Five clocks hang on the wall behind the reception desk of the single-storey red building that is the headquarters of Gujarat International Financial-Tec City Limited (GIFTCL), touching Gandhinagar. They show time in New York, London, Dubai, Singapore and GIFT City. Four of them are well established international financial centres (IFC), and the fifth is a wannabe. That’s mission statement in the form of installation art. Narendra Modi, as chief minister of Gujarat, had often dreamt of – and promised to – make GIFT City a top financial hub. It is still waiting for its time.

Of course, New York or London, like the proverbial Rome, was not built in a day. Liberal financial regulations and lower taxation on financial deals, developed over the years, have attracted investors there. Dubai, for example, follows zero-taxation policy. In Singapore and Malaysia it is 10 percent (it was previously 5 percent) and 3 percent. The IFCs in these cities have contributed in shaping their respective economies.

Considered a dream project of Modi, GIFT City is a step in that direction. It was to be aided by right infrastructure and policy environment over the years. It aimed to make Gujarat a financial services hub by attracting foreign banks, fund managers and stock exchanges. The idea was to provide major banks and financial institutions based in New York, London and Dubai an alternative place to do business. “With the GIFT project we are setting a benchmark for the whole world about how one can deliver financial services, technological security, real time operations, multiple activities, etc. from a single place, at the same time,” said then chief minister Modi, while inaugurating the first of 29-floor twin towers of GIFT City on January 10, 2013.

After eight years of its conception, however, the project remains a no show and there are no indications of its getting off the ground in near future. On the infrastructure side, the work related to city development had been held up as the state government transferred the land to GIFTCL only in 2011. On the policy environment front, in the one and half year of the Modi government at the centre, the finance ministry has issued operating guidelines for IFCs, which experts believe are highly inadequate and not aligned with the government’s vision to develop a global financial centre. They say that the project doesn’t seem to be going anywhere, as major taxation and legal reforms are still awaited. We will get there in sometime. First let us have a look at what India is losing in the absence of an IFC.

India needs financial hub
After the economic liberalisation, India allowed inflow and outflow of capital, but under stringent foreign exchange regulations and higher taxation. Owing to these restrictions, the trade of several financial products and services is not done in India but in Dubai and Singapore. In its report on setting up a financial SEZ, National Institute of Public Finance and Policy (NIPFP), a Delhi-based think-tank under the ministry of finance, pointed out earlier this year that India is losing '1,334 crore every day or '2,00,142 crore every year in rupee derivative trading to other countries. “A substantial part of this trading can be captured by Indian firms, if appropriate regulatory and tax regime exists,” it said. The situation is such that today more rupee-dollar contracts are settled in Dubai than in India, says Shubho Roy, consultant, NIPFP. “If you want to buy Hong Kong dollar the best place is Hong Kong. But if you want to get an exposure to the rupee-dollar exchange the easiest place to do it is Dubai,” Roy said.

Having an IFC in India would mean that even the smaller companies, not just the Tatas and the Bhartis, will be able to raise resources from global investors as the latter will have local presence. It will be a capital raising avenue for Indian companies. Not only will it employ human resource skilled in financial services, it will also have a multiplier effect on the economy due to increased business in the hospitality, tourism and transport sectors.
The idea of having an IFC in the country is not new. It dates back to 2005-06 when the government mooted a plan to make Mumbai a global financial centre. In March 2006, the then prime minister Manmohan Singh, in an address to industrialists and business leaders in Mumbai had said that the city “with all its inherent advantages in terms of human capital and commercial acumen can be positioned as a viable regional financial centre”. The government had then set up a 15-member expert committee, headed by Percy Mistry, chairman, Oxford International Group, and consisting of several top bankers and financial sector titans, to recommend ways to make Mumbai an IFC. The committee submitted its report in 2007. It recommended some radical financial reforms, including full capital account convertibility by 2008, removing securities transaction tax, stamp duties and restriction on foreign investment in sovereign bonds. It also called for downsizing RBI, restricting its role to the monetary policy and not letting it ‘meddle’ with the exchange rate. There has been little progress on that front since then.

The Gujarat government mooted a plan to set up an IFC in the state the same year. The initial paperwork, said a GIFT City official, was done by Hasmukh Adhia, who was then heading Gujarat State Financial Services Company Limited and is now the revenue secretary in the union finance ministry. It was during the initial discussions that Modi coined the term GIFT, the official said. The state government formed a joint venture, a 50:50 percent partnership, with Infrastructure Leasing and Financial Services Limited (IL&FS) and formed GIFTCL. The company decided to build a city, spread over 886 acres, with world-class infrastructure and amenities. It planned to host a multi-services IFC in one-third of the area, carved out as a special economic zone, free from most of the domestic rules and regulations.

