Finance Minister Arun Jaitley on Friday formally kick-started the country's first international financial services centre (IFSC) at the GIFT City in Gandhinagar, Gujarat. Jaitley hinted that the government is trying to present a taxation regime that is internationally compatible and non-adversial. In fact, there are many issues that still need support from the government. In an exclusive interview with BT's Anand Adhikari, the MD & Group CEO of Gujarat International Finance Tec-city Company Ltd, Ramakant Jha, talked about the work in progress. Excerpts:
Q. Will tax concession be a major deciding factor for the success of IFSC?
A. We are in competition with other global financial centres where they have a very liberal tax regime from zero to 10 per cent. Naturally their margins are also very low because of competition. Global investors have a choice today to go to Singapore, the US or Dubai. So the tax rate becomes a very decisive factor. If they have to pay lot of taxes here and that too in a greenfield global financial centre, that will be a deterrent. We have asked the government to make it competitive. Those are also established centres. Ours is a greenfield. Whenever you start something new you need support from the government. Once it reaches a certain level, no support is required. We believe the tax rate should be equal to but not more than other financial centres.
Q. Is zero tax rate also on the table or completely ruled out?
A. Dubai financial centre is zero tax. Malaysia is 3 per cent. Singapore was earlier 5 per cent and now it is 10 per cent. We are suggesting if not zero but make it at least equal to 3 per cent. We can also opt for something like a tax holiday in the initial few years rather than saying zero tax and later putting a reasonable tax rate.
Q. The regulatory framework for banks, stock exchanges and insurance companies is now ready. What is the next step for you?
A. We need an alternative dispute resolution system. Today, our judicial system is well respected and transparent but it also takes a long time. Financial services cannot wait that long. In all the global centres, there is an alternative dispute resolution system. They have an arbitration and appellate body to resolve disputes faster. The disputes globally are generally settled in three to six months' time. We have flagged this off to the corporate affairs ministry, which is also under the finance minister, to have an alternative system. They are working on it. They have appreciated our points. In fact, a full-fledged alternative judicial system may require amendment to the Act. There can be an alternative arrangement by carving out a special court for IFSC.
Q. What about Companies Act?
A. IFSC is a deemed foreign territory. Our Companies Act is meant for Indian companies and hence not applicable for offshore units. We have suggested the government to define units operating in IFSC as a foreign company. This will exempt them from many of the requirements under the Companies Act. We are in dialogue with the government.
Q. When do you think these issues would be sorted out?
A. I expect everything in next one year. The government has acted very fast on the rules and regulations where the RBI, IRDA and Sebi have issued the new regulations. Since we also need certain amendments which will go to Parliament, I expect things to take shape by next budget.
Q. So when we will see the first transaction in IFSC?
A. We expect it in the next financial year 2016/17. Some companies like offshore banks may be in place. Both the exchanges -NSE and BSE, which have signed MoUs with us, will also come. But we expect mostly of Indian origin companies to operate in the IFSC in the initial stages. We have already allotted 13 million square feet, which is roughly 15-20 transactions.
Q. What are the big risks in operating a global financial centre?
A. Our regulators - RBI, Sebi and IRDA -- are well versed in risk management and oversight. Most banks also have operations abroad and they understand the risks in dealing with foreign exchange. So I don't see any risks as of now.
Q. How many years it will take for IFSC to compete with global centres like Singapore?
A. It will take at least 10 years. In one year's time, the activities by Indian players will start, and global companies would come later when all regulatory clarity is in place. Our Gift city IFSC has a good advantage of skill manpower in India and also the cost of transaction, which is very less.
Q. Why will NRIs invest in dollar deposits in a bank in IFSC when they can deposit it in the US or Singapore ?
A. Those who are living in developed countries will not come to IFSC. We have millions of people living abroad in countries other than the US, UK or Singapore. Take for example, there are millions of Indians working in Yemen, Iraq, Lebanon and other unstable countries. Their money or savings are not safe in those countries. In fact, they will feel very safe to invest in India's IFSC. After all, it is also our responsibility to help them. Why are we evacuating Indian people from Yemen today? This is because they are our citizens and we have a moral responsibility. Similarly, IFSC would help them in keeping their foreign currency deposits in a safe country. Our interest rates are better here. They are also Indian passport holders, which makes the KYC (know your client) easier.
Q. What, according to you, are the lending opportunity for banks?
A. Today, regulations by RBI have restricted the banks to lend money only to JVs and wholly owned subsidiaries of Indian companies. We will see the experiment and gradually open the doors. The banks will also have opportunity to route global money by way of FDI through IFSC route. Similarly, if stock exchanges operate, there again will be opportunity for banks.