FPI count at GIFT City doubles in last four months, shows NSDL data

Maiden IFSC emerges as preferred choice of fund managers

Foreign portfolio investors (FPIs) are expanding their presence at the Gujarat International Finance Tec-City (GIFT City) to benefit from lower costs and mitigate operational challenges in popular jurisdictions like Singapore and Mauritius.

The number of FPIs registered in GIFT International Financial Services Centre (IFSC) has doubled in the past four months.

According to data from the National Securities Depository, the number of FPIs registered at GIFT IFSC stood at 41 until February 2024, compared to only 21 until October 2023.

Many fund managers are increasingly looking to re-domicile their base to India’s maiden IFSC, say legal experts. This is because Indian fund managers are opting for GIFT City over their tax havens due to better clarity on regulations, they add.

“Many fund managers have started seeing merit in setting up a GIFT IFSC structure from a long-term perspective, as the said structure can accommodate all the possible strategies that the fund managers may come up with. This, coupled with tax flexibility and substance, makes it a more appealing jurisdiction compared to traditional ones like Mauritius and even Singapore,” said Twinkle Dhamecha, partner, IC Universal Legal.

‘Substance’ refers to the basic requirements mandated for the fund on employees, office, turnover, and expenses to operate in a specific country.

Experts believe that the requirements and compliance at GIFT City are leaner compared to others.

“Also, the GIFT City funds allow investors to invest in India without a permanent account number. The recent amendments in the double taxation avoidance agreement (DTAA) between India and Mauritius may also increase the flow of applications through GIFT City,” she added.

In February, the Mauritius government decided to amend DTAA with India to align with the Organisation for Economic Co-operation and Development proposal on base erosion and profit shifting.

Legal experts believe that this could increase the scrutiny of FPIs.

For India-focused funds, GIFT City is providing an avenue to be closer to the jurisdiction and remain outside of it. For instance, establishing a team at Gift City is less cumbersome.

Furthermore, if the hedge fund or the FPI purely operates derivatives trading strategies, then the derivatives income can get tax exemption in GIFT City.

“For Indian fund managers for whom it may be difficult to maintain substance at the offshore level, it would be fairly easier for them to maintain infrastructure and personnel in GIFT City to meet the substance requirement. With the new regime on overseas investment, Indian fund managers with the capability of global diversification can set up funds in GIFT City and pool money from Indian investors and other global investors to invest globally,” said Sahil Shah, partner, Khaitan & Co.

Although official data on overseas investments through GIFT City has not been released, experts say that such outbound transactions have begun.

“Under the old regime for overseas investment, only a listed company or an individual could invest outside India under the portfolio investment route. Now, Indian private entities like private limited companies, limited liability partnerships, and general partnerships can also invest capital outside India through the route, but via GIFT City,” said Shah.

He added that there are some practical changes from authorised dealer banks to allow such remittances under the overseas portfolio investment route, and clarity from the Reserve Bank of India is awaited on the same.

Along with fund managers relocating to the maiden IFSC, many family investment funds (FIFs) have shown interest after the fund management regulations were put in place.

The FIF route is open for both Indian and foreign families to set up shop and invest globally. Though a slew of queries have come about setting up FIFs, the timeline for final approval is still not clear, say experts.

Azim Premji’s family office has been the first to receive in-principle approval for a FIF, while Narayana Murthy-backed Catamaran Ventures also applied last year.

FINDING A NEW HOME

> GIFT IFSC is the preferred choice for lower costs and substance requirements

> Legal experts say several FPIs are considering relocating from Singapore and Mauritius

> This presents an opportunity to invest globally while being closer to home

> Regulatory changes, increased transparency, and clarity on taxation have facilitated registrations