WHAT IS GIFT CITY?
The Gujarat International Finance Tec-City (GIFT City) stands as India's maiden International Financial Services Centre (IFSC), strategically conceived to be a nucleus of global financial activity. Its establishment signifies a pivotal step in India's ambition to become a prominent player in the international financial landscape. GIFT City offers a conducive ecosystem with a competitive regulatory framework and robust infrastructure, designed to attract both domestic and international financial institutions and investors. Within this dynamic environment, Alternative Investment Funds (AIFs) have emerged as a critical instrument for mobilizing and deploying capital, bridging domestic investment opportunities with global financial resources.
WHAT IS AIF?
“Alternative Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which,- (i) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
Alternative Investment Fund is a special investment category that differs from conventional investment instruments. It is a privately pooled fund. Generally, institutions and HNIs invest in AIFs as substantial investments are required.
These investment vehicles adhere to the SEBI (Alternative Investment Funds) Regulations, 2012. AIFs can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
WHERE THEY ARE PROVIDED?
SEBI (Alternative Investment Funds) Regulations, 2012.
There are three categories of AIF.
Category I: Category I AIF are those which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable. It includes the funds perceived to have positive spillover effects on economy and for which the Board or Government of India or other regulators in India provide incentives or concessions.
Category II: Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government.
Category III: Which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. AIF such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by govt.
WHO CAN BE AIF?
AIF Can be Trust or a company or a limited liability partnership or a body corporate.
WHAT IS AIFs PURPOSE?
- Accessing niche markets, sectors, or opportunities that are otherwise difficult or costly to invest in.
- Providing diversification, risk management, and higher returns potential for investors who are willing to take more risks and have a longer investment horizon.
- Having more flexibility, innovation, and customization, which can suit different investor preferences and needs.
WHAT IS IFSC?
GIFT City in Gujarat is India’s first operational smart city and hosts India’s first and only International Financial Services Centre (IFSC). It’s a hub for financial and IT companies from around the world, offering an ideal ecosystem for both local and international businesses. The IFSC at GIFT City enables onshore and offshore financial services and its mission is to offer cross-border financial products and services within a competitive tax environment.
IFSC is set-up to undertake financial services transactions that are currently carried on outside India by overseas financial institutions and overseas branches / subsidiaries of Indian financial institutions (IFSC unit is treated as a non-resident under RBI regulations) An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centers deal with the flow of finance, financial products and services across borders.
REGULATORY FRAMEWORK
The regulatory landscape for AIFs in GIFT City is primarily governed by the International Financial Services Centres Authority (IFSC Authority), established under the International Financial Services Centres Authority Act, 2019. This Act empowers the IFSC Authority to be the unified regulator for all financial services within the IFSC, ensuring a streamlined and efficient regulatory environment.
The cornerstone of the AIF regulatory framework in GIFT City is the IFSC Authority (Fund Management) Regulations, 2022. These regulations outline the registration process, eligibility criteria, capital requirements, compliance norms, and disclosure standards for AIFs set up in GIFT City.
The regulations permit various legal structures for AIFs, including trusts (governed by the Indian Trusts Act, 1882, as applicable within GIFT City), companies (under the Companies Act, 2013, with specific provisions for IFSC units), and Limited Liability Partnerships (LLPs) (under the Limited Liability Partnership Act, 2008, as adopted in GIFT City).
POTENTIAL FOR AIF GROWTH
Alternate Investment Funds in India (AIFs) In 2012, the SEBI introduced AIF Regulations with an intention to regulate unregistered pooling vehicles. It aimed to avoid regulatory gaps and to have a level playing field for all types of funds in India.
Currently, there are more than 600 AIFs registered with the SEBI [Currently 1565]. As on 31 December 2019, as per the data published by SEBI, the total capital commitment of these AIFs is US$ 49.69 billion out of which the fund raised from investors is US$ 24.53 billion and the amount of investments made is US$ 20.30 billion. These facts clearly demonstrate the potential of AIFs as a pooling vehicle in India.
Considering the success of the AIF regime in domestic market and a with a view to encourage fund regime in IFSC, in 2015, the SEBI had issued detailed guidelines to facilitate and regulate the securities market in India’s first IFSC at GIFT City. This guidelines provides the basic framework for AIFs, such as permissible investors, permissible investments, etc.
STRATEGIC IMPORTANCE OF GIFT AIFS
A. It acts as Catalyst for Inbound Investments and Attracting Global Capital
- GIFT AIFs are designed as specialized vehicles under the IFSCA’s framework, which is built with global best practices. This ensures a transparent, well-regulated environment that is attractive to international investors. The regulatory regime offers tax advantages—such as exemptions on capital gains and other fiscal incentives—which reduce the overall cost of investment. This increases the appetite for foreign direct and portfolio investments.