At GIFTCL’s office, its business development head, Deepesh Shah, says that once the Indian Financial Services Centre (IFSC) at GIFT City becomes operational, expected by 2024, it will help attract a substantial part of offshore business worth $50 billion of Indian clients, which otherwise is being transacted in places like Singapore, Dubai, Malaysia and Hong Kong.

Today, the financial sector contributes 5-6 percent of the GDP. The IFSC, as projected by a McKinsey report on demand assessment for GIFT IFSC, will take this number to 15-20 percent by 2020. It said that the financial sector has the potential to employ 10 million people by 2020 – and one million of them will be employed in GIFT City. By completion, claim GIFTCL officials, the city will have a residential population of one lakh and a working population of five lakh.

To do away with the red tape and bring in professionalism to speed up things, says Ramakant Jha, former CEO, GIFTCL, the state government decided to get a private company on board. “The state government invited expression of interest from the industry. Talks were held with IDFC, UTI and IL&FS,” says Jha, who headed the company between December 2009 and mid-2015. Before GIFT, Jha had experience of developing Navi Mumbai. He now heads the smart city division of IL&FS.

The project was eventually awarded to IL&FS, although it was not done through an open tendering process. Jha says the state government took the decision as there were not many players to execute such a project. “A committee of secretaries headed by the chief secretary found IL&FS the most suitable of the three,” Jha says.

As per the deal, IL&FS would raise all resources for development works, get skilled manpower to manage the city and attract investors. The state government on its part was to provide 886 acres of land (against the consultants’ proposal of 900 acres). The master plan was prepared by Noida-based Fairwood India Pvt Ltd and East China Architectural Design Institute (ECADI), which had developed the IFC in Shanghai.
The government finalised a site near Gandhinagar on the banks of the Sabarmati. “It was a wasteland and an inaccessible place back then,” Jha recalls.
 
City Inc
GIFTCL was formed as an independent company run by a board of directors: four from IL&FS, four from the state government and four independent directors. The company is headed by a chairman. Gujarat’s former chief secretary Sudhir Mankad, who retired in 2007, was appointed the chairman of GIFTCL. He continues to hold the position.

An early hiccup for the project came in the form of the global financial meltdown of 2008, and the corporations which had shown interest started retreating, Jha says, but as the Indian economy weathered the storm the chief minister pushed for placing the project on the front burner.
A development control regulation (DCR), the ground rule for developing GIFT City, was prepared in 2010. (Every city has a DCR which is the comprehensive outline of the city, defining its infrastructure and urban design specification for buildings, among others.)

A GIFTCL urban development authority and a notified area committee, working under the GIFTCL board, were approved by the state government and all development and municipal-related powers were delegated to these agencies respectively. The state government also conferred power distribution licence to GIFTCL so that it could act as a distribution company.

Though it would be unusual to have a city governed by a private entity, Deepesh Shah of GIFTCL argues that Article 243 Q (1C) of the Indian constitution provides for setting up industrial townships, and do away with the formation of a municipal corporation. “The idea is to provide a single window for all permissions,” says Shah.

The state government transferred the land to GIFTCL for a token amount of '1 – though state officials and ministers objected to the proposal of giving the '3,000 crore worth of land for virtually free. “I told the CM that GIFTCL has to give incentives to investors and our objective is to create jobs,” Jha says, justifying the move, which won Modi’s approval. The former CEO says a clause in the deal between the state government and IL&FS states that when GIFTCL makes ‘surplus’ – through earnings from increased land price or improved business climate – 80 percent of the amount will go to the state government and the rest to the company.

The construction work started in October 2011. GIFTCL approached the commerce ministry, in charge of the SEZ regulations, at the same time to seek the international financial services centre (IFSC) status for GIFT City. The ministry approved it in December 2011.

Initially, no developers came forward to build offices, as they saw no business opportunity in it; so IL&FS chose to build two towers to house offices: GIFT 1 and GIFT 2, each of 28 floors, outside the SEZ area, to attract companies related to IT, banking and e-commerce, says Nirav Kothary, national director, industrial services operations head – Ahmedabad, Jones Lang LaSalle Property Consultants (JLL).

Along with McKinsey, JLL was also part of the group that conducted the demand assessment for GIFT IFSC. The GIFT 1 tower was inaugurated by Modi on January 10, 2013. IL&FS spent '800 crore in developing the two towers, Jha says.

