooded GIFT-IFSC's office in its campus opposite to the two iconic 29-storey towers in the GIFT City. "The first unit under IFSC can begin operations before the end of this summer. Also, we have received requests from reputed international financial institutions including the Chicago Mercantile Exchange - one of the largest futures and options exchange for commodities in the world – and ICX, which is a the leading network of regulated exchanges and clearing houses for financial and commodity markets, " says Jha. He adds that the response is encouraging especially after the announcement of IFSC regulations.

Among the domestic players, Jha says BSE, NSE, NCDEX and MCX have made inquiries. BSE plans to set up an international exchange at GIFT.

“Till now, when Indian companies had to raise foreign capital, they had to go to either Singapore or London. Over the last 35 years, Hong Kong has played a major role in mobilising substantial resources for economic development of China. IFSC at GIFT city has the potential to play a similar role for India," Ashishkumar Chauhan, MD & CEO, BSE, said during the launch of IFSC regulations in Gandhinagar recently.

The smart city status has attracted several real estate developers, who have signed MoUs with GIFT to set up hospitals, hotels, residential and commercial complexes. Mumbai's Narsee Monjee Educational Trust has already opened Jamnabai Narsee School for primary grades at GIFT City.

"When I came here about five years ago, there was nothing. We called this area Chambal Ghati . Even the land wasn't transferred and the project was just a concept. We were only 5-7 people in the GIFT team. But with quick and constant support from the State government, in three years land was identified and transferred and the work was put on fast-track," recalls Jha.

Now the next five years will be crucial.