How IFSC/ GIFT City can position India as an International Financial centre

Since the 2015 launch of the International Financial Services Centre (IFSC) in Gujarat's GIFT City, several initiatives at policy, regulatory and operational levels have helped India’s IFSC dream take shape and gain attention from far and wide. IFSC has the potential to become an investment gateway for India as apart from providing a global financial platform, it also provides easy access to the fast-growing Indian economy to global investors.

The establishment of the IFSC Authority (IFSCA) in April 2020 has also come at a very opportune time when global investors are consciously moving out of certain jurisdictions and are actively looking for other investment destinations. Financial markets globally are looking for Indian avenues to invest in. Therefore, the creation of a vibrant financial services ecosystem to attract foreign investment is essential.

The recent changes in tax regulations such as waiver of several taxes like GST, dividend distribution tax and capital gains tax for entities operating in the IFSC, have rendered our tax and supportive regulatory framework comparable to any global financial centre.

Globally, there are 3 different structures of IFSCs:

1. Full-service finance centres such as Tokyo and New York. These centres have their own large domestic economy along with a good regulatory and legal backup.
2. Offshore financial centres like Mauritius do not have a robust domestic economy but have international access and acceptance.
3. A hybrid structure like Singapore has both local and global businesses.

India has decided to adopt the third approach of a hybrid structure. Though we are a late entrant in the IFSC space, it has arrived when there are more opportunities in the financial world and when India has a lot of potentials that can be leveraged. We should focus on tapping into our domestic economy and the Indian diaspora which is present all over the world. The Indian diaspora also has a commendable financial talent which can be useful for the growth of IFSC.

With the changes in the IFSC regulations further envisaged by the IFSCA, in line with our prime minister’s vision “in 10 years from now, Gift city should become the price setter for at least a few of the largest traded instruments in the world, whether in commodities, currencies, equities, interest rates or any other financial instrument.” The latest Global Financial Centers Index, London, dated September 2020 already places IFSC at GIFT City right at the top amongst 15 centres globally, which are likely to gain greater significance in the next 24 months.

Furthermore, it would be important to encourage domestic players to commence their global operations at IFSC.

The initial regulatory framework for IFSC was framed in 2016 and the new IFSCA regime has inherited it. The IFSCA is now implementing its own regulatory framework such as relevant banking regulations which are not entirely dependent on the local regulators.

IFSCA is building the new framework basis four principles of eliminating, replace, modify and adopt – using the domestic regulatory framework as a base, remove regulations which don’t apply to IFSC, replace the irrelevant regulations, modify wherever required and finally adopt the ones (such as anti-money laundering and FATF) which can be directly adopted. On completion of this exercise by the IFSCA, one can expect a new set of pragmatic regulations. I believe this is, indeed, a practical way of approaching the regulatory framework.

IFSCA has already initiated some progressive steps like:

• A window of Liberalised Remittance Scheme (LRS) where resident Indians can invest upto US$250,000 per annum in certain permitted foreign currency instruments. IFSCA is focused on making regulation for master funds to tap this money;
• Liberalized ECB guidelines;
• A transitionary regulatory framework and
• Building an International Bullion Exchange

Another important area of focus for IFSCA is creation of a fintech hub. With large number of Indians outside India working in fintechs, India can be positioned as a fintech hub. It will be important for IFSCA to work on building the ecosystem for aircraft leasing, which is today a blank space for India.

IFSC should also focus on ease of investment products such as equity, depository receipts, ETFs, mutual funds, REITs, Invits and AIFs. Secondly, primary markets issuances and products for the primary markets could also be promoted. Thirdly, access to international markets through IFSC may be considered for domestic entities, FIIs, foreign banks and markets stakeholders like capital markets players, banks, NBFCs and mutual funds.

IFSC is already on a very good footing. With a reinvigorated regulator and regulatory framework, it will go a long way in positioning India as an international financial center. Of course, it will be a marathon, but with firm initial steps.

International Financial Services Center (IFSC)

• IFSC seeks to bring in India, those types of financial services and transactions that are currently carried on outside India by overseas FIs and overseas branches of Indian FI subsidiaries. It is also designated as a ‘deemed foreign territory’ which would have the same ecosystem as other offshore locations but is physically on Indian soil.
• SEZ Act provides for the establishment of an IFSC in India within an SEZ in India and enables the Central Govt to regulate IFSC activities. SEBI, RBI, IRDAI and Dept of Financial Services issued the regulations for IFSC-GIFT under the provisions of SEZ Act, 2005.
• Gujarat International Finance Tec-City Co. Ltd (GIFT) is being developed as the country’s first IFSC.
• Any financial institution (or its branch) set up in the IFSC is

1. Treated as a NRI located outside India.
2. Conducting a business in foreign currency.
3. Only 1 IFSC is approved in an SEZ.
4. Nothing contained in any other regulations shall apply to a unit located in IFSC, subject to certain provisions.

• Some of its major services include:

1. Fund-raising services for individuals, corporations and govts.
2. Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual fund
3. Wealth management
4. Global tax management and cross-border tax liability optimization
5. Risk management operations such as insurance and reinsurance
6. Merger and acquisition activities among trans-national corporations etc.

• Budget 2016-17 announed a tax regime for IFSC

1. Tax exemptions for a period of 10 years.
2. MAT reduced from 18.5% to 9%.
3. Exemptions from DDT, STT, Commodities TT and Long terms CGT.
4. Short-term capital gains tax is taxable at 15%.

