The Gujarat International Financial Technology (GIFT) City Project is Prime Minister Narendra Modi's eight-year-old ambition. His aim is to create a financial hub in the East of Gujarat, which will stand up to the might of Hong Kong, Dubai and Singapore, or maybe even London or New York in future.
CNBC-TV18’s Latha Venkatesh caught up with SS Thakur, Chairman of the Policy Making Committee of International Financial Centre; Neeraj Gambhir, co-head, Nomura India; and eminent lawyer Jayesh H of JurisCorp, to discuss what it will take to create one.
“The original proposal was to set up an offshore international financial centre in New Mumbai,” Thakur said. “[But] land acquisition unfortunately became a problem… so the project has been shifted to Gujarat.”
He foresaw capital account convertibility -- currencies are freely convertible in most financial centres -- to be an issue and said GIFT may adopt the Malaysian model (like the rupee, the ringgit is partially convertible).
Below is the transcript of the interview on CNBC-TV18.
Q: What exactly is the government envisaging in the first phase of setting up this International Financial Centre? Legally what will be available to attract companies to gift city?
Thakur: Originally the proposal was to set up an off shore international financial centre in New Mumbai because Mumbai is only the domestic financial capital so we wanted to make it an international financial capital. However question arose that the land acquisition became unfortunately a problem in Mumbai so the project has shifted to Gujarat. This project will be divided in to two parts - the domestic sector and the international financial sector. Now the special economic zone (SEZ) act which was enacted in 2005 and came into force in 2006 there is a clause sec 18 of this SEZ zone that the central government may set up an off shore international financial centre in a SEZ and the rules and regulations will be formulated in consultants with the regulators that is the Reserve Bank of India (RBI), Sebi and Insurance Regulatory development Authority (IRDA) so these provisions are already made in the act of parliament. Pursuant to this act then the rules and regulations have been formulated, draft regulations which the government of India will have to announce sooner or later their rules and regulations.
Q: At the moment what do you envisage could be the first set of rules for the international financial centre? When you say there is a domestic area and am area for the international centre. Is it that entry and exit from that place physically will be a accordant of or you have other rules specific to companies that will be registered in that area? If you can give me an idea what are the rules that you have in mind?
Thakur: The International Financial sector will be completely encircled by from the domestic financial sector because all transactions in the International Financial Sector will be held in foreign currency they will be held particularly in US dollar. All banking - non banking, foreign exchange transactions, insurance - re- insurance transactions, mutual fund - stock exchange transactions will be done only in that centre in dollars. National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) have already entered into agreement to set up stock exchanges in this centre. Where the overseas companies, the Indian companies will be listed instead of Indian companies going to New York and London they can be listed here. Similarly LIC in the insurance sector can set up a branch there. International insurance company can also set up their branch, and the transactions will be done all over the world not merely in India all over the world just like Singapore and Hong Kong they are doing international transactions this deemed territory it will be a foreign territory. All international transactions, financial transactions will be done in foreign currency particularly US dollars.
Q: When you say all transactions in dollars do you mean that I pay even my taxi driver in dollars within that international city? What I mean is even retail transactions or only wholesale and the second question the more important one is who regulates? Will there be a separate regulator set up for capital markets, banking in that area? Will there be different kind of capital adequacy norms so who does the banking regulation, who does the capital markets regulations as well what are the tax laws applicable?
Thakur: Regulators will be the existing regulators as I mentioned RBI, IRDA for insurance regulations and Sebi for all securities transactions these will be the regulators. Proposal is to set up an office of these regulators and there will be a board where the senior level representatives will be the members of the board. The applications for setting up an off shore banking system, international insurance sector and capital market they will receive their applications in a prescribed form. They will get the approval of their concerned regulator for necessary approval. Once this centre gets the approval the applicant will be informed about this clearance for their application that they have been made. We are discussing what is needed to make the proposed International Financial Centre in gift city in Gujarat a financial destination comparable to Hong Kong or London.
Latha: From what you have heard Mr. Thakur explaining in terms of way the way in which the international centre is likely to be laid out, what is your best guess? Will this be enough to attract a lot of foreign brokerages and banks to this centre?
