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Like globally evaluated financial centres, Gujarat International Finance Tec-City (GIFT City) is being developed as a global IT and banking services hub. It includes a Special Economic Zone established by the International Finance Services Centre (“IFSC”). The IFSC was created to manage financial services transactions that are now handled by international financial institutions and the foreign subsidiaries and affiliates of Indian financial organisations outside of India.
Large regulatory revisions have been made to the framework governing funds in the IFSC as part of a larger regulatory effort to facilitate the growth of financial service intermediaries in the IFSC. Consequently, the IFSC is fast becoming a competitive substitute for widely recognised fund destinations like Singapore and Mauritius.
The Central Government developed a framework for creating an IFSC within the Special Economic Zones Act 2005. The IFSC was established to enable financial service providers to provide their clients with foreign currency investments and services (i.e., non-INR currencies).
Inside the context of India’s exchange control legislation, “persons resident outside India” refers to “units” and “entities” inside an IFSC.
To remain competitive with other financial hubs worldwide, GIFT City, Gandhinagar, Gujarat, is being developed as a global hub for financial and IT services. It is the first IFSC approved in India and was designated a Special Economic Zone (“SEZ”). Due to its distinct location, the IFSC is a sought-after jurisdiction for managing and pooling international funds.
AIF stands for Alternate Investment Fund. An AIF is an Indian investment vehicle that raises money from overseas or sophisticated Indian investors and uses it to make investments in accordance with predetermined investment policies.
India’s Securities and Exchange Board oversees alternative investment funds (SEBI). Nevertheless, neither the SEBI (Collective Investment Schemes) requirements of 1999, the Mutual Funds Regulations of 1996, nor any other fund management requirements apply to AIF Funds.
Investment strategies offered by AIFs are customised to meet the requirements of institutional investors, family offices, and high-net-worth individuals. SEBI AIFs provide a wider variety of investment options and various asset management techniques. AIF Funds can be formed as corporations, limited liability partnerships (LLPs), or trusts, and they invest in assets that are often inaccessible through standard investment channels.
Launch your investments vision with AIF registration today to dive into a world of exclusive opportunities designed for discerning investors like you.
Three categories of AIFs exist in India, according to a 2012 rule released by the market regulator. Among them are:
These funds make investments in infrastructure, startups, early-stage businesses, social initiatives, SMEs, and other industries that regulators and the government deem economically or socially acceptable. Capital, infrastructural, SME, socially beneficial, and exceptional circumstance funds are also included in this category.
Funds outside the first or third categories are classified as Category II AIFs. Other than meeting urgent operating needs, this money cannot be used as leverage or borrowed. These funds frequently invest in unlisted companies in their middle or late stages of development. Usually, the investments take the shape of debt or stock.
Another name for these funds is Private Equity funds. These funds are referred to as pre-IPO funds when they invest in companies trying to go public. Several well-known companies operate in this sector, including Kotak Mahindra, Axis Bank, Edelweiss, Capital mind, Avendus, IIFL, ICICI Venture, and others.
These funds are permitted to use leverage for transactions in published or unpublished securities and use a variety of sophisticated trading tactics. They also consist of hedge funds and other short-term return-oriented funds. Long-only funds and long-short funds are additional divisions of Category III funds.
Several places stand out as crucial hubs for trade and investment in the ever-changing world of international banking and industry. Gujarat International Financial Tec-City, or GIFT City, is the name of India’s calculated attempt to create a hub of this kind. GIFT City is an ambitious project that aims to lead India’s fast-growing IT and financial industries by providing numerous infrastructure advantages and incentives.
This in-depth synopsis will explore the origins, development, and unique features of GIFT City. It includes opinions from seasoned market professionals and insights from respected stakeholders, such as the much-appreciated involvement of Nishith Desai of Nishith Desai Associates, who has been actively involved in the GIFT City project since its start.
Near Gujarat’s capital, Gandhinagar, the Gujarat International Financial Tec-City (GIFT City) opened in 2015 as the country’s first International Financial Services Centre (IFSC). More attractive advantages for offshore investors have been made available by the GIFT City IFSC in recent years. Capital gains tax, dividend payout tax, and GST are among the taxes waived for firms in the IFSC under the new tax regulations.
