Foreign FIs suspend plans to set up investment firms within IFSCs

Several foreign financial institutions seeking to set up investment entities in India’s International Financial Services Centers (IFSCs) have pressed the pause button pending negotiations of India’s terminated bilateral trade agreements with 58 countries, even as the Indian funds are exploring opportunities in these centers.

A European fund seeking to establish a base in India through the IFSC has hit a roadblock after its legal advisers pointed out that India had failed to enter into trade treaties with several countries.

The entity is setting up an India-focused fund with a pooling vehicle being set up in Luxembourg, a person with direct knowledge of the matter told ET.

An IFSC is an offshore financial center that facilitates the flow of various financial products and services across countries for customers outside the host country’s financial system. India has so far developed such a center, GIFT City, in Gandhinagar.

“Many foreign financial institutions have yet to assess the IFSC and include it in their list of approved jurisdictions,” said Yashesh Ashar, partner at tax consultancy Bhuta Shah & Co. many financial institutions to make direct investments in funds created or proposed for creation in India.

By March 2017, the government had terminated bilateral trade investment agreements with 58 countries, including 22 European Union countries.

Trade pacts tend to protect domestic assets of foreign companies, including copyright and intellectual property.

Generally, foreign companies are more concerned with trade pacts than, say, financial investors or funds. Still, that’s one of the reasons foreign funds are treading carefully when it comes to setting up stores in IFSCs, industry insiders said.

While foreign funds are suspending their projects, many Indian funds or funds backed by Indian banks, financial institutes and Indian companies are exploring the advantages offered by these centers as an opportunity.

Many domestic funds are seeking to set up entities within GIFT City so that they can manage large pools of money for investment inside and outside India, people briefed have said. of development.

“Indian high net worth individuals (HNI) overseas investments are slowly catching up with the rest of the developed world, with Indians becoming more sophisticated investors,” said Rajesh H Gandhi, partner at Deloitte India. “Some fund managers are seriously considering setting up a GIFT City fund to pool Indian money to invest overseas,” he said.

“A GIFT City fund offers various regulatory and tax advantages over a national fund, such as the 25% removal and restriction of connection to India, the use of leverage, the possibility of setting up places a separate structure and the tax exemption on gains from the sale of foreign securities,” Gandhi said.

At least a dozen Indian entities are considering GIFT City, people familiar with the matter said.

Fund managers looking to create new entities in GIFT City had contacted their legal experts to determine whether they should move in immediately or if they could work remotely amid the pandemic and still be eligible for tax breaks, like ET l first reported in May. 23.

There is ambiguity as to whether a fund manager must reside inside GIFT City or how long they must stay there each year.