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GIFT needs LRS, Rupee ECB, will try to convince RBI,

consult IT: Injeti Srinivas
BCCL - Non Copyright

Like pursuing the use of LRS, Srinivas will take up with RBI to let banks in GIFT IFSC offer r̀upee external commercial
borrowings’.

Synopsis
On the applicability of harsh Indian laws like PMLA, Black Money Act and Benami Act, the IFSCA
chairman said, “No one is saying KYC should not exist, but these laws should dovetail to the
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functioning
trade more lots and nature
with the sameof the business in IFSC.
capital.
By SUGATA GHOSH
ET Bureau

Last Updated: Aug 10, 2020, 07:28 AM IST 5

MUMBAI: As New Delhi hopes to give wing to its fledgling international financial
centre in Gujarat, senior bureaucrat Injeti Srinivas prepares to walk the tortuous
road where he has to persuade conservative Indian regulators, push new rules and
products, and strike a balance that would tempt investors as well as convince the
taxman.
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“We have to be flexible and indulgent when it comes to products in order to attract
Abc Small
investors with risk appetite. I feel resident Indians should be allowed to use the
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Liberalised
Abc
Remittance Scheme (LRS) to invest in the International Financial
Normal
Services Centre. There is no sound rationale in disallowing it.. Also, banks in IFSC
shouldAbc
have the flexibility give rupee ECBs
Large(foreign currency loans denominated in
rupees),” said Srinivas, who was appointed as chairman of IFSC Authority (IFSCA)
last month, in an interview with ET.
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`E cluding GIFT from LRS is Unfair’

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Under LRS, a resident Indian can invest $250000 a year to hold bank accounts, buy
stocks in the spot market, and properties abroad. But RBI, amid concerns over fund
round-tripping and other sharp practices, disallowed the use of LRS by local
investors to trade in IFSC bourses or open accounts with GIFT bank branches.
Srinivas thinks such concerns are overplayed. “In fact, the central bank and other
authorities can easily track the flow of LRS funds invested in GIFT. Today, it’s
virtually impossible to trace the money invested (under LRS) in Dubai or other
jurisdictions...If LRS exists, excluding GIFT is unfair. We will take it up with RBI and
try to convince the.. I don’t foresee any turf battle with the domestic financial
regulators,” said the 1983 batch IAS officer from the Odisha cadre who has three
years to make a difference.

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The newly formed IFSCA is the unified authority to regulate all financial services in
international
Abc financial services centresSmall
in India.

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Besides setting up a financial servicesNormal
Abc hub in Asia that would compete with
Singapore and Hong Kong, the idea of IFSC also emanates from the need to claw
back markets
Abc that India has lost to offshore
Largecentres and offer services that Dubai,
Mauritius and other jurisdictions provide. “But whatever treatment is given to
Mauritius or Singapore should be given to GIFT. That is quite straightforward but
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may require changes in regulations, legal amendments,” said Srinivas who believes
that GIFT IFSC, which has seen tweaking of rules within the existing framework,
will now have to be taken to the next level.

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Though investors from Mauritius and Singapore have to pay capital gains tax -- 15%
on short term gains and 10% on long term gains for listed stocks, and 30% on short-
term gains and 10% on long term gains for unlisted stocks -- they are spared of the
20% tax that a fund set up in GIFT has to fork out for gains from trades in derivatives
like futures and options.

‘A Delicate Balance’ on Substance

In tackling questions raised by tax authorities on whether investors coming from
Mauritius and Singapore have a real presence there or simply operate as paper
entities with post office addresses to claim tax benefits, both have put in place
‘substance’ rules that require investors to hire office space, employees, and hold
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board meetings.
Abc Small
In this context some of the stakeholders have told IFSCA to come out with a
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substance
Abc rule to avoid being pulled up by the Income tax department. This,
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according to Srinivas, requires a “delicate balance”. “There has to be a substance
principle.
AbcWe can in no way have shell companies,
Large invite dark money, and violate
standards set by the Financial Action Task Force (which frames anti-money
laundering rules). At the same, we must recognise that it will be a dampener if rigid
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regulations force funds, banks and other business entities to shift employees lock,
stock and barrel to IFSC.”

