Traditionally, finance has been ‘global’ in character. Over the centuries, frequent changes of regimes, combined with evolution of administrative systems, have restricted free movement of capital and discouraged free markets. With the passage of time, free trade almost became imaginary.

Financial integration among industrialised nations was fast-tracked in the last two decades of the 20th century with the rise of international financial services (IFS) that are mainly available in specialised markets known as international financial centres (IFC), which cater to customers outside their own jurisdiction. In recent times, Dubai and Singapore have become major centres for international financial transactions and are fast emerging as global financial centres. Modern-day IFCs are driven by various factors, such as rapid innovations in financial products and services, structures and arrangements to accommodate as well as manage myriad requirements and risks, while pursuing the quest for cost reduction.

The setting up of the international financial services centre (IFSC) at the Gujarat International Finance Tec (GIFT) City in 2015 has been a shot in the arm for India’s growing international trade initiatives. The IFSC-GIFT is set up as a multi-services special economic zone (SEZ) in accordance with the SEZ Act 2005 read with the SEZ Rules 2006. Sections 18 and 55 of the Act have made provisions for the establishment of an IFSC within an SEZ in India and enabled the central government to regulate IFSC activities.

The IFSC-GIFT has been designated as a ‘deemed foreign territory’ for all practical purposes and has the same ecosystem as any offshore location, even though it is physically located on Indian soil. A financial institution setting up its office under IFSC at GIFT City is treated at par with an NRI institution located outside India and is expected to carry out business in foreign currency with such entities, whether resident or non-resident, as the regulatory authority may determine.

Nothing contained in any other regulation shall apply to such a unit, subject to certain provisions. The government of India offers favourable tax benefits to both financial and non-financial entities (such as ITES, BPOs, educational, healthcare) undertaking business at the IFSC-GIFT. For example, exchanges are charged a reduced minimum alternate tax of 9 percent compared to 18.5 percent in the rest of India. Capital market entities are exempted from security transaction tax, commodity transaction tax, dividend distribution tax, long term capital gain tax and so on. Apart from these exemptions, various indirect taxes such as customs duty, central excise duty, service tax and central sales tax have been waived, based on authorised operations at the IFSC. Also, the state government has waived stamp duty, electricity duty and registration fees for businesses registering at IFSC.

Also, the cost of operation at IFSC-GIFT is much lower than that at other IFCs across the world. On the legal front, 50 sections of Indian Companies Act have been waived for companies setting up office at IFSC-GIFT. Recently, IFSC-GIFT City tied up with Singapore Arbitration Centre to set up an arbitration centre within the SEZ.

The IFSC-GIFT is expected to tap the country’s large potential in financial services by offering firms world-class infrastructure and facilities. Till now, IFSC-GIFT has facilitated transactions worth $34 billion of international financial services from outside India to serve domestic requirements. Ten banks have already established offices at GIFT. Recently, one of the banks reportedly funded an Indian company at GIFT for the acquisition of a large foreign business entity.

Apart from ten banks, the IFSC-GIFT houses two exchanges and clearing houses, 87 capital market entities and six insurance companies. More companies are waiting for the requisite completion of formalities to establish operations at GIFT. The Indian government has estimated that the value of transactions by IFS firms would exceed $120 billion by 2025 and is trying to create a conducive business environment for the same. Although the setting up of the IFSC-GIFT has catapulted India to the league of major IFCs around the world, it is still far away from catching up with its global counterparts. The obvious question that looms large now is, how do we reach there?

What needs to be done

To develop IFSC-GIFT at par with its global counterparts, we need to find the procedural and strategic hurdles which are creating inefficiencies. IFSC-GIFT should pick and choose the best global practices adopted by existing IFCs to carry out their businesses. The need of the hour is to strengthen the three vital aspects – regulatory, legal and commercial frameworks – at IFSC-GIFT that will encourage foreign participants to choose it over its competitors. To start with, a detailed examination should be done to understand the regulatory challenges faced by potential investors.

For example, under the current framework, promoters (applicants) need to approach multiple regulators for different approvals and clearances to set shop at IFSC-GIFT. Unfortunately, not all regulatory entities fall under the same nodal agencies within the government. Hence, none of these authorities want to be the first one to give a go-ahead to the applicant.

Other IFCs, such as Dubai and Singapore, have minimal turnaround time in issuing clearance for setting up business. One of the best examples, although not an IFC, is Ras-al-Khaimah in the UAE, which issues business licences within 48 hours of application.

What is truly desired in case of IFSC-GIFT is a single window for granting clearances to all applicants. Further, this window should be set up under a nodal agency, preferably at the PMO, comprising members from different approving authorities who would work simultaneously to issue clearances within in a stipulated time. Smooth and timely expedition of applications is possible only when a nodal agency is given the onus for getting these applications cleared.

Second, the legal framework at the IFSC-GIFT needs to be tightened and made impenetrable. Policymakers ought to understand the various legal challenges that may arise in future. The recent agreement with the Singapore International Arbitration Centre for dispute resolution has been a significant move in this direction. However, this move alone is not sufficient. Emphasis must be laid on developing appropriate in-house legal mechanisms to deal with the legalities of dispute resolution, arbitral reward, exit process, insolvency and bankruptcy code among others.

With passage of time, markets will start trading in specialised financial instruments which may be complex in nature, interpretation as well as implementation. Due to lack of exposure to such cases, the mainland judiciary may lack the expertise to effectively handle them. In order to ensure that disputes are resolved within a reasonable time-frame and implementation of arbitral award are carried out, the local judiciary and law officers should be trained to deal with these sophisticated legal proceedings. Also, to enforce the arbitral award, the judiciary – specifically the district court/the Gujarat high court (depending on whose jurisdiction the matter falls under) – needs to form a special bench so that  such cases can be handled smoothly.
Additionally, the courts should come out with specific rules for speedy judgment on priority cases without any adjournment being granted in such matters. In this regard, the Competition Act should be appropriately amended, with certain exceptions made for IFSC-GIFT to expedite such proceedings. These need to be achieved since factors such as enforcement of contracts and rule of law are important parameters in determining the ease of doing business.

Third, the regulatory framework needs to include a well-defined ‘Right of Exit’ clause for an established entity at IFSC-GIFT. While much emphasis has been laid on the right to entry for business entities at IFSC-GIFT, the government has overlooked the exit process for an entity, if the need arises. Currently, India does not have a mechanism for resolution of disputes among financial firms. The Financial Resolution and Deposit Insurance Bill 2017, which would provide for a comprehensive resolution framework for specified financial sector entities to deal with bankruptcy situations in banks, insurance companies and financial sector entities is still pending with parliament. In the absence of a bankruptcy law for financial firms, liquidation of such entities is a problem, as these cannot be liquidated like regular manufacturing and production units. Hence, an appropriate mechanism needs to be put in place to assure participants that the exit process will be an easy, smooth and time-bound process.

Modern-day financial markets are fast-paced and are constantly evolving. For IFSC-GIFT to evolve as a global financial destination, it is pertinent that it matches operational competency and regulatory flexibility at par with its global counterparts. The above suggestions are just the starting point.

Goswami is an associate fellow at Pahle India Foundation. All views are personal.