By June 2013 GIFTCL entered in talks with the first set of developers and investors. So far, the two top stock exchanges in the country – BSE and NSE – as well as other exchanges like NCDEX and ICEX, a Tata Communications-led consortium, and West India Hospitality Limited, among others, have signed pacts with GIFTCL to open their offices in GIFT City.

In April 2015 finance minister Arun Jaitley visited GIFT City to unveil the operating guidelines for the IFSCs prepared by the RBI, SEBI, and IRDA. It was a major milestone for the PM’s ambitious project. GIFTCL officials allege that their request to the UPA government for issuing operating guidelines fell on deaf years in the past four years. The guidelines allowed domestic and foreign banks, exchanges and insurance business to set up offices in the IFSC, albeit under stringent conditions.

Speaking at the release of guidelines, Jaitley said, “The announcement of regulations and guidelines will create a lot of excitement, but we need the right legal system and taxation norms. Also, GIFT has to be like a foreign territory.” He estimated that it would take about a year for it to start operations and “we are aiming for full-fledged operations in three years’ time. By that time, we would have invested '4,000-5,000 crore in infrastructure.” The guidelines, say experts, leave much to be desired.

Challenges
If GIFT City has to compete with Dubai, Singapore and Hong Kong – if not with London and New York – it has to have liberal regulations: exemption from heavy taxation, labour laws, and an alternate legal system for dispute resolution.

The progress on the regulation front is tardy. Experts believe that the operating rules released by Jaitley need to be reworked. The biggest criticism comes from his own ministry’s think-tank NIPFP. “The regulations that have come up are in no way different from what applies to mainland India. The RBI wrote the international banking unit (IBU) regulation. But it doesn’t permit banks to open current or savings accounts in the IFSC,” says Bhargavi Zaveri, consultant, NIPFP, who was part of the team which brought out the report on creating financial SEZs and IFSCs in India. It will be very difficult for a broker sitting in the IFSC to trade on an exchange in IFSC, she says.

“The RBI has to open up the regulations. How do you generate funds if you can’t open an account in the IFC?” asks Jha.
The country has to shift from the current mode of source-based taxation to residence-based taxation. “Indian rules say that if you (a foreign investor) buy an Indian asset, irrespective of where you are, India’s revenue authority has the right to tax your profit,” Zaveri explains. This is called source-based taxation. The residence-based taxation, part of modern taxation system followed by all global financial centres and several developed and developing economies, will exempt foreign investors from the Indian tax regime.

India follows residence-based taxation policy only with Mauritius and Singapore. That is why most foreign investors take the Mauritius route to invest in India.

The IFSC regulations must cover the entire gamut of issues related to a financial centre. Dubai IFSC regulations, for example, cover a range of issues: dispute regulation, banking and securities regulation, contract enforcement and processes related to payments. The document of regulations is so detailed that it runs into 6,000 pages, says Roy of NIPFP.

Road ahead
Removal of capital control is the first and foremost necessity highlighted by many economists, investors and government-appointed committees. As long as full capital account convertibility is pending, the GIFT IFSC may not take off without it, experts unanimously believe. [Simply put, full capital account convertibility is the freedom to convert local financial assets – stocks, commodities and bonds, among others – into foreign financial assets and vice versa at market determined exchange rates.]

To begin with, the RBI should allow full capital account convertibility at least for the IFSC.

Moreover, the taxation system has to be competitive. “If the government expects foreign investors to set up business in an Indian IFSC, it has to offer the same level of taxation as in Singapore, Dubai or London. This will mean getting rid of securities transaction tax (STT),” Roy says.

The government needs to bring down the corporate income tax which goes up to 35 percent. For foreign corporates it extends to 40 percent. In the OECD countries, it is 25 percent. In Singapore it is only 16 percent. Besides, the government needs to incentivise brokers to shift to GIFT City.
Once the IFSC become functional, it can have a users’ committee comprising corporates working in the IFSC to advise the regulator in making competitive regulations, the NIPFP researchers said.

Roy of NIPFP sums up the way forward: First, rewrite the current operating guidelines, aligned with vision of creating a global or regional financial centre. Second, create a separate financial regulatory authority particularly for the IFSC; pass a separate act to create a separate RBI, SEBI and IRDA only for the purpose of IFSC.

Jha says that for the city to flourish as an IFSC and attract foreign banks and fund managers, the two cities of Ahmedabad and Gandhinagar will also have to be revamped. “The airport will get saturated in three to four years if its capacity is not enhanced. The metro rail project [linking Ahmedabad and Gandhinagar] has to be hastened in the GIFT area. It will require continued support from the state government,” he says.