Gift City

Biz@India

January-February 2019

Gujarat International Finance Tec (GIFT) City is a pet project of Prime Minister Narendra Modi
aimed at becoming the offshore capital hub of India. The project has been hit by the bankruptcy last
year of IL&FS, the biggest state-owned infrastructure conglomerate, that had a 50 pc stake in GIFT.
By buying out IL&FS, the Gujarat government hopes to keep GIFT City afloat.

On the outskirts of Gandhinagar, the capital of Gujarat, 50-storeyed towers stand tall amidst fertile black soil farms that produce at least two rich harvests a year. On the ground, workers move at a frenetic pace to finish tunnels that are meant to carry not just water and sewage lines from the offices, homes and other buildings, but also connect them with optic fibre. The tunnels are large enough so that garbage collection trucks can move in them, collecting solid wastes from around the town. Welcome to the GIFT City, India’s most modern city and indeed a smart city in every sense of the word.

The project was conceived almost a decade ago, when Gujarat government joined hands with the Infrastructure Leasing & Financial Services Limited (IL&FS) to establish a 50:50 joint venture company. The INR 700 billion (USD 10 billion) project is a ‘smart’ city with high-quality physical infrastructure and includes an international financial services centre (IFSC) structured as a special economic zone and a global financial hub.

Due to huge infrastructure financing and development requirements in the country, the company grew from a small road building and operating firm to an infrastructure giant in about 25 years. In 2014, when newly-elected Prime Minister Narendra Modi announced a major programme to build highways, roads, tunnels, affordable housing and renewable power generation across the country, IL&FS’s ambitions grew and it was one of the biggest beneficiaries of the drive. It won several of these projects, either through direct bidding or joint ventures, but took heavy debt as a result.

When the debt crisis got murkier, the government of Gujarat decided to step in and buy out the 50 pc stake. “We have taken an in-principle decision to buy out the IL&FS stake in GIFT City as we think this project has a very good future. Already, some of the world’s biggest banks and India’s top financial institutions have opened their offices there. We are encouraging every finance company to set up base there,” says Gujarat chief minister Vijay Rupani. Sources in the state government said once the government acquires the stake from IL&FS, it will look for a strategic investor who can take the project forward.

Land and development rights given to IL&FS need to be sorted or else it will be impossible to move on

Blessing in disguise

In the middle of this messy situation, what are the obvious problems GIFT City is about to face?

Business journalist Sucheta Dalal in one of her articles wrote, “If one were to go by the calculations of D C Anjaria, the former director of GIFT City, who blew the whistle on the shocking gold-plating of this project, the Gujarat government could probably demand control of GIFT City without paying anything at all. Anjaria reckons that IL&FS owes the government billions of rupees, even after IL&FS’s entities pocketed multiple fees and charges, in what has been its signature modus operandi. Also, the entire project is built on land that belongs to the people of Gujarat.”

The IL&FS crisis may prove to be a boon for GIFT as in an effort to deal with the crisis, the government has taken several steps that have increased the attractivity of GIFT to financial industry players from India and overseas. Recently the Securities & Exchange Board of India (SEBI), the stock market regulator, allowed alternate investment funds (AIFs), such as private equity funds and venture funds, to operate from GIFT City’s IFSC, providing it a significant boost.

There are other multiple problems with which GIFT City is still entangled with. Land and development rights given to IL&FS need to be sorted or else it will be impossible to move on. Not only the land was given away as a gift to IL&FS, but a hefty management fee and out of pocket expense amount was also being paid to IL&FS over the last few years. To attract global investment, GIFT City needs a clean slate so that trust is built.

There are serious issues with documenting irregularities and defaults by IL&FS’s entities reported by the audit committee. With no one to take the responsibility to the core, it might put many important matters in the black hole leading a gap in the investigation.

As per the JV contract, GIFT City itself has to pay the Gujarat government 1 pc of the income from the sale of development rights as a premium. Since the value of development rights sold is approximately INR 80 billion (USD 1 billion), payment of INR 800 million (USD 11 million) or so is already overdue. And this is how the entire amount is piling up increasing the danger.

Regulatory challenges

If GIFT City has to compete with Dubai, Singapore and Hong Kong – if not with London and New York – it has to have bigger issues to solve even if the state government clears the IL&FS mayhem. Liberal regulations, exemption from heavy taxation, labour laws, and an alternate legal system for dispute resolution will have to be in order.

The National Institute of Public Finance & Policy (NIPFP), a think-tank and autonomous research institute under the ministry of finance of Government of India are critical about it. “The regulations that have come up are in no way different from what applies to mainland India. The RBI wrote the international banking unit regulation. But it doesn’t permit banks to open current or savings accounts in the IFSC,” says Bhargavi Zaveri, consultant, NIPFP, who was part of the team which brought out the report on creating financial SEZs and IFSCs in India. It will be very difficult for a broker sitting in the IFSC to trade on an exchange in IFSC, she says.

As perceived by many top economists, investors, and experts, easing capital controls is the top priority to remove the immediate roadblocks for GIFT City. Also, the taxation system has to be competitive. “If the government expects foreign investors to set up business in an Indian IFSC, it has to offer the same level of taxation as in Singapore, Dubai or London. This will mean getting rid of securities transaction tax,” commented Shubho Roy, another consultant and researcher at NIPFP.

Last but not the least, according to the latest news, many foreign banks and Indian brokerages are going to face the prospect of their licences in GIFT City being cancelled with many of them unable to meet a key rule required to stay put. An entity that sets up shop in the GIFT City needs to earn more dollar income than in rupees. With the government in 2018 clarifying that dollar income coming from services to Indian companies or individuals would not be considered, many of these entities are unable to meet the criteria of operating from the GIFT City, which was set up to compete with established financial centres like Singapore and Hong Kong. The GIFT City will have to overcome all the miseries to prove this otherwise.