Gambhir: My true sense here is that if you are trying to compare with what happens in a jurisdiction such as Singapore or Hong Kong or for that matter Dubai, there is a vast difference between the regulatory framework which is applicable in those jurisdictions versus how we treat financial services industry in India both with respect to the regulatory framework as well as with respect to the taxation framework. So, at a very high level whether people will be interested in coming up and setting up here besides the issues of accessibility, ability to communicate, an ability to travel easily, the other issue will also be that how closely we can come to some of these jurisdictions in terms of our regulatory and taxation framework. A large number of multinational foreign institutions such as ourselves today have a vast number of employees in setups where these employees undertake various activities which are not necessarily financial transactions but support services for our global offices. So, in some senses this SEZ concept which has been already in existence is being used by global financial services industry to offshore and send a lot of business into India. Now the question is whether we can upgrade that to actual financial transactions in the sense of a financial centre and we need a fairly comprehensive framework for that.
Latha: What can be the tax concessions or tax regime for companies located in the international financial centre? Obviously there will not be Indian tax laws like a 30 percent if you make a interest income and capital gains 20 percent. It will not be that, it would be something comparable globally?
Thakur: Let me first clarify that in this centre the offshore International Financial Centre will not be adopted on the model of Singapore or Hong Kong. Their currencies because Indian rupee is not fully convertible so I would like to say that what we are following is a Malaysian model because Malaysian currency is also like Indian rupee, is not fully convertible. But in this territory of international financial, it will be separated; it will be a deemed foreign territory within India for all regulatory and procedural approvals. It will be a totally and secure from the domestic market where the transactions…(interrupted)
Latha: What about tax?
Thakur: The tax also we are recommending that whatever the tax implication available for the special economic zone (SEZ) sectors, the same will be applicable in this international financial centre also.
Latha: What have you made of this concept legally and would you have any further questions for Mr. Thakur?
Jayesh: If you are asking me how do I design this to make it really work and what would be a success measure; if we can get even 10 percent of the Indians employed in Singapore into the centre, it will be a great success. That is a success measure at a starting point. So, then what do I need to have in place to make it a success and this is what the regulator and the government financial institution(FIs) should really give it a serious thought. Start from that I will be permitting everything, let me just set out what I will not permit so okay I will not permit gambling and casinos maybe, obviously but otherwise any financial product, any securities market transactions even commodities, derivatives, what not, everything should be permissible. If you are a really talking of an International Financial Centre, you need to completely depart from the domestic mindset where we have a huge control mechanism in place for the various segments of the financial and commodities market and for me International Financial Centre has to include commodities, otherwise there is a huge gap out there and even the same thing for insurance. I will give you a simple product which is not there in Indian markets which is there offshore; third party warrants. Today if I want to take a three year view on Infosys, I have to buy the share, there is no other way I can do it but third party warrants means I go and buy a warrant which is nominal investment and I get to take a three year-five year view on that stock. So, like that …(interrupted)
Latha: Or for that matter a Credit Default Swaps (CDS) on an Indian corporate bond?
Jayesh H: Absolutely and also listing of rates from whichever neighbouring country or globally you want to—we have Indian rates effectively getting less than Singapore, you would be allowing the other way round. Second you asked a fair question that what does it mean for in day to day terms that, tax drivers and all that. I would have thought you very much still continue transact in Indian rupees for your daily transactions. It is the actual financial transactions which get denominated in dollars or any of the global convertible currencies as these seven currencies or G8 now rather and also from a perspective of the regulator yes, as Mr. Thakur rightly said, each of them will set up a division there and be manned from there and it becomes ring fence but from a physical entry perspective it is no different from you entering BKC; it is just an island by itself so speak and that is how you enter and exit and what matters is the transaction being booked within how we are being booked and accounted for. Two key things according to me which can really make a huge difference, one is the court infrastructure and we really need to really look at the Dubai model there. Increasingly global transactions are now referring to Dubai International Financial Centre (DIFC) courts as a dispute resolution mechanism and the reason they have managed to inspire that confidence is those courts are actually manned by judges coming in from England and Singapore, completely technology driven, completely efficient in time-bound disposal of matters so, it is a huge radical change from what we are used to in India. So, being able to have that mindset and okay I will do what it takes and second is on the tax side we talked about SEZ; we have to some extent muddled up the taxation of SEZ. First we talked of tax-free and then we imposed MAT. Again you need to be completely clear that this is not domestic area, this is a deemed foreign area. They are transacting with India as if they are transacting with India as if they are transacting sitting in Singapore or Dubai so what Indian tax am I talking about?
