India AIFs explore relocation to booming GIFT City

Fund groups are being tempted to relocate their offshore India-focused alternative investment funds (AIFs) to the Gujarat International Finance Tec-City (GIFT City), speakers agreed at a recent Apex Group webinar. Recent regulatory enhancements in its International Financial Services Centre (IFSC) have put it on par with established offshore financial centres.

The IFSC provides a platform for both international institutions and Indian entities carrying out foreign currency activities outside India. Its regulatory authority (IFSCA) was established as a unified regulator, effective October 1, 2020, replacing domestic insurance, banking and capital market regulators.

The IFSCA has been aligning regulation with international best practice and removing factors that previously pushed funds offshore, such as a lack of full capital account convertibility and inefficient regulatory and tax structures. The main objective of IFSCA is to develop strong global connections; while focusing on the needs of the Indian economy it will serve as a regional and global financial platform.

“Since 2015, the government of India has taken all of the right steps, one-by-one, in terms of setting up the IFSC and the unified regulator,” said Dipesh Shah, Head of Development at IFSCA.

The IFSCA has issued 14 pieces of regulation to cover separate areas. “Banking regulations came out, which are a breakaway from domestic regulations. Bullion exchange regulations are also in place now… Foreign institutions can now set up in the IFSC and serve global markets. [And there is] a very enabling regulatory sandbox framework for the fintech companies,” says Shah.

“The way the financial services ecosystem has responded to the regulatory changes has been remarkable,” he said. “[There are] 20-odd companies now but this is just the beginning. We see the whole ecosystem evolving into a larger global financial hub.”

AIF managers have started to obtain regulatory approvals from the IFSCA. Avendus Capital, India’s biggest AIF company, in September became the fourth firm to receive a licence from the IFSCA, following True Beacon, Kedaara Capital and Multiples Alternate Asset Management.

IFSCA has made improvements across the board to tempt fund managers. “Tax is on top of the list, for sure, followed by regulatory and legal concerns,” said Tej Gujadhur, Director, Mauritius Apex Group. “India has been doing a phenomenal job in building the ecosystem, but it remains a work in progress. What India is doing in taxation, is to make it neutral to re-domesticate.”

The idea is to replicate the tax arrangements of offshore jurisdictions and thereby remove the incentives for India-focused AIF managers to base themselves elsewhere. “Mauritius has been consistent for the 38 years of the treaty with India,” said Gujadhur. “On the Mauritian side, there's no capital gains, there's no withholding [tax] and there's free exchange of capital.”

The fund regulations mean there is “no tax implication” from moving investments from Mauritius to India. However, he notes that as money is only passing through Mauritius, perhaps from a US or EU investor, “things get a little bit murkier” in the investor’s home country as a relocation may be treated as a taxable event.

The new tax regime was a “game changer”, said Tushar Sachade, Partner at Price Waterhouse & Co. “It gives exactly the same benefits to fund ecosystems… and tax breaks as those available in jurisdictions such as Singapore, Mauritius, Luxembourg and Ireland.”

IFSC is most likely to attract funds from Mauritius, which is the most common offshore domicile for India-focused funds, followed by Singapore, according to Sachade.

“If you want to invest in India, the best place to be is in India,” said Mandar Mhatre, Chief Executive of India Apex Group. “The big question each investor or limited partner (LP) needs to ask is whether adding another feeder structure is going to be beneficial for them, from a long-term perspective,” he said.

Apex Group in November became one of the first global fund administrators to receive regulatory approval to operate in the IFSC. Apex is in advanced discussions with many global funds and other clients seeking to set up funds in the financial hub.

To view the ‘Re-domestication of funds in GIFT’ webinar click here.

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