India’s GIFT City aspires to integrate its economy into the global financial system, ensure capital flow and connectivity with global financial markets in a business-friendly environment
Proclaimed as the embodiment of ‘Aatmanirbhar Bharat’, a hub of ingenuity and innovation, the Gujarat International Finance Tech (GIFT) City in Gandhinagar is India's first greenfield smart city housing the International Financial Services Centre (IFSC). It operates as a multi-service Special Economic Zone (SEZ),[1] providing tax exemptions and simplified regulations. The International Financial Services Centres Authority, established in 2020, acts as a unified regulator overseeing financial products, services, and institutions, including banking entities operating IFSC Banking Units (IBUs).
Aiming to compete with international financial zones like La Defense, France, and Shinjuku, Japan, the GIFT City aspires to integrate India's economy into the global financial system, encourage capital flow, and enhance connectivity with global financial markets in a business-friendly environment.
Evoking comparisons to the 2008 Financial Crisis, the Silicon Valley Bank's (SVB) closure and Credit Suisse's collapse in March 2023 caused numerous Indian startups to experience a fund freeze. For years, while “offshoring” was the startup world's catchphrase, with many India-centric ventures establishing global holding structures, these events marked a shift back to “onshoring” as prominent startups sought to return to India. Over US$200 million of the US$1 billion held by startups with SVB has now been transferred to banks in GIFT City, a secure space for foreign currency transactions.
While “offshoring” was the startup world's catchphrase, with many India-centric ventures establishing global holding structures, these events marked a shift back to “onshoring” as prominent startups sought to return to India.
Capitalising on this trend, IFSC Authority published a white paper detailing plans to develop GIFT City as a hub for businesses to “reverse-flip” or shift domicile back to India—suggesting legal (SAFE agreements and offshore exchange listings) and fiscal (tax exemptions and angel tax relief) reforms.
Over 400 entities, primarily from the banking and financial services sector, have opened offices in GIFT City, with over 20,000 employees. However, cultivating a thriving financial ecosystem with a robust market turnover remains a regulatory challenge.
Indian and foreign banks can establish IBUs in GIFT IFSC upon obtaining the necessary licenses. Five major global and 14 Indian banks have already set up operational units. As of July 2023, GIFT City’s total banking assets reached US$41.20 billion, accompanied by cumulative transactions worth US$508 billion.
Under exchange control laws, Indian banks' IBUs are considered offshore branches and can conduct convertible foreign currency transactions. Permissible IBU activities include opening foreign currency accounts for residents in India and abroad, accepting deposits, extending credit by offering loans and trade finances, credit enhancement, insurance services, sourcing foreign currency funds and more. IBU’s are also encouraged to establish global or regional treasury units.
Under exchange control laws, Indian banks' IBUs are considered offshore branches and can conduct convertible foreign currency transactions.
Banks are actively attempting to capitalise on the financial inflows from startups by providing customised solutions. For instance, the Bank of Baroda’s GIFT City branch offers ‘World Startup’ services for transaction-based internet banking services in US Dollar, Euro, and British Pound Sterling.
Allowing foreign banks' IBUs to finance acquisitions in GIFT IFSC could present new business prospects and offer Indian companies an additional funding source for domestic takeovers. Acquisition financing[2] by these IBUs will acknowledge offshore derivative instruments (ODIs)[3] as valid contracts.
The value of outstanding ODIs in the domestic economy reached INR 1.49 trillion in December 2023, showing a 63-percent growth in calendar year 2023. The government is considering simplifying the issuance of such ODIs concerning GIFT City banking units, by eliminating double taxation on the income they generate. Moreover, IBUs shall be exempted from taxation for non-resident ODI holders to reduce tax-related complications and income distribution. This proposal aims to motivate foreign banks' IBUs to issue ODIs for their clientele, fostering growth and collaboration within the financial sector.
