A subsidiary of the National Stock Exchange on Thursday introduced a facility through which Indian retail investors can directly trade stocks listed on US stock exchanges. The NSE branch would invest the funds in these specific shares against which investors would receive certificates of deposit instead of actual shares.
The subsidiary – NSE IFSC – is registered at the International Financial Services Center (IFSC) of Gujarat International Finance Tec-City (GIFT), a financial district located between Ahmedabad and Gandhinagar in Gujarat.
The City was conceptualized as an alternative to global financial centers such as Hong Kong, Singapore or London. Although the idea was mooted in 2007, work on the physical infrastructure began in 2012. It was not until 2015 that business regulations were introduced; 2017 saw the establishment of an international stock exchange.
The GIFT City SEZ – with demarcations for domestic and export oriented units – is the only place in India to be designated as an IFSC.
“A jurisdiction which provides financial services to non-residents and residents alike, to the extent permitted by applicable regulations, in any currency except the Indian Rupee” is how GIFT City defines the IFSC.
Doing business within the IFSC enjoys a relaxed tax regime – a 10-year tax holiday with no securities transaction tax, commodity transaction tax or long-term capital gains tax .
The Global Financial Centers Index, London report in March 2021 placed GIFT City’s IFSC at the top of 15 global centres, which are expected to become more important over the next two to three years.
One step at a time
Over the past few years, the IFSC has witnessed a multitude of regulations or developments. For example, in February 2021, regulations relating to the registration of aircraft leasing companies within the IFSC were put in place; within a year from then, 13 companies had registered under this umbrella. In May 2021, a notification in the Official Gazette clarified that foreign investors in a certain category of alternative investment funds would not need a PAN number to bring their funds into the financial jurisdiction.
The announcement of the IFSC Authority (IFSCA) at the end of 2020 under the chairmanship of the former Chairman of the Insolvency Law Committee, Injeti Srinivas, has injected welcome energy into the project. The IFSCA assumes responsibility as a unified regulator – in all areas overseen by the RBI, SEBI, IRDAI and PFRDA. The nature of the activities of IFSCs requires a high degree of cross-regulatory coordination within the financial sector. Companies have likely found it slow in getting approvals from each of these regulators.
The IFSCA recently urged the RBI to include aircraft leasing as a financial service, so that banks can become eligible to fund such leasing.
In October 2021, the NSE agreed to establish a data connection with SGX through the IFSC, allowing SGX investors to access real-time data. After nearly two decades of partnership, the NSE blocked SGX’s access to real-time data in 2018. The pipeline is seen as the first step in migrating Nifty futures trading that used to take place on the SGX, to the NSE IFSC. In 2021, the SGX saw trades that averaged twice the volume of Nifty futures contracts traded on the NSE. Open interest, or unsettled derivative contracts, was also higher, at 3.38 times. From April, the exchange of Nifty Future with the IFSC will begin in a phased manner.
Currently, more than 200 entities have taken up offices in the City, where 12,000 people work. BSE and NSE have established their international stock exchanges within the IFSC; 17 banks, five of which are international banks, have obtained operating licenses, more than 100 units offer brokerage, depository and clearing services, and 19 companies have started non-life reinsurance operations.
Despite these progressive steps, investors have been slow to accept the offers. Most new trading jurisdictions tend to give advantages to financial trading firms for early participation or encourage equity liquidity, but the goal is to eventually encourage genuine retail investor participation.
The media reported that even in February 2021, a large proportion of stock trading within the IFSC was proprietary, i.e. trades made by companies for their own profit, rather than using funds of investors to generate profits for the participants.
Among the main concerns of institutional investors are that the Indian currency has not become fully convertible, that the country has not been visibly consistent in its tax laws and their interpretation, and that the speed of settlement of disputes has been less than satisfactory.
The Indian Rupee is currently partially convertible, meaning it is free to exchange currencies at market rates, but when larger amounts are involved, approvals are required. A fully convertible currency would also have no authorities intervening in the markets to stem volatility or bring the rate down to a certain level. A typical example is the RBI which enters the market to support the currency if world events or oil prices lead to extreme weakness in the Rupee, as was the case on Friday when the Rupee fell below the 76 level. for a dollar. .
India’s move to scrap retroactive tax laws to close cases against companies like Cairn Energy and Vodafone was likely welcomed.
In terms of dispute resolution, the 2022 budget had proposed the creation of an international arbitration center; this is intended to provide IFSC offshore investors with assurance of intent, given the uncertainty that accompanies corporate litigation in India.
Insolvency standards in the country have been strengthened with the introduction of the Insolvency and Bankruptcy Code; but under that umbrella too, the time taken by lenders to collect the funds owed to them – even allowing for major haircuts – prevents investors from venturing out enthusiastically.
Legal experts have proposed cross-border insolvency standards that meet IFSC requirements as a means to initiate broader insolvency reforms in the country. Although there are some provisions on this subject in the IPC, a stronger framework is considered necessary to guarantee the intention of the investors. In 2018, the Insolvency Law Committee submitted its recommendations to the government for the adoption of the “UNCITRAL Model Law on Cross-Border Insolvency”. The United Nations Commission on International Trade Law (UNCITRAL) says the law is “designed to help states develop a modern, harmonized and fair insolvency framework to more effectively deal with cases of cross-border proceedings involving debtors in serious financial difficulty or in a situation of insolvency”.
Significantly, India can learn lessons from Dubai International Financial Center and Abu Dhabi World Market, which passed the UNCITRAL Act, even though the UAE as a nation has yet to legislation to combat cross-border insolvency. These are cited as examples for the IFSC to independently set the tone.