Gujarat accelerates work on the eight-year-old project billed as India's first global financial services centrea potential rival to Dubai, Hong Kong and Singapore. We chronicle the scale of the challenge
Ahmedabad/Mumbai: Something is stirring at the Gujarat International Finance Hi-Tec (GIFT) City. After a long, long time. Eight years, to be precise.
Late last month, BSE Ltd, which runs Asia’s oldest stock exchange in Mumbai, said it will set up an international exchange at GIFT City.
Estimated investment: ₹ 150 crore.
Around the same time, the BSE Brokers’ Forum, an association of brokers who trade on the exchange and hold almost 40% equity in it, said it will set up its back-office operations at the financial enclave, at a cost of ₹ 200 crore.
Then, again, GIFT, whose first phase is due to be completed by 2016, recently found a place in KPMG International’s Infrastructure 100: World Markets Report. This report highlights key trends driving infrastructure investment across the globe.
“The US$20-billion mega GIFT City project combines state-of-the-art connectivity, infrastructure and transportation with sustainable, environmentally-sensitive growth. Although only two of the planned buildings have been constructed, new Indian Prime Minister Narendra Modi backs the initiative, which is designed to change the way India thinks about contemporary urban planning," the report says.
Well, that’s not all.
In the last year or so, several banks have picked up small chunks of land at the project site. These include State Bank of India, the country’s largest lender; ICICI Bank Ltd and HDFC Bank Ltd, India’s largest and second largest private sector banks by assets; and Yes Bank Ltd, the country’s youngest lender.
Needless to say, thanks to this sudden, peaking interest, R.K. Jha, 68, finds himself a relieved man.
The managing director of GIFT, Jha, who’s been around with the project from Day One, says it has finally taken off. So much so that the first phase is sold out.
Now, all of this brings us to a simple question; what gives?
Well, Narendra Modi.
GIFT City is one of the pet projects of Modi. It was in June 2007, when he was Gujarat chief minister, that he first proposed GIFT City as an international financial services centre (IFSC).
Set up on the banks of the Sabarmati river, near Gujarat’s capital, Gandhinagar, Modi pitted GIFT as a rival to the IFSCs of Dubai, Singapore and Hong Kong. And if you were to stretch your imagination a bit—even New York and London.
Back then, Modi nursed a burning ambition to sell Gujarat to the world as the most favourable investment destination in India.
The idea of GIFT City made for a good sell. Plus it was also a reply to his counterpart in Maharashtra, the late Vilasrao Deshmukh, who had wanted to turn Mumbai into an international financial centre.
Except that, beyond an idea, an earmarked special economic zone (SEZ), a management team, design contracts that got mired in controversy and a website, GIFT City never really took off.
And no prizes for guessing—neither did Deshmukh’s dream of turning Mumbai into a global financial hub.
Now, all of this changed last year, when Modi became Prime Minister.
GIFT City is now being projected as the first of the 100 smart cities that the Bharatiya Janta Party (BJP)-led government wants to build.
To be able to do that, the IFSC guidelines (read: essential legal framework) are expected to be announced in the 2015 budget that will be presented by finance minister Arun Jaitley on 28 February.
Speculation has been doing the rounds that the government will tweak the Foreign Exchange Management Act (FEMA) to accommodate the special needs of an IFSC. The Reserve Bank of India (RBI), too, has been kept in the loop.
Hasmukh Adhia, financial services secretary in the Union finance ministry, says that the process of drafting these guidelines has been on for a while and once they are in place, GIFT City will be good to go.
Jha has been waiting for this day.
“We have been in talks with the National Stock Exchange and they are also exploring to set up an international exchange similar to BSE," he says. “Global exchanges like New York Stock Exchange and London Stock Exchange who operate through brokers have also evinced interest in setting up international operations at our SEZ. All are awaiting the IFSC rules to be announced."
To be sure, the regulations are yet to be announced, and a lot rests on the finer details. But the government’s intention is clear.