A fund that exclusively makes long-term investments in assets intending to capitalise on gains by remaining invested is known as a long-only AIF. Short-selling securities are prohibited for them. A fund where management is permitted to short-sell securities while investing in it long-term is known as a long-short AIF. The additional flexibility of these funds allows them to profit from both rising and declining markets.
AIFs in the IFSC are also subject to the SEBI (Alternative Investment Funds) Regulations, 2012, or “AIF Regulations.” However, to maintain tax efficiency while granting them more operational independence, AIFs in IFSCs have been granted certain exemptions. Special guidelines and limitations have been established for AIF establishment in GIFT City by SEBI, India’s capital markets regulator, which regulates AIF management.
The main regulatory bodies that govern AIFs in an IFSC are the Foreign Exchange Management (IFSC) Regulations, 2015, the SEBI (IFSC) Guidelines, 2015, and the Operating Guidelines. To function as an AIF (as defined by the IFSC Authority Act, 2019), a fund must register with the IFSC Authority.
The requirements for AIFs in International Financial Services Centres (IFSCs) are as follows: on November 26, 2018, the Securities and Exchange Board of India (“SEBI”) announced Operating Regulations for Alternative Investment Funds within International Financial Services Centres (“Operating Guidelines”).
A minimum scheme size of at least USD 3 million; a minimum investment (a) by investors – USD 150 thousand; a continuous, minimum sponsor commitment of the lowest of USD 0.75 million, or 2.5 per cent of the fund’s corpus for Category I and II AIFs; USD 1.5 million, or 5% of the fund’s corpus for Category III AIFs; and by the AIF manager’s staff members and directors.
Following are some of the advantages of establishing AIFs in GIFT City:
With a strong legal framework that complies with international standards, GIFT City offers a safe and open climate for Alternative Investment Funds. Both investors and fund managers see GIFT City as a desirable location due to the regulations’ clarity and simplicity of compliance.
One of the main attractions for Alves in GIFT City is the range of incentives and tax breaks available. GIFT City’s Special Economic Zone (SEZ) designation results in tax advantages and vacations, which makes it an advantageous location for investors and fund managers looking for the best profits.
GIFT City’s advantageous position increases its allure and makes it simple to reach international markets. Enhancing connectivity even more, the Multi-Modal Transportation location (MMTH) sets the city up as the perfect location for overseeing international investments via AIFs.
Technology innovation is highly valued in GIFT City and applies to AIFs. Incorporating fintech technologies into the city’s financial ecosystem optimises fund managers’ operations and boosts AIFs’ overall effectiveness.
GIFT City’s ecosystem facilitates a wide range of investment options, encompassing startups, creative companies, real estate, and infrastructure projects. Because of their diversity, AIFs can investigate a wide range of investment opportunities and correspond with the changing tastes of affluent investors.
Modern facilities and top-notch infrastructure in the city offer fund managers the perfect environment for smooth operations. A business-friendly atmosphere and access to state-of-the-art technology are factors in AlF’s success and expansion in GIFT City.
The federal and state governments have continually supported GIFT City. Their aggressive policies and actions designed to draw in international investment demonstrate their dedication to creating a favourable climate for financial services, particularly AIFs.
According to the Finance Act of 2023, several initiatives have been proposed to encourage development within the GIFT City IFSC. The concept of “original fund” has been updated to facilitate the tax-neutral relocation of offshore assets fully owned and governed by the Government of Dubai and the Abu Dhabi Investment Authority to the IFSC.
The angel tax previously applied to shares of Indian firms that are not publicly traded would no longer apply to Alternative Investment Funds (AIFs) established under the IFSC.
Together with these actions, the IFSC Offshore Banking Units (OBUs) tax holiday has been increased to 100% for the valuation year beginning on April 1, 2023. Instead of applying the 20% dividend distribution tax on dividends for non-IFSC Indian firms, the IFSC units now pay only 10%, which is intended to entice not residing investment in the IFSC.
Beneficiaries of a subsidised tax withholding rate include non-residents who receive interest payments from overtime or rupee-denominated securities registered on IFSC stock markets. Last, the tax benefit period for AIFs moving to a new location in the GIFT City-IFSC has been extended from March 31, 2023, to March 31, 2025.
The Gujarat International Finance Tec-City (GIFT City) is an internationally integrated corporate hub in Gujarat, India. Its regulatory system and special economic zone are intended to facilitate international business. The Securities and Exchange Board of India’s (SEBI) rules and regulations apply to Alternative Investment Funds (AIFs) that operate in GIFT City.
