GIFT for investors?

The International Financial Service Centre in the GIFT city of Gujarat is up and running. What does all this action spell for investors?

Skyscrapers without boundary walls; cables running underground in a futuristic utility tunnel; potable water straight from the tap; centralised monitoring of all the buildings in the city — if you thought such facilities are possible only in cities abroad, you would be wrong.

These are some of the basic infrastructure features that have been put in place at the Gujarat International Finance Tec-City (GIFT City). This is the first greenfield smart city being developed in the country on a sprawling 886 acres, on the banks of the Sabarmati, close to Gandhinagar, Gujarat.

The purpose of the GIFT City is two-fold. One, to provide an alternative to domestic companies that are grappling with space constraint and poor infrastructure in metros. This is the domestic area of the GIFT City.

Then there is the multi-service Special Economic Zone where companies that are into services exports can re-locate and export from. Within the SEZ is the International Financial Service Centre (IFSC) that is of the greatest relevance to investors.

The GIFT IFSC intends to eventually compete with other IFSCs such as Singapore and Dubai in facilitating flow and investment of international capital.

Two years ago, when the Union Budget proposed setting up an IFSC in the GIFT City, many scoffed at the idea, given the numerous regulatory challenges. But a lot of ground has been covered in the last 18 months.

Many laws have been modified, tax concessions obtained, new regulations framed, multiple projects allotted to developers, more than 100 companies, including banks, exchanges and software companies have begun operations here and almost 7,000 people are employed in the City.

The business of GIFT

Indian companies can operate in the domestic area of the GIFT City.

There are different companies, involved in different activities, serving different markets, working out of the domestic area currently, says Ajay Pandey, MD, GIFT City. For instance, Oracle is developing some high-end software for its HR module that will be used globally. Bank of Baroda is doing some of the back-office work for its India operation.

Then there is a chip-designing company that is serving its US parent doing integrated chip designing, almost 60 per cent of TCS’ staff are working on SAP support platforms, Infibeam, an e-commerce player, is doing some market-place activities.

“These companies are drawn here because cost of operations is 30 to 40 per cent lower,” adds Pandey.

The GIFT IFSC that has been the focus area of the management has three verticals — capital markets, banking and insurance.

The capital market segment will have exchanges, both domestic and foreign, facilitating trading of equity, commodity and currency derivatives. The banking vertical is aimed at improving the overseas fund-raising capabilities of domestic companies and the insurance segment facilitates hedging of risk.

Other participants in an IFSC, such as tax, legal and M&A consultants, fund managers, investment banks, etc., are also likely to set up shop here in the years ahead.

While the basic rules are in place and many entities have begun operations, there are many regulatory glitches that still need ironing out. The fact that the rupee is partially convertible on the capital account is one of the major hurdles in the progress of the IFSC as it impedes free flow of domestic money into the IFSC.

That said, the GIFT IFSC still provides opportunities for investors and companies.

INX on a roll

The BSE’s subsidiary, India INX, and the NSE have launched exchange platforms in GIFT IFSC. India INX, with its first-mover advantage, is beginning to witness traction, with SEBI allowing trading of index derivatives, Indian and foreign stock futures and commodity futures on the platform.

The exchange has begun to clock daily volume of around $50 million these days, thanks to growing interest in Sensex 50 futures and gold futures. The liquid stock futures such as Infosys, Reliance, TCS, L&T are also witnessing some volume though foreign stocks that are listed on the exchange are not finding too many takers. More than 50 brokers from India have become members of the exchange and most of the trading volume is being generated through them, trading on their proprietary books. According to sources, these members are carrying out 3-way arbitrage trading between SGX Nifty futures traded on Singapore, Nifty futures traded on domestic exchanges and the Sensex 50 futures traded on INX.

Since Sensex 50 is closer to Nifty 50 in its constituents, it is witnessing higher volumes. Post 3.30 pm, when the Indian market is closed, trading in gold futures picks up here due to arbitrage trades with the Dubai IFC.

