Gift City IFSC - The Key to Unlocking India's Brimming Potential as A Global Investment and Arbitration Hub

GIFT CITY IFSC - THE KEY TO UNLOCKING INDIA'S BRIMMING POTENTIAL AS A GLOBAL INVESTMENT AND ARBITRATION HUB

The Indian Government's proactive and investor-friendly policy initiatives along with the setting up of the IFSCA as a unified regulator, are steps in the right direction in positioning GIFT City IFSC as India's leading investor-friendly jurisdiction

Over the last century, technology propelled changes in the manufacturing, communications and transportation sectors have played a major role in revolutionizing international trade and commerce. An exponential growth in domestic and international business, trade and commerce has led to the emergence of international commercial hubs globally.

Historically, global financial centers have been in strategically located jurisdictions and so port cities such as Singapore, London, New York, Tokyo and Hong Kong, have developed into the financial capitals of the world. These jurisdictions are now firmly established as integral focal points of international business and financial activities.

Over the last decade, other jurisdictions have set up bespoke financial centers in geographically defined areas within their territorial border. These 'International Financial Centers' ("IFCs"), usually situated within a Special Economic Zone ("SEZ"), feature state-of-the-art hard and soft infrastructure in support of a well-rounded financial ecosystem, aided by sophisticated investor-friendly laws and practices.

These IFCs cater to entities both within and outside the jurisdiction of the domestic economy where they are situated, primarily offering products and rendering services in the financial sector. Beneficial legislation such as less-restrictive economic and regulatory laws and other fiscal incentives, such as tax exemptions, duty-free imports, further attract the interest of investors.

Key examples are the Dubai International Financial Center ("DIFC") and the Abu Dhabi Global Market ("ADGM"), which were set up within the United Arab Emirates ("UAE"), and introduced their own independent legal framework to cater to the global economy. The laws of the DIFC and ADGM are based on the English common law system,1 distinct from civil law principles and Sharia law which govern the rest of the UAE. As a result, the DIFC and ADGM have emerged as attractive financial jurisdictions for international investors, who tend to be receptive to the more familiar principles of common law.

Rationale for setting up an IFC in India

Despite India being a strong contributor to the global economy, foreign investors have shown apprehensions in conducting international business on Indian soil due to a regulatory and legal regime plagued by procedural red-tapism. The Indian Government has in the last decade introduced a number of economic initiatives such as 'Make in India', 'Digital India' and 'Atmanirbhar Bharat Abhiyaan (Self-reliant India), and also put in place measures to ease the setting up of and doing business in India, hoping to attract more foreign direct investment.

The most compelling argument for establishing an IFC in India is its demographic and location. Having a large pool of young and skilled workforce means there is a naturally available and diverse human capital to match the employment opportunities that would arise. India's strategic location at the heart of South Asia and its proximity to important sea lanes with regards to trade connectivity coupled with India's information technology capability and steady economic growth gives it a unique advantage over other jurisdictions.

To provide a conducive business-friendly environment for the world's business community, the Government of India set its sights on establishing a modern financial jurisdiction in the form of an IFC at GIFT City.

GIFT City International Financial Services Center established

In 2007, the idea of India's first smart city – the Gujarat International Finance Tech City ("GIFT City") was visualized at the Vibrant Gujarat Global Investor Summit. Pursuant to the 2015 Budget speech, GIFT City was chosen as the home of India's first IFSC. GIFT City located near Gandhinagar, Gujarat is spread across 886 acres, of which 261 acres was earmarked as a multi-services SEZ and in 2015, notified as an International Financial Services Center ("GIFT City IFSC"). GIFT City IFSC has been created in a SEZ under the Special Economic Zones Act, 20052 ("SEZ Act"). The remaining 625 acres is being developed as a domestic tariff area, focused on local business activities and services.

GIFT City IFSC is intended to compete with the top global financial centers, serving as a hub for international finance and information technology services. The GIFT City IFSC as a jurisdiction has an ecosystem distinct from the rest of India, although situated within its territorial borders. Under the SEZ Act, GIFT IFSC is deemed to be a foreign territory for the purpose of trade duties and tariffs, whilst under the Foreign Exchange Management Act, 1999 (read with the Foreign Exchange Management (IFSC) Regulations 2015, GIFT IFSC entities have been conferred with the status of persons resident outside India.

GIFT City IFSC functions under an independent regulatory framework which is distinct from the rest of India. It is governed by an independent regulatory authority i.e. the IFSC Authority ("IFSCA") established in 2020 headquartered at GIFT City is the nodal regulator for all IFSCs in India. The IFSCA has taken over the powers and jurisdiction of various financial regulators, including SEBI and RBI, extending to IFSCs pan-India, and is intended to be a unified regulator to promote ease of doing business and provide a world-class regulatory environment in Indian IFSCs.

Minimum Government, Maximum Governance: The Indian Government's efforts to develop GIFT City IFSC

A unique feature of the IFSC's exceptionalism is that business may be conducted in any currency other than the Indian Rupee. As a result, the flow of foreign currencies in the IFSC presents a lucrative opportunity for the Government to direct valuable foreign capital into the Indian economy. With this in mind, international stock exchanges have been set up by the BSE and NSE, viz. India INX and NSE IFSC, and offer extended hours of trading in several instruments including debt securities, currency and commodity derivatives in foreign currencies.