Investors in GIFT City who qualify for AIFs include:
Domestic investors are Indian citizens or companies with Indian registrations that want to put money into AIFs that are based in GIFT City.
Foreign investors are non-resident people or organisations looking to invest in GIFT City’s AIFs. Qualified foreign investors (QFIs), foreign portfolio investors (FPIs), and other foreign investors who satisfy the eligibility requirements may fall under this category.
AIFs in GIFT City may also be purchased by organisations that fit the regulatory criteria, including banks, mutual funds, insurance providers, pension funds, and other financial organisations.
HNIs fulfil SEBI’s minimum investment standards and have significant personal wealth.
Wealth management advice companies that cater to affluent people and families may also purchase AIFs in GIFT City on behalf of their customers.
Note: Depending on the type of AIF and its investing approach, as well as the rules established by SEBI and the International Financial Services Centre (IFSC) Authority, the precise qualifying requirements for investors may change. Before making any investments, you must receive advice from a financial adviser or legal professional to ascertain your eligibility.
Aiming to become a financial services hub, the IFSC expects its management for the AIF to be physically housed inside the IFSC at GIFT City. A domestic AIF’s sponsor/manager entity may choose to create an affiliate or subsidiary under the umbrella of an organisation or limited liability partnership (LLP).
However, there are foreign exchange control regulations to take into account, including the Foreign Exchange Management (Transfer or issue of any foreign security) Regulations, 2004 (the “TIFS Regulations”), and the RBI’s approval requirement for investing in foreign financial services companies. Naturally, these rules could make it harder for Indian physicians to manage IFSC AIF from where they now work, outside the IFSC.
It should be underlined, therefore, that local investors would have to deal with similar foreign exchange regulation problems if they participated in an offshore fund set up in a country like Singapore or Mauritius. The need to get prior RBI clearance to establish a management/sponsor firm in the GIFT City IFSC and fulfil the sponsor commitment criteria should be relaxed, given that Indian authorities oversee the IFSC. If all other parameters remained the same, this would incentivise fund managers to choose IFSC AIFs over overseas fund formats.
While all units within an IFSC, comprising an IFSC AIF along with its manager/sponsor entity set up in the IFSC, are classed as persons residing outside of India for foreign exchange management and taxation of income purposes, these organisations are considered residents of India.
The Income-tax Act of 1961 (“ITA”), however, offers IFSC units including IFSC AIFs along with their Investment Managers several benefits, including a 100% tax holiday on business profits for any ten years that follow the unit’s initial fifteen-year tenure in the IFSC under Section 80LA of the ITA.
The fund industry is now vulnerable to having its revenue redefined as company revenue, especially when investment managers create the income (rather than capital gains). However, as the tax discount under section 80LA should cover performance charges payable by the IFSC AIF, this risk is mitigated for management businesses incorporated within the IFSC.
This makes the GIFT City system of governance and the GST exemption attractive. Units in an IFSC are also granted several tax incentives under the ITA, including a reduced baseline alternative tax, a reduced tax on withholding earnings from interest, and an exemption from capital gains tax on transferring specific securities.
Non-resident investors’ income from offshore investments routed through a Category-I or Category-II AIF, a non-resident investor’s direct investment outside of India is not subject to Indian taxation, as per the Central Board of Direct Taxes.
Consequently, income received by non-resident investors from investments overseas undertaken via Category-I or Category-II IFSC AIFs should not be subject to Indian taxation. The CBDT states that non-residents are exempt from filing an income tax return in India if their earnings from holdings in an IFSC AIF are taxable under the ITA.
However, the IFSC AIF must correctly deduct and remit the tax to the government in compliance with the ITA’s regulations for such an exemption to be granted. Similarly, non-residents are free from obtaining a Permanent Account Number (“PAN”) from the CBDT, provided that certain conditions are satisfied.
Know the investment norms and restriction for AIFs in GIFT City are:
In GIFT City, Alternative Investment Funds (AIFs) are exempt from the usual investment limits and rules common in other financial jurisdictions. AIFs in GIFT City are also exempt from SEBI laws that restrict investment concentrations, such as the 25% cap on the amount of money that may be employed in an individual investee business for Category I and II AIFs.
Fund managers may arrange their investment portfolios more freely, following their tactical objectives and risk evaluations attributable to this flexibility.