IBUs find themselves in a unique position, as they must simultaneously navigate the overlapping territorial laws of India and the fictional regulations within an IFSC. One significant challenge they face is the absence of a sophisticated dispute resolution system for IBUs and GIFT city transactions. Potential investors and reverse flippers may apprehend the potential complexities that could arise when dealing with disputes, inevitably leading to cumbersome settlements.
One significant challenge they face is the absence of a sophisticated dispute resolution system for IBUs and GIFT city transactions.
Although the IFSC Authority oversees all banking activities of IBUs within an IFSC, there is no exclusive court or dispute resolution forum to handle disputes arising from these transactions. Their absence creates challenges, particularly in cases involving multifaceted civil and criminal disputes, such as fraud. For instance, the provisions of the Prevention of Money-Laundering Act, 2002 (PMLA) could extend beyond India's borders in situations involving cross-border offences linked directly or indirectly to India, encompassing foreign branches or subsidiaries of Indian entities. Similarly, RBI's directives apply to branches and majority-owned subsidiaries of banking companies located abroad as long as they do not contradict local laws in the host country.
Consequently, while an IBU might be considered a “foreign branch” from a foreign exchange regulatory standpoint, other aspects like debt recovery could be scrutinised by Indian territorial laws. Awareness concerning this overlapping legal landscape is vital for new IFSC entrants.
The 2023-2024 Union Budget introduced acquisition financing by IFSC banking units of foreign banks and subsidiary Export-Import Bank of India (EXIM Bank) for trade refinancing, set foundations for arbitration and related services, and recognised ODIs as valid contracts. To further promote GIFT City's growth, Finance Minister Nirmala Sitharaman added that data embassies would be facilitated for countries seeking digital continuity solutions.
The industry expects the 2024-2025 Budget to further liberalise banking services towards capital account convertibility. Taking advantage of the positive fintech environment in GIFT City, the government can conceive several reforms to bolster the banking sector's progress in IFSC. It is vital for IBUs to access a wide array of Electronic Trading Platforms and Voice Brokers, with reasonable registration requirements for platforms servicing IFSC entities. Additionally, allowing IBUs to join platforms regulated by respected international authorities like the Financial Control Authority (FCA UK) and the Monetary Authority of Singapore (MAS) could attract non-resident participants.
The exemption of mergers from the intricate procedures of the National Company Law Tribunal (NCLT) while ensuring a simplified dispute resolution process can “flip” holding companies back into India.
The IFSC Authority’s white paper suggested ODIs for entities in GIFT IFSC with Indian subsidiaries to expand offshore merger possibilities. The exemption of mergers from the intricate procedures of the National Company Law Tribunal (NCLT) while ensuring a simplified dispute resolution process can “flip” holding companies back into India.
A well-rounded dispute resolution mechanism would only be complete with specialised commercial courts in GIFT City staffed by judges possessing business acumen. This system would not only support arbitration[4] processes but also enforce awards effectively. In the medium to long term, risk mitigation could be achieved by establishing advanced ruling authorities that address investor and entrepreneur transaction concerns.
Making regulatory changes to ease investment restrictions under the Overseas Investment and Liberalised Remittance Scheme, offering tax-neutral treatment for startups in GIFT IFSC, and ensuring robust intellectual property protection and soft infrastructure can propel GIFT IFSC to a global startup hub exploring the Indian market.
Amidst the fall of banking giants like SVB and Credit Suisse, a need for secure banking emerges. With its digital banking prowess, including the acclaimed unified payments interface (UPI), India can emerge as a cost-effective global financial hub, offering seamless banking experiences in Gift City.
Dharmil Doshi is an intern at the Observer Research Foundation
[1] SEZs function as foreign territories for trade, applying tariff rules and goods entering the same are regarded as imports.
[2] Acquisition financing essentially refers to funding raised by an entity to acquire another company.
[3] ODIs are investment vehicles enabling foreign investors into Indian equities such as swaps, participatory notes and forwards.
[4] Arbitration refers to a dispute resolution process, with minimal judicial intervention, where the parties themselves decide the arbitrators and procedures to reach a settlement in the form of an ‘award’.
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