In the Budget of 2016-17, various concessions have been given to the capital market operations of the GIFT City, including exemptions from Security Transaction Tax, Commodity Transaction Tax, Dividend Distribution Tax, Long Term Capital Gain Tax and Stamp duty on Capital market transactions. The MAT rate charged to companies is 9 per cent.

While liquidity is picking up, there are some regulatory anomalies that are preventing better participation. Foreign investors not registered with SEBI can trade in the GIFT IFSC under the EFI (Eligible Foreign Investor) category. But NRIs and individual foreign investors are unable to participate because they are not permitted to open an account with the International Banking Units (IBU) in GIFT.

Takeaways

Individual investors are also not allowed to participate in trading on the exchanges in the GIFT City. This is because the sum of $2,50,000 allowed as investment under the Liberalised Remittance Scheme (LRS) cannot be used to buy or sell derivative products. And exchanges on the GIFT trade in futures and options only! Also, these investors will be unable to open a bank account with the IBUs in the GIFT.

Relaxation of these rules and permission to trade rupee futures on the exchanges can see action picking up on these exchanges.

Also, eventually, mutual funds and Portfolio Management Schemes could be set up in GIFT by both domestic and foreign players. Investors could then invest money in these funds or schemes up to the limit permitted under LRS.

As these funds can, in turn, invest in stocks listed on global exchanges, that could open up a new avenue for investors.

Since the BSE stock is listed, investors need to factor in the volume being recorded by its wholly-owned subsidiary, India INX. With this arm already clocking turnover of almost ₹500 crore daily, it could start contributing significantly to the BSE’s top and bottom-line.



The GIFT IBU

Nine Indian banks — State Bank of India, ICICI Bank, YES Bank, Kotak Mahindra Bank, IDBI Bank, IndusInd Bank, Federal Bank, RBL Bank and Bank of Baroda — have set up International Banking Units in the GIFT City. These units are treated as foreign branches of the respective banks.

These branches do foreign currency lending to corporates — a mix of Indian corporates and wholly-owned subsidiaries or joint ventures of Indian corporates located abroad.

“We can lend to other foreign companies also but our strategy so far has been to lend to customers of YES Bank, India, alone,” says Manish Vora, CEO of YES Bank’s IBU in the GIFT City. YES Bank was the first to get the licence to start an IBU in the GIFT City in 2015 and has grown its balance sheet to $1 billion since then.

Sources of funds for these branches are largely institutional borrowings from multi-lateral or bi-lateral institutions, foreign banks, etc. These are LIBOR denominated borrowings. The regulator does not allow banks to accept deposits from individuals though they can accept deposits from corporates.

“This is quite an important step for us because we did not have a foreign branch so far. Through this branch, we are now able to offer many new products that we were earlier not able to offer, such as foreign currency loans to non-resident entities, trade transactions like buyer’s credit, M&A funding, etc.,” says Vora.

Takeaways:

It’s quite obvious that Indian corporates are now beginning to route their external commercial borrowings through banks located in the GIFT City. Since ECBs worth ₹5,000-10,000 crore are raised by Indian corporates every month, these units will not have trouble getting business. Investors can watch out for the kicker to the bottom-lines of banks, especially the smaller ones, through the GIFT IBUs.

Since only two public sector insurers are operating in the GIFT City, the working of the insurance vertical is not of any particular relevance to Indian investors.



Building and engineering

The first phase of the GIFT City has been completed and it involved expenses of nearly ₹1,000 crore. The management thinks that at least that much will be required in the next phase as well. Some of these orders could land in the books of listed companies too.

Ongoing capacity augmentation will ensure steady stream of order for construction and engineering companies.

For instance, the district cooling plant in GIFT has a maximum capacity of 40,000 tonnes. Of this 10,000 tonnes has been made operational and the rest will be augmented in a staggered manner of 10,000 tonnes at each stage.

Listed companies such as Blue Star, Voltas and L&T were involved in the first phase of construction at GIFT and others could benefit in the following stages.

Real estate companies are being invited to develop projects which can subsequently be leased to companies in GIFT. Brigade and Prestige have begun developing a project each in the GIFT city, another area listed players can tap.

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