An incentive to AIF – GIFT IFSC

By CA. Ninad Saiya , Manager – TransPrice

GIFT City is an emerging global financial and IT services hub, a first of its kind in India, designed to be at or above par with globally benchmarked business districts. Gujarat Gift City is India’s only International Financial Services Centre (IFSC). IFSCs are treated as international tax jurisdictions as they offer several tax benefits and other compliance which are not otherwise available in the country. 

Traditionally, the Global fund managers managing offshore funds were operating from offshore financial centers such as Singapore, Hong Kong, London, Ireland, etc, for making investments into Indian assets. However, since, the establishment of GIFT city, many Global Alternative Investment Funds (‘AIF’) have moved their base as the units set up in IFSC are treated as a “person resident outside India” (i.e., non-resident) which are eligible for various tax incentives.

The investments in IFSC AIF were considered outbound in nature and, therefore, as per The Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (“ODI Regulations”), the investments by an Indian Party (“IP”) into an overseas entity engaged in financial services were not permitted under the automatic route.

However, the recent RBI Index Circular vide RBI/2021-22/38, A.P.(DIR Series) Circular No. 04 dated 12.05.2021 (“the Circular”), has allowed sponsor investments by IP in AIFs set up in an overseas jurisdiction or in an International Financial Services Centre (IFSC) in India to come through the automatic route.

The Circular mentions the following four additional conditions as mentioned in Paragraph B.6 of the Master Direction as well as in Regulation 7 of the ODI regulations that need to be complied with by all IPs making any investment and/or financial commitment towards any overseas entity which is engaged in the financial services sector:

  1. be registered with the regulatory authority in India for conducting the financial sector activities;
  2. has earned net profit during the preceding three financial years from the financial services activities;
  3. has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and
  4. has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.

Hence, this circular allows IPs to setup AIF in overseas jurisdictions, including IFSCs, under the automatic route provided it complies with Regulation 7 of the Notification FEMA 120/2004-RB.

Concluding Remarks

The importance of the above RBI circular is that it provides much needed guidance to Indian Party who are looking to invest in AIF setup in Overseas jurisdictions and GIFT. The relaxation provided in the RBI circular will act as a booster to the concept of GIFT city allowing both Indian and foreign promoters to set up AIFs in the GIFT city. This will ease the process for Indian entities sponsoring GIFT based funds, without going through the tedious and time-consuming process of regulatory approvals and entity set-ups. The relaxation is also expected to resolve the issue of round tripping associated with sponsor commitment and the fund can be invested back into India without the same being treated as round-tripping. However, there are still certain ambiguities which needs to be cleared to attract Indian investors to sponsoring a fund in the GIFT City.

In case you have any questions around the taxation of AIFs or need more information on the GIFT IFSC, you can reach out to us at info@transprice.in