“We have to be flexible and indulgent when it comes to products in order to attract investors with risk appetite. I feel resident Indians should be allowed to use the Liberalised Remittance Scheme (LRS) to invest in the International Financial Services Centre. There is no sound rationale in disallowing it.. Also, banks in IFSC should have the flexibility give rupee ECBs (foreign currency loans denominated in rupees),” said Srinivas, who was appointed as chairman of IFSC Authority (IFSCA) last month, in an interview with ET.
`Excluding GIFT from LRS is Unfair’
Under LRS, a resident Indian can invest $250000 a year to hold bank accounts, buy stocks in the spot market, and properties abroad. But RBI, amid concerns over fund round-tripping and other sharp practices, disallowed the use of LRS by local investors to trade in IFSC bourses or open accounts with GIFT bank branches. Srinivas thinks such concerns are overplayed. “In fact, the central bank and other authorities can easily track the flow of LRS funds invested in GIFT. Today, it’s virtually impossible to trace the money invested (under LRS) in Dubai or other jurisdictions…If LRS exists, excluding GIFT is unfair. We will take it up with RBI and try to convince the.. I don’t foresee any turf battle with the domestic financial regulators,” said the 1983 batch IAS officer from the Odisha cadre who has three years to make a difference.
The newly formed IFSCA is the unified authority to regulate all financial services in international financial services centres in India.
Besides setting up a financial services hub in Asia that would compete with Singapore and Hong Kong, the idea of IFSC also emanates from the need to claw back markets that India has lost to offshore centres and offer services that Dubai, Mauritius and other jurisdictions provide. “But whatever treatment is given to Mauritius or Singapore should be given to GIFT. That is quite straightforward but may require changes in regulations, legal amendments,” said Srinivas who believes that GIFT IFSC, which has seen tweaking of rules within the existing framework, will now have to be taken to the next level.
Though investors from Mauritius and Singapore have to pay capital gains tax — 15% on short term gains and 10% on long term gains for listed stocks, and 30% on short-term gains and 10% on long term gains for unlisted stocks — they are spared of the 20% tax that a fund set up in GIFT has to fork out for gains from trades in derivatives like futures and options.
‘A Delicate Balance’ on Substance
In tackling questions raised by tax authorities on whether investors coming from Mauritius and Singapore have a real presence there or simply operate as paper entities with post office addresses to claim tax benefits, both have put in place ‘substance’ rules that require investors to hire office space, employees, and hold board meetings.
In this context some of the stakeholders have told IFSCA to come out with a substance rule to avoid being pulled up by the Income tax department. This, according to Srinivas, requires a “delicate balance”. “There has to be a substance principle. We can in no way have shell companies, invite dark money, and violate standards set by the Financial Action Task Force (which frames anti-money laundering rules). At the same, we must recognise that it will be a dampener if rigid regulations force funds, banks and other business entities to shift employees lock, stock and barrel to IFSC.”
“Professionals may not want to stay till there is life in IFSC, and there will be no life unless they stay. It’s a bit of a chicken and egg story. We have to be nimble footed. A billion dollar fund can be managed by five people. Should regulations require all five of them to compulsorily relocate to GIFT? That may not work. We have to be reasonable on substance. We would take the Income Tax department on board..i must say the tax department has been very open to suggestions and flexible on these matters in the last two years,” he said.
On the applicability of harsh Indian laws like PMLA, Black Money Act and Benami Act, the IFSCA chairman said, “No one is saying KYC should not exist, but these laws should dovetail to the functioning and nature of the business in IFSC. 99% should not suffer because of the suspicion on 1%..We have to keep in mind what competitors are doing.”
Allow Rupee ECB, tap Diaspora
Like pursuing the use of LRS, Srinivas will take up with RBI to let banks in GIFT IFSC offer `rupee external commercial borrowings’ – similar to ‘masala bonds’, these are foreign loans denominated in rupees where the exchange risk lies with the lender. For small and mid-sized companies, such loans may work out a little cheaper than the cost involved in borrowing in foreign currency and hedging it. “Banks in London and Singapore can offer rupee ECBs. Why can’t banks in GIFT offer it?,“ he said while adding that a part of the business that Indian banks do abroad can move to GIFT. “All big companies have treasury offices outside India. Indian banks hold large dollar assets in branches abroad, and a predominant part of it comprises of exposure to Indian business groups. Why can’t this business move to GIFT?”
Since June RBI has allowed bank branches in GIFT to cut currency deals in the non-deliverable forward (NDF) market (where banks and funds in Singapore, Hong Kong and London bet on the movement of Indian rupee against US dollar).
“Large economies like China and Japan,” he said, “have tapped their domestic strengthens to grow. We too should do it to create a critical mass in GIFT. The size and strength of our economy and diaspora must be leveraged..There is a 20 million strong Indian diaspora with assets of $3 trillion. It will make a difference even if you get a small percentage of that in GIFT banks. If a foreign bank holds that money, backstopping it would be primarily the job of the bank’s home country regulator. Besides, Basel norms would prevail and IFSCA too will regulate all compliances arising out of it.” GIFT is creating an IT systems to support its regulatory framework. “I feel the system of inspectors with their template of annual inspection does not work anymore,“ said the IFSCA chief who has a mental picture of transforming GIFT in a way where a pharma company in Bangladesh, a tea plantation in Sri Lanka, or businesses in Nepal , along with Indian companies to raise capital.
Even though perceived as a pet project of Prime Minister Narendra Modi, GIFT has till now made baby steps, by largely tweaking the rules within the existing framework. While GIFT City spread over 886 acres near Ahmedabad has attracted companies like TCS, BankAm and Oracle and many ECB deals are booked in the IFSC, the exchanges lack liquidity and the IFSC has long way to go in emerging as a regional financial hub. Will IFSCA change that? Will Srinivas succeed? “The IFSC Authority will work to put the pieces in the jigsaw puzzle. There is determination in the government which will manifest itself,” said the seasoned bureaucrat.
HIGHLIGHTS: IFSCA PLAN TRANSFORM GIFT?
# Be flexible, indulgent in allowing products
# Do not blindly replicate all laws
# Careful framing of the ‘substance’ rule
# Allow LRS, rupee ECBs
# Tap a slice of the diaspora savings