- The regulatory oversight provided by IFSCA instills confidence among institutional investors. The process is less cumbersome than traditional regulatory environments. With clear norms regarding transparency, disclosure, and portfolio management, GIFT AIFs reduce uncertainties that typically deter foreign investors, thereby bolstering inbound investment flows.
B. Facilitating Outbound Investments
- GIFT AIFs are not only designed to attract capital into India but also to empower Indian fund managers and domestic investors to invest abroad. They operate under a structure that circumvents many of the traditional hurdles of outbound investments, such as cumbersome RBI approvals.
- For Indian institutional and high-net-worth investors, access to global asset classes, international venture capital, and diversified markets becomes easier. This outward expansion supports portfolio diversification while aligning with global economic trends.
Leveraging Liberalized Investment Norms
- The GIFT City framework benefits from alignment with international regulatory practices, facilitating a smoother process for outbound investments and allows domestic capital to be deployed in emerging and developed markets efficiently.
- By offering vehicles for international investments—ranging from equities to real estate and emerging technologies—GIFT AIFs are positioned as a gateway for Indian capital to compete on a global stage.
- Investing in India through the Gujarat International Finance Tec-City (GIFT City) offers foreign investors a range of advantages over traditional direct investment routes.
BENEFITS IN GIFT CITY
The GIFT City AIF framework offers significant advantages over the earlier regulatory regime, primarily the SEBI (Alternative Investment Funds) Regulations, 2012, which were designed for the domestic market. These benefits stem from GIFT City's unique legal and regulatory framework, designed to facilitate international financial services. Some of the advantages are;
1. Tax Incentives
- Corporate Tax Exemption: Units established in the International Financial Services Centre (IFSC) within GIFT City are eligible for a 100% tax exemption on business profits for any 10 consecutive years out of a 15-year period.[2]
- Capital Gains: Transfers of specified securities listed on IFSC exchanges by non-residents are not treated as taxable transfers, and gains arising from such transfers are not chargeable to tax in India if consideration for such transaction is paid or payable in foreign currency. [3]
- Indirect Taxes: Transactions carried out in IFSC exchanges are exempt from Goods and Services Tax (GST)[4] on services received by units in IFSC or provided to IFSC/SEZ units/offshore clients.
- Minimum Alternate Tax (MAT)/Alternate Minimum Tax (AMT): Applicable at a reduced rate of 9% of book profits for companies in the IFSC. Companies opting for the new tax regime are exempt from MAT.[5]
2. Regulatory Advantages
- Single-Win Regulatory Authority: The International Financial Services Centres Authority (IFSCA) provides a unified regulatory regime in GIFT City for all financial services. This single-window approach simplifies compliance for fund managers and companies, reducing the administrative burden. The IFSCA framework itself—established by the Government of India—streamlines regulatory norms that earlier involved multiple regulators such as SEBI, RBI, and the Ministry of Finance.
- Operational Efficiency: GIFT City leverages digital platforms for onboarding, Know Your Customer (KYC), and other compliance processes. This modernization reduces delays, minimizes paperwork, and expedites investor transactions.
3. Foreign Exchange and Capital Repatriation
- Favourable FEMA Provisions: Under the Foreign Exchange Management Act (FEMA) and the SEZ Act, IFSC units in GIFT City are treated as non-residents.[6] This treatment allows for a more liberalized regime regarding the repatriation of profits and capital, facilitating smoother international transactions.
4. Infrastructure and Innovation
- World-Class Infrastructure State-of-the-Art Facilities: GIFT City offers modern infrastructure, advanced telecommunications, reliable utilities, and an ecosystem tailored to support high-tech financial services.
- Diverse Investment Opportunities: Investors have access to multiple asset classes, including international equities, bonds, derivatives, and specialized funds like Alternative Investment Funds (AIFs).
5. Leverage
The SEBI AIF regulations restrict category I and Category II AIFs from borrowing or engaging in any leverage. The only excepting is to meet temporary funding requirements upto 30 days, on not more than 4 occasions in a year and subject to a maximum of 10% of investible funds. Category II AIFs are permitted to engage in leverage subject to consent from investors of the fund, upto a maximum limit not exceeding 2 times of the Net Asset Value. However, these restrictions do not apply to IFSC AIFs subject to the certain conditions.[7]
6. Diversification Norms
As per SEBI Regulations, category I and II AIFs cannot invest more than 25% on the investable funds in any one investee company. For Category III AIFs, this is capped at 10%. However, for IFSC AIFs, these limits do not apply provided appropriate disclosures have been made.[8]
7. Access to a Global Investment Ecosystem
GIFT City is designed to be a conduit for cross-border financial flows. The AIF framework facilitates inbound Investments by streamlined processes for foreign investors to participate in the Indian growth story through GIFT City AIFs and outbound investments by providing opportunities for Indian investors to access global markets through AIFs established in GIFT City, offering diversification benefits.
