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London, New York, Hong Kong, Singapore, Shanghai, Sydney, and.. GIFT City? One of these is not like the others. There is, however, a painstaking effort being made by the Gujurat International Finance Tec-City (GIFT City) to be admitted into the elite club of international financial services centers (IFSC). Conceived of in 2007 during the Vibrant Gujurat Global Investor Summit, the project is reportedly a personal favourite of the Prime Minister Narendra Modi. He was of course Chief Minister of Gujurat then, and the project would have likely been the centerpiece of his Gujurat Model. Now that GIFT City’s initial development is complete, and operations are underway, the question of whether it can really emerge as an IFSC remains to be answered.

Back in 2007 the Indian government decided to embark on a project that would see Mumbai become an IFSC. It planned to make the Indian rupee a fully convertible currency by the end of 2008 at the latest but just then economic calamity struck and the project was halted. Mumbai is the natural choice for such a project, it is after all the country’s financial capital and carries similar cultural value to the other IFSCs like London and New York. Modi evidently does not share this view. He instead believes that a vacant strip of land along the Sabarmati somewhere between Gandhinagar and Ahmedabad is the ideal location for an IFSC modeled on Shanghai.

Thus far, 10 buildings have been constructed with 12,000 people working in GIFT City in the fields of banking, insurance, financial services, and IT. It boasts a corporate club called ‘GIFT Club’ and a 5-star hotel named the ‘Grand Mercure’, along with solid waste management and the country’s first city-wide district cooling system. Yet it is still struggling to attract the brokers, traders, lawyers, accountants, and so on needed to turn a city into an IFSC.

The government has in some cases bent over backwards in terms of the incentives it has offered and the regulations it has withdrawn in order to make GIFT City an attractive destination for the world’s major financial players. 

It has deregulated to such an extent that it appears to be encouraging questionable practices, as it has given brokers the right to pool foreign investors’ money into an omnibus account along with the freedom to conduct their own due diligence. This means that rich Indians can very easily take their earnings out of India and bring it back in through a practice known as ‘round-tripping’.

Indian government also tried to pick a fight with the Singapore Exchange (SGX) two years ago, much to the dismay of the Futures Industry Association (FIA), which is an international trade body for the derivatives market.The government  wanted the SGX to stop trading the benchmark Indian exchange NIFTY on its platform. It has since backed down and the SGX continues to trade NIFTY contracts on its exchange, meaning that the effort to make these contracts exclusively tradeable on Indian exchanges has been foiled.

It has also been reported that 85-90% of all trades that occur at the GIFT exchanges i.e, India INX and NSE IFSC are proprietary trades. This means that the trades that are happening at GIFT City are merely the kinds of investments one would see a corporation making on its own behalf, and not the kind of investments hedge funds make which is what an IFSC like GIFT City would be after.

What does it take to become an IFSC?

So what does GIFT City need to do to become a major IFSC?  To understand this we need to understand just what it is that makes the likes of Shanghai, New York, Hong Kong, London etc. an IFSC in the first place. The most basic definition of an IFSC would be any place where a large amount of financial business is conducted. This of course is what happens in the aforementioned cities, but the reason as to why they are international is the fact that individuals can trade with/in foreign currencies in these cities as well. For instance, an Indian can buy US securities using dollars in London, where the local currency is the pound. This is possible because of the level of financial expertise and resources available there, which is something unique to these places.

Any major IFSC will have certain core institutions present in order to facilitate the kind of transactions that normally take place there. They are broadly categorised into capital raisers and risk managers. Capital raising includes the issuance of securities, debt, and other financial instruments while risk management includes all those activities that protects against the risks involved in the former. 

This includes contracts where people can lock in the future price of an asset or protect against future price movements. Brokers, traders, investment funds, exchanges, and so on are all essential to the functioning of a true IFSC. These cities also rely on the presence of auxiliary professionals like lawyers, accountants, insurers, actuaries, and so on without which the scale and complexity of the financial transactions that occur would not be possible.

There are a number of theories which seek to explain how and why IFSCs emerged in these cities in the first place. The earlier explanations were based on geography, and claimed that prevalence of a trading hub (Singapore, Hong Kong), the location of manufacturing and basic service industries, make for a natural location for an IFSC. Meanwhile, modern theorists argue that economies of scale or ‘endowed capacities’ are the chief determining factors. There are advantages to concentrating the entirety of an industry in one locality as a number of costs are minimised. These theories cite that the cities that are already endowed with these capacities (London, New York) have an easier path to emerging as an IFSC.

Beyond the presence of institutions and infrastructure, ‘quality of life’ also plays a vital role. The professionals who live in these cities need to have access to schools, restaurants, pubs, recreational activities, and so on. Ease of living is very important and this is achieved by having attractive residential spaces, a good public transportation system, and high levels of cleanliness. From a regulatory point of view, there needs to be a stable tax regime, a freely convertible currency, and freedom of movement between countries.

Considering all that has been mentioned above, how many of these facilities/features are provided in GIFT City? Right now, not many. Mumbai would have been the ideal location to set up an IFSC and it is unclear why the government chose to shift the project to Gujurat. It has its work cut out for itself to develop GIFT City into a true IFSC, but theorists explain that it is possible. Government action can certainly influence the creation of such a city, by building infrastructure and maintaining a stable regulatory framework. It is difficult, however, to create cultural value in a place that until very recently did not exist. To attract the world’s top talent in these fields, the city itself needs to have a certain amount of pull. This can certainly be said of all the other cities on the list of IFSCs, and can be said of Mumbai as well. GIFT City can not yet boast of such a presence, and there is unfortunately no shortcut to creating something as intangible as culture

For feedback, comments and views write to pavan@bclindia.in

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