Budget 2023: GIFT City gets a big boost as govt announces several sops

Pnotes issued at IFSC will be recognised by bourses; as on December 2022, FPIs' pnote holding at just Rs 96,000 cr

In a bid to give a fresh fillip to the Gujarat International Finance Tec-City (GIFT), Finance Minister Nirmala Sitharaman in the Union Budget 2023-24 permitted acquisition financing, recognised offshore derivative instruments, and set up a single-window registration for approvals.

The Budget provided acquisition financing by units of foreign banks set up at the International Financial Services Centre (IFSC) — a move that will bring down the cost of financing for outbound mergers and acquisitions (M&A).

Under the current regulations, Indian banks and branches of foreign banks in India are restricted from providing financing for acquisition of shares.

“The Budget proposes to relax this restriction for offshore units of foreign banks, thereby making Gift City competitive and comparable to other international finance centres where no such restriction exists. However, clearly it appears that units of Indian banks in Gift City may still not get this leeway resulting in a loss of this opportunity for them at this point,” said Siddharth Shah, partner, Khaitan & Co.

Sitharaman also announced that offshore derivative instruments — also known as participatory notes (P-notes) — will be recognised as valid contracts.

Experts said the move will enable foreign banks issue P-note contracts via the Gift City for foreign investors willing to take exposure to onshore market. Currently, such contracts are issued largely out of tax-friendly jurisdictions, such as Mauritius and Luxembourg.

Some experts said P-notes were already permitted via Gift City, however, the Budget had removed a critical irritant.

“The change proposed on P-notes is a clarification that distribution of income by offshore banking units to investors will not be subject to tax, thereby avoiding double taxation. The regulations around ODI investment through the gift city have not been expanded or modified,” said Rajesh Gandhi, Partner, Deloitte.

As of December 2022, P-note holders had an exposure of nearly Rs 96,000 crore in domestic equity, debt, and other hybrid instruments. This is less than 2 per cent of FPIs' exposure to Indian assets.

The Budget move could open up a huge opportunity for banks, who can re-issue these contracts by the Gift City.

In other measures aimed at boosting the IFSC, the FM announced a single-window IT system for registration and approval from several financial regulators, including IFSCA, SEZ authorities, Goods and Services Tax Network (GSTN), Reserve Bank of India (RBI), Securities and Exchange Board of India (Sebi), and Insurance Regulatory and Development Authority (Irdai).

Sitharaman also announced the establishment of a subsidiary of Export-Import (EXIM) Bank at GIFT IFSC for trade refinancing. “This would encourage emerging sectors such as aircraft and ship financing activities in GIFT City,” said Tapan Ray, MD & Group CEO, GIFT City.

Furthermore, the FM also announced that the IFSCA Act will be amended for statutory provisions for arbitration, ancillary services, and avoiding dual regulations under the SEZ Act. IFSCA will also be delegated powers under the SEZ Act.

Among other decisions, tax benefits for funds relocating to the GIFT City have been extended till March 2025. 

FM’s GIFT

• Acquisition financing by IFSC Banking Units of foreign banks permitted
• Pnotes issued at Gift City to be recognized as valid contracts, removes tax overhang
• Subsidiary of EXIM Bank to facilitate trade re-financing
• Single window IT system for registration and approval from financial regulators
• Statutory provisions for arbitration, ancillary services, and avoiding dual regulation
• Facilitation of Data Embassies of other countries
• Tax benefits to funds relocating to IFSC, GIFT City extended till March 2025