Additionally, the Government of India has introduced a slew of beneficial and business friendly concessions / exemptions applicable to entities setting up in GIFT City IFSC. Private and public companies are granted various compliance and administrative relaxations / exemptions from the provisions of the Companies Act, 2013, for example, relaxation of timelines for filing forms and returns, greater administrative flexibility, etc.3 Entities engaged in rendering financial services enjoy the benefits of fiscal incentives.4 For instance, IFSC units are granted a tax holiday for 10 consecutive years (in the first 15 years of commencing operations).

GIFT City IFSC has also been the breeding ground for novel initiatives by the Government. To make it a world-class fintech hub, the IFSCA introduced the Regulatory Sandbox Framework for IFSC entities involved in the Fintech space in October 2020.5 This framework breeds innovation of new products, services and solutions in a controlled environment isolated from the live market on the basis of real market data and information. A similar initiative was the introduction of the Framework for Aircraft Operating Lease6 under which registered lessors in the IFSC can lease aircraft to airline operators. Previously, with the lack of a developed domestic aircraft leasing industry, Indian airline operators have looked to foreign lessors when acquiring aircraft, which has led to higher operational expenses. The introduction of the framework for Aircraft Operating Lease is a step establishing GIFT City IFSC as a global aircraft leasing hub.

Alternate Investment Funds ("AIFs") have assumed a position of great significance in the rapidly evolving Indian economy which is witnessing increasing investment sophistication and diversity. The ability of AIFs to customize and curate products across asset classes, increase diversification, reduce risks and maximize returns, has attracted both domestic and foreign investors in India. As such AIFs are being encouraged to operate in the IFSC to provide investors a structured, sophisticated, and state-of-the-art investment route. The SEBI (International Financial Services Center) Guidelines, 20157 and Operating Guidelines for Alternative Investment Funds in International Financial Services Centers8 provide a broad framework for AIFs set up in the IFSC.

In the IFSC, AIFs offer investor flexibility, in that they can be set up in the form of a trust, company or LLP and can invest in securities which are (i) listed in the IFSC, (ii) issued by companies incorporated in the IFSC, as well as (iii) issued by companies incorporated in a foreign jurisdiction9. Given the significant and substantial benefits offered to AIFs set up in IFSCs, it is no surprise that several AIFs are lining up to set up shop in GIFT City. Avendus Capital, one of India's largest players, became the fourth firm to set up an AIF in GIFT City in September 2021.

Dispute Resolution in the IFSC

Arm-in-arm with a holistic financial ecosystem which is conducive for business activities, there must be a robust and effective dispute resolution framework – comprising independent courts and alternate dispute resolution ("ADR") services. For a dispute resolution system to be effective, the ease of enforcement of judicial decisions/awards holds vital importance. Accordingly, the jurisdictions, within which the IFCs are located, have clear laws to enforce the judgments / awards rendered by the courts / arbitral tribunals of the IFC concerned.

Recognizing that most cross-border commercial transactions include arbitration as the preferred mode for dispute resolution, over the last decade, there has been a concerted pro-arbitration approach by the Indian Government, recognizing that increasing efficiencies in arbitration and strengthening the enforcement process would increase its attractiveness as an investment destination. To that intent, key amendments were made to the Indian arbitration regime, in 2015, 2019 and 2021, in a bid to establish India as a pro-arbitration jurisdiction.

A truly international arbitration institution with sophisticated arbitral rules drawing on the best practices in international arbitration to administer the conduct of arbitral proceedings seated within its jurisdiction is on the cards. The Singapore International Arbitration Center ("SIAC") opened its representative office in GIFT City in 2017.10 Additionally, India's first arbitration and mediation center exclusively focusing on shipping and maritime disputes - the Gujarat International Maritime Arbitration Center ("GIMAC"), is being developed by the Gujarat Maritime University and the Gujarat Government, and will form part of the Gujarat Maritime Cluster located at GIFT City.11

The 2022 Budget has further strengthened the Government's bid to establish a state-of-the-art dispute resolution mechanism by announcing an international arbitration center to be set up in GIFT City IFSC. An international arbitration center in the IFSC would go a long way in providing investor comfort in enforcement of contracts and enhance ease of doing business in the IFSC.

As mediation becomes more popular, it is hoped that the proposed bespoke legislation for mediation, will ensure amicable resolution of disputes and permit enforcement of mediated settlement agreements.

Opportunity for Third-Party Funding

Third-party funding refers to an arrangement between a funder and a litigant in which the funder 'funds' or provides monetary support to a litigant for pursuing and/or enforcing a claim, in return for a share in any ensuing award or settlement. The funding provided is 'non-recourse' so that the funder recoups its investment (with a profit if any) only in a successful outcome of the action, and not otherwise.

While there exists no specific formal legislation dealing with litigation financing in India, the prevailing view is that it is permissible, both under the Code of Civil Procedure, 1908 (governing the procedure of civil actions in courts), and the Arbitration and Conciliation Act, 1996. Various courts have also upheld funding agreements, albeit perhaps not with a sophisticated specially set up litigation funder. However, the Supreme Court in Bar Council of India v A.K. Balaji,12 noted that there was no restriction on third-parties (as long as they were not lawyers acting in the case), to fund a litigation.

Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.