While Gujarat International Finance Tec-City, or Gift City, is attracting growing interest from Indian investors seeking access to global markets, getting foreign investors and financial firms to set up operations remains a challenge for India’s first International Financial Services Centre (IFSC), partly due to stricter reporting requirements.
Gift City saw the number of Global Access Providers (GAPs)—intermediaries that enable investors to invest and trade stocks listed on overseas exchanges—rise to 18 by July, from just a handful a year ago, according to the International Financial Services Centres Authority (IFSCA).
Meanwhile, the number of investors using GAPs through India International Exchange (IFSC) Ltd, or India INX, rose to 6,044 by March, while the total traded value rose 11% year-on-year to $39 million, showed the IFSCA March-quarter bulletin.
However, the next challenge is to attract financial firms and investors from major financial centres such as Hong Kong, Singapore and Dubai, including foreign nationals seeking to use India as a base for global trading, as nearly 90% of investors trading through GAPs are Indians, said a GIFT City official close to the matter on condition of anonymity.
Stumbling blocks
Market participants point to the reporting requirements attached to every trade as one factor that could be making the financial centre less attractive to foreign firms. The GAP framework requires intermediaries to comply with know-your-customer (KYC) and anti-money laundering (AML) norms, disclose information to clients, segregate funds, monitor trading activity and maintain transaction and trade data within the IFSC.
Sumit Chandra, founder and chief executive at Jarvis Invest, a stock advisory platform that considered setting up in Gift City but ultimately chose the Dubai International Financial Centre (DIFC), said jurisdictions such as the DIFC and Singapore generally require annual and quarterly compliance reporting on areas including risk and KYC.
Gift City, by contrast, also requires transaction-level reporting, meaning firms must report every trade executed on a global exchange.
These requirements are intended to ensure that investments comply with transparency and investor protection rules, including those governing the use of funds under the Liberalised Remittance Scheme (LRS), such as restrictions on derivatives and other non-permitted instruments, said Pradeep Ramakrishnan, executive director at the IFSCA.
“Without reporting, it would be difficult to monitor whether these rules are being followed, and one wrong investment could potentially put the entire GAP framework at risk. Since the investments are made through foreign brokers and the assets are held abroad, there is limited control over the rules of the foreign exchanges,” he added.
The lack of a suitable omnibus structure for foreign firms could be another downer. "For many foreign brokers, their existing infrastructure is built around an omnibus model, and the ability to offer a comparable structure through the GAP framework would be important for them to scale their operations efficiently,” said Ronit Kar, director and CEO of ViewTrade International IFSC Pvt. Ltd.
“At least in the next 6-8 months, we do not expect a very high influx of foreign brokers bringing their customers to Gift City for global trading," he added.
Data protection is another constraint. Some countries do not allow customers’ personal information to be transferred outside their jurisdiction. “An appropriately structured omnibus model could help address this concern by allowing the foreign broker to retain the underlying customer information, while the IFSC provider receives the information and order flow necessary to fulfil its regulatory and operational responsibilities," Kar said, adding that this could enable foreign customers to access Gift City without requiring the foreign broker to transfer all customer-level personal information outside its home jurisdiction.
Prime broking is another area where GIFT City currently has limitations. Globally, prime brokers connect clients to multiple exchanges, allowing traders to maintain a single pool of capital that can be used as margin across markets. This enables traders to access greater leverage without maintaining separate capital pools across different brokers.
“For example, if you want to trade in Japan and the US, a prime broker abroad can allow you to use the same pool of capital and margin across both markets without having to place money separately in each jurisdiction. In Gift City, the extent to which the same leverage can be used across multiple markets will depend on the products and the banks providing the leverage,” said an executive working with a proprietary trading firm based out of Gift City on condition of anonymity.
Some interest
Despite these limitations, several major international brokers, including Interactive Brokers, Alpaca, ViewTrade, ClearStreet, and CLSA, have established or are establishing a presence in Gift City, while others are awaiting licence approvals.
“We are increasingly seeing Gift City being evaluated by investors and financial intermediaries with existing relationships or operations across international financial centres such as Singapore, Dubai and Hong Kong,” said Umang Pandya, compliance officer at Phillip Ventures IFSC.
That said, the development is better seen as a gradual diversification of where global financial activity is being conducted, rather than a wholesale migration from established international centres, Pandya added.