In the absence of an IFSC in India, the country has lost roughly 50% market share in the two most important India-related financial products. These are the rupee-dollar futures contracts traded on the Dubai Gold and Commodities Exchange (DGCX) and the Nifty futures contracts traded on the Singapore Exchange (SGX), which are popular among international traders. With an IFSC, this trade could move to India. To GIFT City. And that’s just for starters.
As you travel about 20km from Ahmedabad towards Gandhinagar, two 28-storey buildings stand out in the skyline.
These buildings, the tallest in the state, are symbolic of the ₹ 78,000 crore GIFT project. As things stand today, there’s little that’s going on, other than construction.
The buildings themselves are largely unoccupied, except for six companies that have begun operations—Gujarat Electricity Regulatory Commission, Syndicate Bank, IL&FS group, and (n)Code Solutions, an IT arm of Gujarat Narmada Valley Fertilizers and Chemicals (GNFC). Adjacent to them, a temporary office has been constructed, which houses the staff of GIFT Co. Ltd.
The company is a 50:50 joint venture (JV) between Infrastructure Leasing and Financial Services Ltd (IL&FS) and the state government-owned Gujarat Urban Development Co. (GUDC). Of the 880 acres of land allotted to GIFT City, about 250 acres is earmarked for the IFSC.
This will be treated as an SEZ. The project envisages setting aside 12 million sq. ft in the first phase, of which about 1.2 million sq. ft has been constructed.
But once the project is completed, about 125 buildings with a built-up area of 62 million sq. ft are expected to come up.
It will be fair to say that the scale of GIFT City is huge, almost five times Mumbai’s financial district, Bandra-Kurla Complex. But a critical question remains: what exactly can take place inside this IFSC?
On the face of it, a lot.
From offshore banking to currency convertibility, re-insurance, commodity and securities trading and capital raising; just about every activity which takes place in IFSCs around the globe.
“Almost everything can be done here, which will be complementary to what happens in Mumbai," says a board member of GIFT Co., requesting anonymity because he is not authorized to speak with the media. “See, finance is location-neutral and quite a few parts are not client-facing. GIFT could be the back office of the world. Plus you have a lot of offshore activities that can happen here."
Ashish Chauhan, managing director of BSE, believes GIFT City will serve a few other critical purposes. For instance, get back what has been lost.
“If you look around, in Dubai and Singapore, the best derivative traders and investment bankers are all Indians," he says. “Both these centres developed because of Indian needs. Because a lot of foreign institutional investors (FIIs) and foreign investors do not like to be registered in India. So if GIFT provides a separate jurisdiction, where it is easy to do business because the tax laws are relaxed, then I see it doing really, really well."
On paper, sure. But for an international exchange to come up in GIFT and, for that matter in India, certainly not having high volumes would be a concern, right?
“Initially, yes," says Chauhan. “But you have to look forward. India over the next 20 years is going to be the next big market. For that, we will need to raise funds. Our companies will need to raise funds. So GIFT can become for India, what Hong Kong became for China."
So an Indian company in search of funds, rather than looking at Singapore or London’s Alternative Investment Market, could look at listing on GIFT?
Of course, there’s much more to an IFSC than an exchange. Simply put, it is a financial ecosystem comprising a majority of the 100 best banks in the world, world-class financial professionals, infrastructure and rules and regulations that are on par or better than competing centres.
For KPMG, it is the vision and the scale of the project that make it promising. In its report, factors such as the size, feasibility, complexity, impact on society and innovation were taken into account while identifying the top 100 infrastructure projects, says Arvind Mahajan, head of the government and infrastructure practice at KPMG in India.
“GIFT City has made significant progress, and is in the right direction of taking off," he says. “Modi was perhaps involved with this project right from the very beginning. GIFT City will evolve over a period of time once it gathers a certain momentum and gains critical mass. It will play a much larger role in the domestic and international financial services sector."
Then, again, nothing restricts GIFT from moving beyond financial services. It will also house information technology (IT) and IT services companies. After all, India is the offshore IT destination of the world. And almost 40% of the business is driven by the banking and financial services sector.
“As the offshore and domestic markets continue to grow, we believe that India is very well positioned to capture a large portion of this opportunity," says Jha.