International Financial Services Center (IFSC) Authority Bill, 2019

• Establishment of IFSC Authority: to develop and regulate the financial services market in the International Financial Services Centres set up under the Special Economic Zones Act, 2005.
• Composition of Authority: It will consist of 9 members appointed by the Central Govt- Chairperson;

1. 4 members to be nominated from RBI, SEBI, IRDAI and PFRDA;
2. 2 members from amongst officials of the Ministry of Finance;
3. 2 members to be appointed on the recommendation of a Selection Committee.

• Functions: include Regulating financial products, financial services, and financial institutions in an IFSC.
• Transaction in foreign currency: As per the Bill, all transactions of financial services in IFSCs will be in such foreign currency as specified by the Authority, in consultation with the central government.
• Setting up an IFSC Authority Fund: All grants, fees and charges received by the Authority and all sums received by the Authority from various sources, as decided by the central government will be credited to this Fund.
• All the laws of the land, including the Prevention of Money-laundering Act, would apply and would be audited by CVC and CAG.
• Tax Holiday is given only for 10 years in IFSC.
• IFSC provides jurisdiction for carrying out International financial services domestically.
• No limit on the number of IFSCs that can be set up.

UNEP’S 2020 YOUNG CHAMPIONS OF THE EARTH AWARD

The United Nations Environment Programme recently named seven dynamic Environmentalists as its Young Champions of the Earth.

Prize winners

The following seven people won the UNEP 2020 Young Championships of the Earth Award

• Nzambi Matee of Kenya. He is a material engineer and is receiving the award for producing low-cost construction materials from recycled plastic waste and sand.
• Xiaoyuan Ren of China. He leads the MyH20 organization that tests and records the quality of groundwater in rural China. He is awarded the prize for developing an application that will educate the communities in rural areas about the sources of clean water.
• Vidyut Mohan of India. He is the co-founder of Takachar. He has built affordable and portable biomass upgrading equipment. It allows farmers to prevent open burning by converting crops to fuels, activated carbon and fertilizers.
• Lefteris Arapakis of Greece. He founded Enaleia. It trains, empowers and incentivises local fishing community to collect plastic from sea. The collected plastic is recycled into fashion merchandise such as socks and swimsuits.
• Niria Alicia Garcia of USA. Niria coordinated alongside a community of indigenous activists to bring life to the historical journey of the Sacramento chinook salmon along the largest watershed of California.
• Fatehmah Alzelzela of Kuwait. Fatehmah established Eco Star, a non-profit recycling initiative. It exchanges trees and plants for wastes from schools, homes and businesses in Kuwait. The company has so far recycled 130 tonnes of metal, plastic and paper.
• Max Hidalgo Quinto of Peru. Max founded Yawa. He built portable wind turbines that can harvest 300 litres fo water per day from atmospheric humidity and mist. It uses air to water technology.

Background

• The Young Champions of the Earth prize is awarded every year to seven entrepreneurs under the age of thirty.
• These entrepreneurs should have bold ideas for sustainable environmental change.
• The winners of the award receive mentoring, seed funding, communications support to amplify their efforts.
• The Young Champions award aims to inspire more young people to get closer to the United Nations Decade on Ecosystem Restoration (2021-2030).

QUANTUM KEY DISTRIBUTION (QKD):

• The Defence Research and Development Organisation (DRDO) successfully demonstrated communication between its two labs using Quantum Key Distribution technology.
• The Defence Research and Development Laboratory (DRDL) and The Research Centre Imarat (RCI) were the two labs that participated in this demonstration.

About this technology:

• Quantum computing refers to a new era of faster and more powerful computers, and the theory goes that they would be able to break current levels of encryption.
• QKD works by using photons — the particles which transmit light — to transfer data.
• QKD allows two distant users, who do not share a long secret key initially, to produce a common, random string of secret bits, called a secret key.

Significance of this technology:

• The encryption is “unbreakable” and that’s mainly because of the way data is carried via the photon.
• A photon cannot be perfectly copied and any attempt to measure it will disturb it.
• This means that a person trying to intercept the data will leave a trace.

UN Investment Promotion award to Invest India

• Context in Current Affairs: The United Nations Conference on Trade and Development (UNCTAD) recently declared “Invest India” as the winner of the United Nations Investment Promotion Award, 2020.
• The award recognizes the outstanding achievements of investment promotion agencies spread all over the world. Around 180 such agencies were shortlisted for the award in 2020.

United Nations Conference on Trade and Development

• UNCTAD deals with trade, investment and development issues.
• The main goal of the organization is to maximize trade and investment.
• It was established in 1964.
• It releases reports such as Trade and Development Report and World Investment Report

World Investment Report, 2020

• The report was released by UNCTAD in June 2020.
• According to the report, the FDI flows decreased by 40% in 2020 as compared to 2019.
• For the first time, the global FDI flows will be below 1 trillion USD since 2005.
• India jumped to 9^th position in FDI flows in 2019. The FDI flows into India were 51 billion USD. India was in 12^th position in 2018.

Trade and Development Report

• The report said that the public external debt might increase from 2 trillion USD to 3.6 trillion USD in 2020-21.
• To adopt Automatic Temporary standstills. This will provide macroeconomic breathing space for all developing countries.
• Debt relief and restructure programmes.