Q: You got an idea of what the legal and the financial experts are envisaging. Is this doable?
Thakur: No, this year the thing which I would like to clarify about the capital market or securities transactions, the National Stock Exchange (NSE) and Bombay Stock Exchange have already agreed to set up and sign an agreement. The international financial centre in London, New York can also set up their branches and offices and the listing of Indian companies and also the overseas companies in south-east Asia other things, the can be listed there but the transactions will be done, the trading will be done only not in Indian rupees, but they will be done only in foreign currency, particularly in USD. Just as if the Indian company lists in London, they are done in pound sterling, if they are listed in New York, they are done in dollars. Similarly, listing of companies in India and other overseas countries in the Gujarat International Finance Tech (GIFT) City market, they will be done transactions only in dollars, not in rupees also. Similarly, if LIC opens a branch there, LIC cannot issue policies in dollars from India. But once they open a branch, they can issue policies all over the world, collect premium in dollars and settle claims in dollars.
Q: I take your point, I followed that. Jayesh was just speaking about the Dubai international financial centre’s courts, that they have been able to get judges from London and other western nations, will that be set in this Dubai pattern, in GIFT city?
Thakur: No, dispute will be settled by… There will be a separate commission will be set up of the regulators there. The dispute as far possible, but if the dispute are in terms of the Indian regulations, they cannot be settled by that. But as far as possible, the board to be set up of their senior representatives of all the regulators will be there and they will like to resolve to the extent possible all the disputes and they can do it.
Q: I just want one sentence from all three of you. Mr Thakur, you go first. What is the time you are envisaging when we may have at least a body of transactions and a reasonable body of companies listed in this international centre? Are we looking at 2020?
Thakur: I think so because first of all the infrastructure has to be set up in GIFT city. The construction has already been going on there. The infrastructure has to be set up for the overseas companies and Indian companies to settle their off road offices there or branches there. That will take some time, maybe five years, six years. That is the infrastructure once it is set up and then in the mean time, once the regulations are announced by the government of India, marketing will be done so that overseas offices anything who want to set up their branches can set up this. They can acquire the property either on a ownership basis or on a lease basis in this centre.
Q: So, you are looking at a minimum of three or at least a minimum of five years?
Thakur: At least 3-5 minimum years will be taken for creating the construction activities.
Q: I get your point. What does it look like to you Jayesh? Does it look like within five years this could be a thriving centre or at least a fledgling?
Jayesh: Barring the infrastructure timeline, which I have no idea, but otherwise this can become a thriving centre. It can be a game changer which for years we have been trying for about exporting the Indian capital market, the financial markets to centres all around the world. This could be the game changer which can bring those markets to a large extent back.
Q: Last thoughts. In five years even some of Indian capital controls could disappear perhaps.
Gambhir: Perhaps Indian regulations will also move towards a more liberal regime and I do remember visiting the IFC when it was just launched maybe in 2001, 2002. It takes a fairly long period of time to convince the investors that you have a fairly stable regulatory and tax regime. It takes a bit of a time to get the international financing committee to look upon you as a interesting destination where you could house yourself from a jurisdictional perspective. So, I think all of these things take a little bit of a time, but I will be very happy to see if over the next five years, we have a very clearly enunciated policy stance around how we want to develop this project, what kind of products and services we think that the firms should be engaging in, what is the kind of infrastructure we want to put in place. If all of these things are amply clarified and they from international stand point, they are competitive, they are good enough for people to start looking at this venue as an attractive venue to house their businesses, I think it will be a good achievement.