GIFT City, An Audacious Idea - Livemint

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    17 September 2015 | E-Paper

    Home Politics

    Last Modified: Wed, Feb 18 2015. 08 53 PM IST

    Maulik Pathak | Ashish Kumar Mishra

    GIFT City, an audacious ideaGujarat accelerates work on the eight-year-old project billed as Indias first globalfinancial services centrea potential rival to Dubai, Hong Kong and Singapore. Wechronicle the scale of the challenge

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  • Of the 880 acres allotted to Gujarat International Finance Hi-Tec (GIFT) City, which is beingprojected as the first of 100 smart cities that the BJP-led government wants to build, about 250acres is earmarked for the international financial services centre.

    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 Asias oldest stock exchange in Mumbai, saidit will set up an international exchange at GIFT City.

    Estimated investment: Rs.150 crore.

    Around the same time, the BSE Brokers Forum, an association of brokers who tradeon the exchange and hold almost 40% equity in it, said it will set up its back-officeoperations at the financial enclave, at a cost of Rs.200 crore.

    Then, again, GIFT, whose first phase is due to be completed by 2016, recently found aplace in KPMG Internationals Infrastructure 100: World Markets Report. This reporthighlights 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-sensitivegrowth. Although only two of the planned buildings have been constructed, newIndian Prime Minister Narendra Modi backs the initiative, which is designed tochange the way India thinks about contemporary urban planning, the report says.

  • Well, thats not all.

    In the last year or so, several banks have picked up small chunks of land at theproject site. These include State Bank of India, the countrys largest lender; ICICIBank Ltd and HDFC Bank Ltd, Indias largest and second largest private sector banksby assets; and Yes Bank Ltd, the countrys youngest lender.

    Needless to say, thanks to this sudden, peaking interest, R.K. Jha, 68, finds himself arelieved man.

    The managing director of GIFT, Jha, whos been around with the project from DayOne, 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 wasGujarat chief minister, that he first proposed GIFT City as an international financialservices centre (IFSC).

    Set up on the banks of the Sabarmati river, near Gujarats capital, Gandhinagar, Modipitted GIFT as a rival to the IFSCs of Dubai, Singapore and Hong Kong. And if youwere to stretch your imagination a biteven New York and London.

    Back then, Modi nursed a burning ambition to sell Gujarat to the world as the mostfavourable investment destination in India.

    The idea of GIFT City made for a good sell. Plus it was also a reply to his counterpartin Maharashtra, the late Vilasrao Deshmukh, who had wanted to turn Mumbai intoan international financial centre.

    Except that, beyond an idea, an earmarked special economic zone (SEZ), amanagement team, design contracts that got mired in controversy and a website,GIFT City never really took off.

    And no prizes for guessingneither did Deshmukhs dream of turning Mumbai intoa 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 theBharatiya Janta Party (BJP)-led government wants to build.

  • To be able to do that, the IFSC guidelines (read: essential legal framework) areexpected to be announced in the 2015 budget that will be presented by financeminister Arun Jaitley on 28 February.

    Speculation has been doing the rounds that the government will tweak the ForeignExchange 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, saysthat the process of drafting these guidelines has been on for a while and once theyare 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 alsoexploring to set up an international exchange similar to BSE, he says. Globalexchanges like New York Stock Exchange and London Stock Exchange who operatethrough brokers have also evinced interest in setting up international operations atour 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 finerdetails. But the governments intention is clear.

    In the absence of an IFSC in India, the country has lost roughly 50% market share inthe two most important India-related financial products. These are the rupee-dollarfutures contracts traded on the Dubai Gold and Commodities Exchange (DGCX) andthe Nifty futures contracts traded on the Singapore Exchange (SGX), which arepopular among international traders. With an IFSC, this trade could move to India.To GIFT City. And thats just for starters.

    The possibilities

    As you travel about 20km from Ahmedabad towards Gandhinagar, two 28-storeybuildings stand out in the skyline.

    These buildings, the tallest in the state, are symbolic of the Rs.78,000 crore GIFTproject. As things stand today, theres little thats going on, other than construction.

    The buildings themselves are largely unoccupied, except for six companies thathave begun operationsGujarat Electricity Regulatory Commission, SyndicateBank, IL&FS group, and (n)Code Solutions, an IT arm of Gujarat Narmada ValleyFertilizers and Chemicals (GNFC). Adjacent to them, a temporary office has beenconstructed, which houses the staff of GIFT Co. Ltd.

  • The company is a 50:50 joint venture (JV) between Infrastructure Leasing andFinancial Services Ltd (IL&FS) and the state government-owned Gujarat UrbanDevelopment Co. (GUDC). Of the 880 acres of land allotted to GIFT City, about 250acres is earmarked for the IFSC.

    This will be treated as an SEZ. The project envisages setting aside 12 million sq. ft inthe 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 62million sq. ft are expected to come up.

    It will be fair to say that the scale of GIFT City is huge, almost five times Mumbaisfinancial district, Bandra-Kurla Complex. But a critical question remains: whatexactly can take place inside this IFSC?

    On the face of it, a lot.

    From offshore banking to currency convertibility, re-insurance, commodity andsecurities trading and capital raising; just about every activity which takes place inIFSCs around the globe.

