Foreign Investment

Why FPIs Prefer GIFT IFSC Over Traditional Investment Routes?

India’s GIFT IFSC is witnessing a relevant shift of foreign portfolio investors(FPIs) from traditional investment routes to enjoy several tax benefits and improve the ease of business. SEBI’s Registered Foreign Portfolio Investors are free to make investments in the GIFT IFSC and other investment opportunities to enjoy the benefits offered by the offshore centre. Further, the blog compares GIFT IFSC investments and common investment channels.

What is GIFT IFSC?

GIFT IFSC, which stands for Gujarat International Finance Tec-City International Financial Service Centre, is a worldwide centre that draws companies from a variety of sectors, such as capital market, fintech, IT banking, insurance, etc. The GIFT IFSC, an initiative of the Indian government, provides a strategic location for developing an efficient platform for all types of inbound and outbound foreign currency transactions.

It is recognized as a unique international financial jurisdiction that serves customers from offshore regions. Simply, a GIFT IFSC is a jurisdiction set up to provide financial services to non-residents and resident companies (in any currency other than the Indian rupee).

Regulation of GIFT IFSC in India: Know How it Works?

The government of India is responsible for regulating and approving the GIFT IFSC under the Special Economic Zones Act of 2005. The International Financial Services Centres Authority (IFSCA), which holds the power of all four financial services regulators in India, is considered to be a united regulator that regulates the GIFT IFSC.

What is the Indian Government’s Vision for GIFT and IFSC?

The GIFT IFSC aims to develop the new-age international financial centres strategically. The following is the vision of developing an international financial services centre in the GIFT city:

• Facilitate global capital flows within the country;
• Accelerate economic growth and stability;
• Onshore the financial transactions and services carried out in the offshore jurisdiction;
• Enhance connectivity with international financial markets;
• Provide a business-friendly environment;
• Generate job opportunities for talented Indian workforce;
• Incorporate principles of sustainable urban development;
• Develop an eco-friendly infrastructure and transportation system.

What are the Categories of India’s Approved IFSC?

Currently, the following are the categories of India’s approved IFSC at the Gujarat International Finance Tec-City:

• International Stock Exchange;
• IFSC Banking Units;
• Brokers and Intermediaries;
• Insurers and Intermediaries;
• Ancillary Services.

Why GIFT IFSC is Beneficial for Foreign Portfolio Investors?

Foreign portfolio investors mostly prefer investments in GIFT IFSC over traditional investment routes (including Mauritius or Singapore). The following are the benefits of investments made through GIFT IFSC:

1.    Offshore Jurisdiction within India

The GIFT IFSC promotes offshore jurisdiction within India by establishing foreign banks like Standard Chartered, JP Morgan, etc. Offshore financial centres are essentially established to serve clients who are not within their jurisdiction.

GIFT IFSC, designated as a non-resident zone under FEMA (International Financial Services Centres) Regulations of 2015, ensures business flexibility and efficient transaction of convertible foreign currency.

2.    Return Leakage through Currency Depreciation

Foreign currency investments and their withdrawal in the GIFT IFSC use constant currency depreciation to eliminate the leakage of returns generated against dollars. 

3.    Promotes Remote Investment

The GIFT IFSC promotes higher remote investments in good market opportunities for non-residents and persons of Indian origin based in GIFT City. The Securities Exchange Board of India promotes more exposure to passive funds to group firms and NRIs owing 100% global funds in the location.

4.    Eliminates Big Taxation Confusion

It eliminates major tax confusion through 100% tax breaks to IFSC units like the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and State Bank of India. Also, non-resident investors and startups are exempted from the following taxes on the transactions made on IFSC exchanges:

• Tax holiday for 10 years;
• Exempted from payment of GST;
• Tax exemption on interest generated on deposits;
• Zero tax on securities transaction tax (STT);
• Zero tax on commodity transaction tax (CTT);
• Zero tax on dividend income distributed by company in IFSC;
• Zero tax on long-term and short-term capital gains tax;
• Exempted from payment of withholding tax;
• Reduced minimum alternative tax (MAT).

5.    Gateway for Global Capital Inflows

India’s GIFT City is now emerging as a gateway for global capital inflows, which combines three overlapping aspects as provided below:

• A multiverse special economic zone;
• Tax-exempt heaven for companies;
• Creates a conducive financial ecosystem.

These aspects create a global gateway that promotes capital inflow and sustainable growth in the capital market for companies established in the GIFT City.

6.    Develop a World-Class Fintech Ecosystem

The GIFT IFSC promotes a world-class and vibrant ecosystem for fintech companies, startups, and financial institutions. Currently, more than 40 fintech companies have been approved to foster innovation and collaboration under the provisions of the IFSCA entity framework of 2022.

It promotes an ecosystem to support startup innovation, mentorship programs, incubators, accelerators, and other supportive services for refining business strategies and competitiveness in the global market.

7.    Ease of Doing Business for Foreign Investors

The business-friendly regulatory framework of GIFT IFSC promotes flexibility and ease of doing business for foreign investors. Further, GIFT IFSC provides a single-window IT system for securing all regulatory approvals, which facilitates the ease of doing business.

8.    Exemption Under the Companies Act of 2013

Foreign investors investing in GIFT IFSC also enjoy exemptions under the Companies Act of 2013. The following are some of the exemptions and subsidies made available under the Companies Act:

• No CSR responsibility for first 5 years;
• Internal audit only in case if AOA is provided;
• There is no requirement for nominations, audits, and remuneration committees;
• Exemption from offering subscription in securities.

Comparison b/w GIFT IFSC & Traditional Investment Routes

A continuous shift of foreign portfolio investors on the GIFT IFSC over the traditional investment routes is observed. The following comparison clarifies the features and benefits of making investments in the categories provided below:

Basis of Comparison	India’s GIFT IFSC	Traditional Investment Routes
Regulatory Authority	International Financial Services Centre Authority (IFSCA)	Securities Exchange Board of India (SEBI), Reserve Bank of India (RBI) & Insurance Regulatory and Development Authority of India (IRDAI)
Tax Exemptions	Tax Exemptions 100% tax exemptions from: Capital gains tax; Goods and services tax (GST); Securities transaction tax (STT); Commodities transaction tax (CTT); Reduced minimum alternate tax rates (MAT); Dividend distribution tax (DDT); 10-year tax holiday	Limited tax exemption from: Interest income generated from bonds; Capital gains tax; Dividend distribution tax (DDT); Short-term capital gains from stocks; Long-term capital gains from stocks.
Operational Cost	Low operational costs	Higher operational cost
Business Operations	Facilitates hassle-free operations and ease of doing business	There is difficulty in carrying out business operations and comparatively lower ease of doing business.
International Exposure to the Financial Market	Facilitates cross-border transactions and the global financial market.	Limited exposure to the international financial market
Financial Services	Offers services like banking insurance, asset management and stock exchange.	Offers financial services for domestic transactions and the same level of innovation or flexibility for international operations.

Conclusion

The GIFT IFSC, an initiative providing a strategic location establishing an efficient platform to manage foreign currency transactions, is still developing into a premier financial hub. It is emerging as an advanced and tech-driven centre for international finance and technology, offering significant benefits like tax exemptions and regulatory ease.

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