India’s most GIFTED city

The centre has extended a slew of tax breaks and deployed parliamentary procedure to get the gujarat government-owned International financial services centre moving

India’s first International Financial Services Centre (IFSC) in Gandhinagar seems to be moving up — at least on paper — after delays in land acquisition, infrastructure development snags and political crosswinds.

Touted as India’s offshore alternative to Singapore, Hong Kong and London, the IFSC is located in an under-development “smart” township called Gujarat International Financial Tec-city (GIFT), which is about a tenth of the size of Vatican City, the world’s smallest state. It is a tax mecca, offering incentives that Indian businesses outside the city cannot avail of.

After infrastructure lender IL&FS (a 50 per cent shareholder in GIFT) imploded in 2018, things have moved briskly for the IFSC. Especially intriguing are developments over the last year when India locked down to contain the coronavirus pandemic and most businesses were fighting to stay alive.

Documents show that at a meeting on June 11, 2020 at GIFT’S headquarters, its board of directors approved the transfer of IL&FS’S entire stake to Gujarat Urban Development Corporation (GUDC). This effectively gave the Vijay Rupani-led Gujarat government control over GIFT. A month later, the board met again and approved raising GIFT’S authorised share capital ten times to ~1,000 crore. GUDC later injected ~200 crore into GIFT in various tranches for the shares it was allocated.

Another state government body named Gujarat Maritime Board was made a shareholder on March 30, 2021. It paid ~100 crore for a minority stake.

The Rupani government aims to offload 50 per cent of the stake it took from IL&FS, but it is unclear yet who will buy it. IL&FS nominees were eased out of the IFSC management and replaced by officers and other managerial personnel of the Gujarat government in 2018. After the Gujarat government took full control and IL&FS exited, GIFT’S financial statements said the move “will boost the confidence of stakeholders and investors”.

The IFSC was spoken of at the annual Gujarat investors’ summit in 2007, when Prime Minister Narendra Modi was chief minister of the state, but the project was in limbo till 2015. In April 2015, then finance minister Arun Jaitley unveiled IFSC regulations at GIFT city to set in motion the process of laws for setting up a tax paradise within India.

While it remains unclear whether there is a correlation between the exit of IL&FS and a boost in investor confidence, there seems to be an uptick in a few crucial parameters. Between 2015 and 2018, when IL&FS exited, 139 units primarily in finance and real estate were approved to set up shop. In 201920, there were 201 units in GIFT. That year alone, 62 units were approved, probably the highest since it informally spurted to life five years ago.

In 2019-20, the volume of banking transactions touched $28 billion, up from $400 million five years ago. From just two banks transacting $200 million each, 13 banks are now transacting ten times that amount each. Capital market transactions touched $4 billion from negligible amounts during the same period. Service exports from GIFT nearly touched $1 billion in 2019-20.

“GIFT City was conceived as a public-private partnership (PPP) project so that it could be developed in a fasttrack mode. IL&FS was selected due to its years of experience in complex and high-value infrastructure projects to realise this PPP model. However, they were over-leveraged, and their position to infuse equity in GIFT felt compromised. Before any doubt could set in, the IL&FS stake was taken over by the government of Gujarat,” said Tapan Ray, CEO of GIFT city and a former Union commerce secretary.

“Now, as a public entity, GIFT city is in a better position to take decisions in public interest, where immediate returns are not the only motive,” said Ray.

Every single national Budget since 2017-18 has provided GIFT city with massive policy incentives.

Modi inaugurated the India International Exchange, the country’s first international stock exchange, at GIFT city in January 2017. A few days later, Jaitley announced a unified regulator for IFSC, a landmark announcement that would fructify through a deft legislative manoeuvre. Minimum alternate tax was halved to nine per cent. Non-resident Indians trading on stock exchanges in IFSC were spared short-term capital gains tax. The finance ministry also exempted intermediary units from goods and services tax (GST). The Reserve Bank of India (RBI) and Securities Exchange Board of India (Sebi) dangled carrots later that year to further sweeten the deal.

The 2018-19 Union Budget was a revelation of sorts for GIFT city. Companies could now choose any period of 10 years in a 15-year window to claim 100 per cent exemption from paying corporation tax. The ambit of capital gains tax and dividend distribution tax for IFSC units in GIFT city was greatly widened. In the 2019-20 Budget, stamp duty exemptions were enhanced. Finance Minister Nirmala Sitharaman announced the setting up of the first bullion exchange at GIFT city. The RBI permitted the trading of rupee derivatives, which could be settled in foreign currency at stock exchanges located in GIFT city.

In 2020-21, Sitharaman announced a slew of measures to make IFSC at GIFT city a magnet for offshore funds in territories like Mauritius and Singapore. Additionally, aircraft leasing, another big source of foreign exchange outflow, was exempted from capital gains tax. In August 2021, the government announced that Indians could trade in select US stocks on American exchanges through facilities in GIFT city.

The government also ensured the project sidestepped legislative hurdles. The nature of financial services set up at GIFT IFSC required permissions from multiple regulators in India: RBI, Sebi, Insurance Regulatory Development Authority of India, Pension Fund Regulatory Development Authority of India and even, possibly, the Directorate General of Civil Aviation. In 2017, the government decided that the powers of all these regulators would be vested with a single entity called the IFSC Authority.

Legislation was introduced in the Rajya Sabha in February 2019. The Rajya Sabha sent it to a Parliamentary Standing Committee for consultations. With no progress on the legislation, the Cabinet in a meeting chaired by Modi on November 20, 2019, decided to withdraw the Bill from the Rajya Sabha and introduce it in the Lok Sabha. The legislation was classified as a Finance Bill, leaving the Rajya Sabha with the option of only accepting or rejecting the Bill. With the Bharatiya Janata Party in majority in the Upper House, the Bill was finally passed in December 2019.

In April 2020, the IFSC Authority Act was enacted after receiving the President’s nod.

In 2017, the government decided that the powers of all these regulators would be vested with a single entity called the IFSC Authority