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“Professionals may not want to stay till there is life in IFSC, and there will be no life
unless they stay. It’s a bit of a chicken and egg story. We have to be nimble footed. A
billion dollar fund can be managed by five people. Should regulations require all five
of them to compulsorily relocate to GIFT? That may not work. We have to be
reasonable on substance. We would take the Income Tax department on board..i
must say the tax department has been very open to suggestions and flexible on these
matters in the last two years,” he said.

On the applicability of harsh Indian laws like PMLA, Black Money Act and Benami
Act, the IFSCA chairman said, “No one is saying KYC should not exist, but these laws
should dovetail to the functioning and nature of the business in IFSC. 99% should
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not suffer because of the suspicion on 1%..We have to keep in mind what competitors
are doing.”
Abc Small
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AllowAbc
Rupee ECB, tap Diaspora Normal

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Large

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Like pursuing the use of LRS, Srinivas will take up with RBI to let banks in GIFT
IFSC offer `rupee external commercial borrowings’ – similar to ‘masala bonds’, these
are foreign loans denominated in rupees where the exchange risk lies with the
lender. For small and mid-sized companies, such loans may work out a little cheaper
than the cost involved in borrowing in foreign currency and hedging it. “Banks in
London and Singapore can offer rupee ECBs. Why can’t banks in GIFT offer it?,“ he
said while adding that a part of the business that Indian banks do abroad can move
to GIFT. “All big companies have treasury offices outside India. Indian banks hold
large dollar assets in branches abroad, and a predominant part of it comprises of
exposure to Indian business groups. Why can’t this business move to GIFT?”

Since June RBI has allowed bank branches in GIFT to cut currency deals in the non-
deliverable forward (NDF) market (where banks and funds in Singapore, Hong Kong
and London bet on the movement of Indian rupee against US dollar).

“Large economies like China and Japan,” he said, “have tapped their domestic
strengthens to grow. We too should do it to create a critical mass in GIFT. The size
and strength of our economy and diaspora must be leveraged..There is a 20 million
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strong Indian diaspora with assets of $3 trillion. It will make a difference even if you
get a small
Abc percentage of that in GIFT banks.
SmallIf a foreign bank holds that money,
backstopping it would be primarily the job of the bank’s home country regulator.
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Besides, Basel norms would prevail and
Abc IFSCA too will regulate all compliances
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arising out of it.” GIFT is creating an IT systems to support its regulatory framework.
“I feelAbc
the system of inspectors with their template of annual inspection does not
Large
work anymore,“ said the IFSCA chief who has a mental picture of transforming GIFT
in a way where a pharma company in Bangladesh, a tea plantation in Sri Lanka, or
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businesses in Nepal , along with Indian companies to raise capital.

Even though perceived as a pet project of Prime Minister Narendra Modi, GIFT has
till now made baby steps, by largely tweaking the rules within the existing
framework. While GIFT City spread over 886 acres near Ahmedabad has attracted
companies like TCS, BankAm and Oracle and many ECB deals are booked in the
IFSC, the exchanges lack liquidity and the IFSC has long way to go in emerging as a
regional financial hub. Will IFSCA change that? Will Srinivas succeed? “The IFSC
Authority will work to put the pieces in the jigsaw puzzle. There is determination in
the government which will manifest itself,” said the seasoned bureaucrat.

HIGHLIGHTS: IFSCA PLAN TRANSFORM GIFT?

# Be flexible, indulgent in allowing products

# Do not blindly replicate all laws

# Careful framing of the ‘substance’ rule

# Allow LRS, rupee ECBs

# Tap a slice of the diaspora savings

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5 COMMENTS ON THIS STORY
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58 minutes ago

Yeshwant Pande
Abc Large
If GIFT is being developed kn the line quasi free ports like Singapore, Dubai etc. or
Totally free like St.Kitts, Panama etc which are taboo then its Read More ▼
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1 hour ago

Niraj Harodia
JPNR Corporate Consultant have their consulting office in GIFT City, still waiting for lot
of opportunities.

1 hour ago

Pramendra Khokher
A good idea rusting away and will soon become irrelevant, killing all the investors lured
into setting up there. A story that is not being played out Read More ▼

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