    Almost everything can be done here, which will be complementary to whathappens in Mumbai, says a board member of GIFT Co., requesting anonymitybecause 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 ofthe 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 othercritical purposes. For instance, get back what has been lost.

    If you look around, in Dubai and Singapore, the best derivative traders andinvestment bankers are all Indians, he says. Both these centres developed becauseof Indian needs. Because a lot of foreign institutional investors (FIIs) and foreigninvestors do not like to be registered in India. So if GIFT provides a separatejurisdiction, where it is easy to do business because the tax laws are relaxed, then Isee it doing really, really well.

    On paper, sure. But for an international exchange to come up in GIFT and, for thatmatter 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 20years is going to be the next big market. For that, we will need to raise funds. Ourcompanies 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 orLondons Alternative Investment Market, could look at listing on GIFT?

    Yes.

    Of course, theres much more to an IFSC than an exchange. Simply put, it is afinancial ecosystem comprising a majority of the 100 best banks in the world, world-class financial professionals, infrastructure and rules and regulations that are onpar or better than competing centres.

    For KPMG, it is the vision and the scale of the project that make it promising. In itsreport, factors such as the size, feasibility, complexity, impact on society andinnovation were taken into account while identifying the top 100 infrastructureprojects, says Arvind Mahajan, head of the government and infrastructure practiceat 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 andgains critical mass. It will play a much larger role in the domestic and internationalfinancial services sector.

    The opportunity

    Then, again, nothing restricts GIFT from moving beyond financial services. It willalso house information technology (IT) and IT services companies. After all, India isthe offshore IT destination of the world. And almost 40% of the business is driven bythe banking and financial services sector.

    As the offshore and domestic markets continue to grow, we believe that India isvery well positioned to capture a large portion of this opportunity, says Jha.

    There are already some takers. In December 2014, Mumbai-based real estate firmHiranandani Constructions Pvt. Ltd (HCPL) announced it will set up a commercialcomplex in GIFT City with an investment of Rs.125 crore to facilitate IT and financialservices. Then, again, in October last year, Bengaluru-based realty firm BrigadeGroup said it will invest Rs.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 interms of indicators like area sold to companies or the number of back offices. The

  • key indicator will be transactionsthe amount and nature of financial transactionswhich 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 demandthe one thing India has inabundance.

    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 thatchoose to set up in the enclave will pay no registration fee, no excise duty, nocustoms duty, no sales tax, no stamp duty on mortgages; they will have exemptionfrom income tax; at least for the first five years of operation. Everything that amanufacturing SEZ offers.

    Ironically, therein lies the problem with GIFT City. It is no manufacturing SEZ. It ispurported to be a financial SEZ. Where, within the confines of a brick and mortarwall, money will move in and outglobally. India hasnt attempted anything likethis before. That it is finally doing so should be lauded. But then, it must also beexamined with a good measure of skepticism. It is after all, in its current form,nothing but an audacious idea.

    The flipside

    In the world of IFSCs, the opinion of Zyen is respected. Zyen is a commercial thinktank, consultancy and venture firm headquartered in London, and is best known forits Global Financial Centres Index.

    MintAsia reached out to Mark G. Yeandle, associate director at the firm, to check ifGIFT 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 replaceincumbents. If liquidity is settled in one place, then it can be hard to move unlessthere are some very compelling reasons, said Yeandle.

    Why would a bank move from Mumbai to Gujarat IFT-C? Mumbai used to competewith western centres for back-office operations and the main factor was cost. Thecost differential has now decreased.

    The factors of competitiveness are many. From business environment factors tofinancial sector development, infrastructure, human capital and reputationalfactors.

  • To put it simply, what will GIFT offer, thats already not there in Singapore or Dubai?As things stand today, there are no easy answers. And then, again, the biggeststumbling block for GIFT could be regulation. See, anybody who comes here needsto see a functioning city, said the board member quoted above.

    Right now, all they can see are physical milestones. Because, since Day One, there

  • Maulik Pathak | Ashish Kumar Mishra

    First Published: Wed, Feb 18 2015. 08 53 PM IST

    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 areno rules which say XYZ activity is allowed in SEZ. That needs to come first. And thathas to be best in the world.

    Pradip Shah, who runs IndAsia, a corporate finance, private equity, and investmentadvisory business, says this argument is sound. And he should know. Shah is anexpert on financial services and IFSCs, and was the founder-managing director ofCrisil Ltd, Indias first and largest credit rating agency, and also assisted in thefounding of Housing Development Finance Corp. Ltd (HDFC), Indias first retailhousing finance company, in 1977.

    If the legal framework is sound, he says, in terms of acceptability to investors forwhom it is intended, then there is an opportunity to rival major internationalfinancial centres and compete with them effectively.

    A simple case in point, which helps explain this best is the issue of minimumalternate tax (MAT), one that has been hanging fire for a while. As things standtoday, 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% onbusiness 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 orSingapore 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 anybodys guess. Stretch yourimagination a bit and youll realize its the same with GIFT City.

    TOPICS: GIFT CITY GUJARAT INTERNATIONAL FINANCE HI-TEC CITY

    NARENDRA MODI INTERNATIONAL FINANCIAL SERVICES CENTRE BSE

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