Recommendations for Hard Asset and Offshore Investments AIFs in GIFT City have access to a wide range of foreign investment options because they can make up to 100% of their investment corpus in foreign securities.
They can also invest up to 20% of their money in tangible things like gold, real estate, and artwork. This ability to provide broad investment diversification is a buffer against market volatility and sector-specific downturns. It particularly appeals to funds that want to combine conventional banking instruments with investments in actual assets.
Categorisation I and II AIFs in GIFT City are granted a tax pass-through status, which implies that income is subject to individual investor taxation rather than fund-level taxation. These categories appeal to investors looking for clear and effective tax processing because of their approach, which helps prevent double taxation.
A further layer of tax benefit is added when non-resident investors use these AIFs to invest abroad and make revenue that is not taxable in India. Benefits & Tax Exemptions for Investors and Fund Managers AIFs in GIFT City receive several tax breaks, as do their fund managers:
GIFT City, an International Finance Services Centre (IFSC), provides a tax advantage and a pleasant regulatory environment for fund establishment and management. The implementation of the Fund Management Regulations by the International Financial Services Centres Authority (IFSCA) makes the procedure even more efficient and flexible for fund managers.
Unlimited worldwide diversity, forward-thinking regulations, affordability, and easy access to a wide range of Indian financial services are among the benefits of setting up a shop in GIFT City. GIFT City is a more desirable global financial hub due to the tax savings offered under the Special Economic Zone (SEZ) structure.
By utilising GIFT City’s advantages and prospects, family-owned businesses and investors may investigate novel paths for expansion and optimise their investment tactics. Because of its distinct location and legal system, GIFT City can grow into one of the asset management sector’s top worldwide hubs.
Discover the future of finance in GIFT City by visiting our website https://enterslice.com/ now and transform your investment journey to seize unparalleled opportunities in the heart of India’s financial revolution.
Under the terms of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), a fund established in an IFSC as a trust, company, limited liability partnership, or corporate body may apply for registration under the AIF Regulations' specified categories.
Registration Process for AIF:1. Steps to Register an AIF with IFSCA in GIFT City.2. Required Documentation and Compliance for Setup.3. Operational Setup.4. Legal and Regulatory Compliances (GST, Income-tax, TDS)5. Investment Norms and Restrictions.6. Tax Benefits and Liabilities.
AIFs in GIFT IFSC Category I and II are tax pass-through entities. This gets rid of double taxes, which happens elsewhere. Any income from the fund is not taxed in India for foreign investors in AIFs who do not have any income there.
According to the SEBI (Alternative Investment Funds) Regulations, 2012, an AIF in the IFSC is allowed to invest in securities listed on the IFSC, issued by firms incorporated in the IFSC/India/foreign jurisdiction, units of other AIFs, and other acceptable investments.
This indicates that the AIF is tax-exempted on whatever revenue it earns (except from business income). Investors will have to pay taxes on these gains. Even if the AIF makes the investments, you will be taxed as though you made them yourself.
Participation in GIFT City AIFs is open to Indian residents with a net worth of at least USD 1 million from the preceding fiscal year, subject to the limits of the RBI's Liberalised Remittance Scheme (currently USD 250,000).
Any AIF scheme, except angel funds, cannot have more than 1000 investors. Note that if the AIF is incorporated as a company, the rules of the Companies Act of 1956 will come into effect. Any angel fund plan cannot have more than 49 angel investors.
An investor must fulfil one of the following requirements to receive the accreditation certificate from externally recognised agencies: either a minimum income of ₹2 crores or a net worth of at least ₹7.5 crores, or a combination of ₹1 crore in income and ₹5 crores in net worth.
Any Indian investment vehicle known as an AIF raises money from overseas or sophisticated Indian investors and uses it to make investments in line with predetermined investment policies. The Securities and Exchange Board of India oversees alternative investment funds (SEBI).
AIFs operating in the IFSC are open to investments from any person as defined in subclause (1) of clause 22 of the SEBI IFSC Guidelines. 5. Under subclause (3) of clause 22 of the SEBI IFSC Guidelines and the periodic circulars issued by SEBI in this regard, an AIF operating in the IFSC is allowed to make investments.
The appropriate short-term capital gains tax rate, determined by the investor's tax bracket, is often applied to short-term capital gains from Category I and II AIFs. Short-term capital gains are generally subject to a 15% tax rate.
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