Advantages for Investor
- Reduced Tax on Capital Gains: As an investor, when you buy and sell specified securities on a recognized IFSC exchange, the capital gains you earn are not taxable in India, enhancing your overall return.[9]
- Liberalized FEMA Provisions: Investments made through IFSCs benefit from more flexible and efficient foreign exchange mechanisms, allowing for smooth repatriation of profits and easier currency conversion. This minimizes delays and currency risk, making your investment liquidity more robust.
- Diverse and Global Investment Opportunities: As an investor, you get access to a wide range of financial instruments—such as international equities, bonds, derivatives, and Alternative Investment Funds (AIFs)—which are available under the IFSC framework. This diversifies your investment portfolio with global exposure.
- Interest Income: Interest income earned by non-residents from monies lent to IFSC units is exempt from tax under Section 10(15)(viii) of the Income Tax Act.
Comparative Advantages
|
Advantages |
GIFT City IFSC Fund |
Traditional VC Fund (Cat I/II/III) |
|
Corporate Tax Incentives |
100% tax holiday on business profits for 10 consecutive years (within a 15-year period), significantly reducing overall tax liability.[10] |
Companies operating under the traditional domestic framework are subject to the standard corporate tax rate (around 22% plus surcharge and cess) without any special exemptions. |
|
MAT/AMT Concessional Treatment |
Reduced MAT at 9% of book profits; Companies opting for the new tax regime (normal provisions) are exempt from MAT. |
Normal MAT/AMT computed at approximately 18.5% of book profits, increasing the effective tax rate.[11] |
|
Capital Gains Benefit |
Gains from transfers of specified securities on IFSC exchanges (bonds, GDRs, derivatives, AIF units, etc.) by non-residents are not taxable where the consideration for such transaction is paid or payable in foreign currency.[12] |
Capital gains arising from similar transactions are subject to standard capital gains taxation. |
|
Indirect Tax Exemptions |
Exempt from STT and CTT on transactions executed on IFSC exchanges; GST on services provided to/from IFSC units is zero-rated.[13] |
Subject to Securities Transaction Tax (STT), Commodity Transaction Tax (CTT), and GST on most transactions, increasing operational costs. |
|
Regulatory Simplicity |
Operates under a unified regulatory framework managed by the IFSCA, which simplifies compliance through digital onboarding and streamlined KYC processes. |
Must comply with multiple regulators (SEBI, RBI, Ministry of Finance), which can complicate and delay regulatory compliance processes. |
|
Foreign Exchange & Repatriation Ease |
Liberalized FEMA provisions: IFSC units are treated as non-residents under the SEZ Act and FEMA, enabling smoother repatriation of profits and easier currency conversion.[14] |
Subject to more complex FEMA processes with potential delays in repatriation and currency conversion for domestic VC funds. |
|
Infrastructure & Operational Efficiency |
Access to modern, world-class facilities designed to support financial services with advanced digital platforms and efficient operational frameworks. |
Generally based in traditional office setups with less emphasis on cutting-edge digital infrastructure, leading to higher operational delays and costs. |
|
Investor Confidence & Transparency |
The modern IFSC ecosystem in GIFT City, with its robust digital infrastructure and unified regulatory framework, instills greater confidence and transparency, aligning with international best practices that global investors expect. |
While regulated under the traditional framework, the multi-agency oversight and less integrated digital systems may not provide the same level of clarity or timely information, making international investors more cautious. |
[1] chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/https://www.giftsez.com/documents/AIFs_in_GIFT_IFSC_Booklet_October_2020.pdf
[3] Section 47(viiab) of the Income Tax Act, 1961
[4] Section 16(1)(b) of the Integrated Goods and Services Tax (IGST) Act, 2017, IFSC Units
[6] FEMA (International Financial Services Centre) Regulations, 2015
[7] https://www.investindia.gov.in/team-india-blogs/ifsc-gift-city-alternative-investment-fund-regime
[8] https://www.investindia.gov.in/team-india-blogs/ifsc-gift-city-alternative-investment-fund-regime
[9] Income Tax Act, 1961, Section 47(viiab).
[11] Income Tax Act, 1961, Section 115JB
[12] Income Tax Act, 1961, Section 47(viiab)
[14] Regulation 3 of FEMA (International Financial Services Centre) Regulations, 2015