GIFT City players may adopt 'wait and watch' approach before 2019 polls

GIFT City has been envisaged by Modi as an alternative financial centre to Mumbai
Market participants with plans to kickstart operations at the International Financial Services Centre (IFSC), set up at the Gujarat International Finance Tec-City (GIFT City) in Gujarat, may adopt a wait and watch approach ahead of the national elections next year. 

While 50-75 domestic brokerages have shifted to IFSC, foreign brokerages and custodians are yet to set up shop, and are likely to wait it out till the elections before taking a decision, say experts.

A unified regulator specifically for IFSC, announced in this year’s Budget, is also unlikely to see the light of the day any time soon.

“Foreign brokers are unlikely to move in the next six months unless there is a compelling announcement in the Budget,” said a broker, on condition of anonymity. 

The Securities and Exchange Board of India (Sebi) recently brought out guidelines allowing alternative investment funds to register at GIFT City and garner funds from abroad. The new framework will allow Indian managers to directly sponsor and manage offshore AIFs set up at IFSC. 

Several fund industry consultants, including top law and advisory firms, are gearing up for roadshows to showcase the benefits of setting up AIFs at GIFT to such investors. About a fourth of India-focused funds based in Singapore and Mauritius may potentially migrate to IFSC over time. The plans, however, may not fructify till the elections, said experts. 

Trading at IFSC has seen a gradual pick-up following the easing of regulations. For instance, the traded value of index futures contracts at NSE International Exchange has gradually risen to $2.96 billion in November from $1.66 billion in April this year. 

Also, the proposed Gift City-connect between the NSE and Singapore Stock Exchange (SGX) could reportedly take a year to materialise. Both the NSE and SGX submitted their initial proposal to their respective regulators — Securities and Exchange Board of India (Sebi) and Monetary Authority of India (MAS) — in October. NSE and SGX are reportedly eyeing an arrangement on the lines of the Shanghai-Hong Kong Stock Connect. The Connect allows Hong Kong residents to trade in Mainland China shares and Mainland residents to deal in popular shares listed on the Hong Kong bourse.

The Centre has already announced several concessions for IFSC investors, including exemption from paying the securities transaction tax, commodities transaction tax and stamp duty. This year’s Budget allowed transactions in derivatives, bonds, global depository receipts and rupee bonds on an IFSC exchange to be exempt from the capital gains tax.

While several sops have been announced for trading out of IFSC, niggling issues remain. For instance, there is concern that a portion of the dividend to be declared by companies operating out of the IFSC could come under the tax net. Similarly, income earned by eligible foreign investors who are not classified as foreign portfolio investors may face a tax outgo of 40 per cent plus surcharge and tax on income earned.

Any income earned by FPIs from trading on the IFSC is regarded as capital gains and is exempt from tax. For example, the tax on short-term gains on derivatives trades is nil. Recently, the Gujarat government decided to buy IL&FS’ 50 per cent stake in GIFT City.
  • While 50-75 domestic brokerages have shifted, foreign brokerages and custodians are yet to set up shop in IFSC as they will weigh their options till the elections
  • Trading at IFSC has seen a gradual pick-up following easing of regulations 
  • In Dec 2015, the Maharashtra govt had set up a task force under Union Minister of State for Finance Jayant Sinha for setting up an IFSC in Mumbai
  • The traded value of index futures contracts at NSE International Exchange has gradually risen to $2.96 bn in Nov from $1.66 bn in Apr this year

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