There are already some takers. In December 2014, Mumbai-based real estate firm Hiranandani Constructions Pvt. Ltd (HCPL) announced it will set up a commercial complex in GIFT City with an investment of ₹ 125 crore to facilitate IT and financial services. Then, again, in October last year, Bengaluru-based realty firm Brigade Group said it will invest ₹ 500 crore in GIFT City for development of commercial, residential, retail mall and hotel projects in SEZ and non-SEZ areas in GIFT City.
It is another matter altogether that the success of an IFSC cannot be measured in terms of indicators like area sold to companies or the number of back offices. The key indicator will be transactions—the amount and nature of financial transactions which will determine its success. And for that, a critical question must be asked, how does the project stack up against Dubai and Singapore?
Jha says GIFT will score well on domestic demand—the one thing India has in abundance.
“GIFT City has the potential of $38-40 billion in terms of foreign exchange," he says. And from a tax point of view, GIFT has a lot to cheer about. So companies that choose to set up in the enclave will pay no registration fee, no excise duty, no customs duty, no sales tax, no stamp duty on mortgages; they will have exemption from income tax; at least for the first five years of operation. Everything that a manufacturing SEZ offers.
Ironically, therein lies the problem with GIFT City. It is no manufacturing SEZ. It is purported to be a financial SEZ. Where, within the confines of a brick and mortar wall, money will move in and out—globally. India hasn’t attempted anything like this before. That it is finally doing so should be lauded. But then, it must also be examined with a good measure of skepticism. It is after all, in its current form, nothing but an audacious idea.
In the world of IFSCs, the opinion of Zyen is respected. Zyen is a commercial think tank, consultancy and venture firm headquartered in London, and is best known for its Global Financial Centres Index.
MintAsia reached out to Mark G. Yeandle, associate director at the firm, to check if GIFT City has been on his radar. His reply: “I am afraid I have not heard of it."
That said, more importantly, in the world of IFSCs, it is quite difficult to replace incumbents. “If liquidity is settled in one place, then it can be hard to move unless there are some very compelling reasons," said Yeandle.
“Why would a bank move from Mumbai to Gujarat IFT-C? Mumbai used to compete with western centres for back-office operations and the main factor was cost. The cost differential has now decreased."
The factors of competitiveness are many. From business environment factors to financial sector development, infrastructure, human capital and reputational factors.
To put it simply, what will GIFT offer, that’s already not there in Singapore or Dubai? As things stand today, there are no easy answers. And then, again, the biggest stumbling block for GIFT could be regulation. “See, anybody who comes here needs to see a functioning city," said the board member quoted above.
“Right now, all they can see are physical milestones. Because, since Day One, there has been no legal clarity on this project. So what will RBI (Reserve Bank of India) say? What will SEBI (Securities and Exchange Board of India) say? Today, there are no rules which say XYZ activity is allowed in SEZ. That needs to come first. And that has to be best in the world."
Pradip Shah, who runs IndAsia, a corporate finance, private equity, and investment advisory business, says this argument is sound. And he should know. Shah is an expert on financial services and IFSCs, and was the founder-managing director of Crisil Ltd, India’s first and largest credit rating agency, and also assisted in the founding of Housing Development Finance Corp. Ltd (HDFC), India’s first retail housing finance company, in 1977.
“If the legal framework is sound," he says, “in terms of acceptability to investors for whom it is intended, then there is an opportunity to rival major international financial centres and compete with them effectively."
A simple case in point, which helps explain this best is the issue of minimum alternate tax (MAT), one that has been hanging fire for a while. As things stand today, companies setting up operations at GIFT City will have to pay MAT at 18.5%.
This is very high in comparison with Singapore that has a tax rate of about 10% on business profits and Dubai, which is tax-free.
“For GIFT City to take on global competitors, MAT has to go down substantially," says Jha. “GIFT is a new place, and firms who have their operations in Dubai or Singapore IFCs are required to make fresh investments to set up operations here. We have urged the central government to consider our case and reduce MAT."
When and, if at all, this will come through, is anybody’s guess. Stretch your imagination a bit and you’ll realize it’s the same with GIFT City.