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Shloka Mathur

The Evolution of India's International Financial Centre: GIFT City and Regulatory Advancements

[Shloka is a student at National Law University Odisha.]


An international financial centre (IFC) is an intense concentration of a wide variety of international financial businesses and transactions in one location. They have evolved over a long time and have increased their importance over successive years. IFCs soon become a parameter for judging a country’s competence and advancement in the arena of trade and development. An IFC helps a host country by enhancing capital account convertibility, gaining better control over financial instruments, setting benchmarks and pricing for major derivatives and commodities, effectively mobilizing funds, and creating diverse investment portfolios and strategies. Consequently, IFCs have emerged as modern hubs for providing global financial services. 


Historically, the International Monetary Fund identified two broad classifications – traditional IFCs and offshore financial centres (OFCs). Traditional IFCs developed in the 19th and 20th centuries in Europe and the US due to the growth of international trade and commerce. In contrast, OFCs are more recent, emerging in developing countries as specialized jurisdictions. This categorization was made for a better understanding of the entire concept.


Development of IFC in India


In contrast, India, one of the fastest-developing countries, significantly delayed the setting up of a financial centre. The process that should have been fast-tracked and prioritized began only after the liberalization of reforms in 1991. Consequently, the author believes that such a delay puts India at a disadvantageous spot and hinders the development of the financial market to its true potential. This impact is also evident in the loss of potential foreign direct investments (FDIs), a preference for other established financial centres over India, and the migration of talented professionals to these developed hubs.


IFSCA, India’s first financial centre regulator was established in 2020 at the Gujarat International Finance Tec-City (GIFT City), Gandhinagar, Gujarat, under the International Financial Services Authorities Act 2019 to regulate and promote financial services in the IFSC. However, GIFT City is not classified as a traditional IFC like those in Europe or the US, nor does it fit the typical profile of an OFC. Instead, it is a unique financial hub. This initiative seeks to attract global financial services and investments, combining aspects of both traditional and offshore financial centres. It was considered a one-stop hub that formed a unified regulation and held regulatory powers previously held by Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), Insurance Regulatory and Development Authority of India and Pension Fund Regulatory and Development Authority. 


Role of IFCs in an Economy 


IFCs are crucial for the economic growth of the countries that develop them. They provide a conducive regulatory environment, well-trained labour, and tax incentives that help attract foreign investment. Consequently, the boost in FDI can be a significant boon to the economy of any nation. Indeed, like almost all financial services, they have the potential to contribute around 7 or 8% toward the GDP of countries such as the UK and the US, and more than 20% as in the case of Hong Kong. Moreover, these centers facilitate a huge volume of financial transactions that cut across borders, hence they are massive exporters of cross-border services. They can be safely considered vital platforms for innovation and global market access, driving economic growth, job creation, and integration into the global economy.


Recent Developments in IFSC


On 18 July 2024, IFSCA released IFSCA (Board for Regulation and Supervision of Payment and Settlement Systems) Regulations 2024. This regulation led to the creation of a committee that would have certain defined duties, powers and functions emphasizing the payment systems in IFSC. Before these regulations, the payment systems in IFSC were governed by RBI through the Payment and Settlement Systems Act 2007. These regulations were not very favourable for IFSC as they are archaic and not consistent with the financial environment of IFSCA. They did not address the specific needs and were considered standard regulations. Furthermore, there was a lack of a unified regulator regulating the financial transactions hence leading to inconsistencies and authority overlaps. The author is of the view that these regulations have come as a rescue in enforcing proper systems in place. The board is responsible for formulating a composite framework for payment systems – electronic and non-electronic. It ensures that such payment systems are safe, secure and efficient. The board also grants authorization to payment systems, ensuring that only those that meet its security and compliance standards are allowed to operate in IFSC. Additionally, the board mandates payment service providers to implement thorough risk management frameworks. This move aims to fill existing regulatory gaps and boost the overall security of payment systems. India needs to establish the credibility of payment systems in IFSC to attract investments and foreign investors and gain a competitive edge globally. 


Another important step towards the growth of IFSC has been taken by SEBI through its 19 July 2024 circular on Enabling Credit Rating Agencies to Undertake Rating Activities under IFSCA. Through this circular, the gateway for the registered credit rating agencies (CRA) to undertake rating activities in the IFSC has been opened. Further enhancing this initiative, IFSCA on 31 July 2024 issued the circular on Enabling Credit Rating Agencies to Undertake Additional Activities relating to ESG Ratings and Data Products Providers. This circular is consistent with the recommendations made by the International Organization of Securities Commissions in its November 2021 report on Environmental, Social and Governance (ESG) Ratings and Data Products Providers. The report provided 10 recommendations for securities market regulators to consider while regulating ESG Ratings and Data Products Providers, focusing on promoting transparency, good governance, management of conflicts of interest, and robust internal systems and controls.


The rating providers (ERPs) on ESG and the CRAs are the two important entities within the financial ecosystem that guide and influence decisions related to capital allocation and investments. The CRAs play a very significant role in rating the credibility and creditworthiness of the investment providers through ratings given to them about various critical parameters of their debt obligations and their time-to-time payments. They help the investor to a great extent in measuring the element of risk that comes with debt instruments, and thus they exert homogeneous rating mechanisms that finally lead to more efficient capital markets.


The ERPs are focused on assessing the sustainability and ethical impact of investments that would work with environmental, social, and governance factors in mind, which vary to a great extent. They evaluate companies on carbon emissions, labour practices, board diversity, and structures of corporate governance. Presently, investors have become aware, and they have developed a sense of responsibility towards sustainability. ERPs help investors assess companies based on ESG practices. This has led to an appropriate framework that ESG have adopted because investors rely on them while making a decision. Companies with good ratings in ESG attract more investors, while those with poor ratings face higher costs or see the withdrawal of investors.


Conclusion and Way Forward


The aspirations and plans of the regulators are becoming clearer, particularly with the establishment of IFSCA in GIFT City, which has now been around for four years. While there may have been some delays, it is important to remember that this is India’s first International Financial Centre, and we are still in the process of learning and making adjustments. Over the past four years, there has been continuous development, and at this stage, strategies are being carefully planned to ensure future success.


The two important developments that the author has discussed in this blog are the establishment of the IFSCA board and the CRAs and ERPs. The board will focus on formulating policies and controls regarding the payment systems in IFSCA. Exercising proactive authority over the payment systems and standards by the board is of immense importance in a sector that is dynamic with technological innovation. This will, to a great extent, reduce some of the correlated risks to digital payments and hence enhance the stability of the financial system. Bringing CRAs and ERPs under the IFSCA ambit is a masterstroke by SEBI to give a boost to the Indian financial ecosystem. Through this, SEBI wants to increase the credibility and variety of services in the IFSC, which will attract more investments, if not anything else, and make this sector more attractive for the domestic and international markets alike. Now that IFSCA is in charge of overseeing CRAs and ERPs, it is the author's view that such centralized oversight would usher in great accountability and transparency in rating processes. This change will solve some very serious concerns raised over the years regarding ratings by CRAs. It is also further aligning India with international practices where financial services operate in specialized jurisdictions; this becomes important at a time when demand for ESG ratings is increasing. The author believes that a strong regulatory framework can, on its own, position India as a competitive player in the international financial services market. The new circular establishes that any matter relating to the services offered by CRAs or ERPs will henceforth be governed by IFSCA, thereby rendering the regulatory process clean and efficient. This is truly in line with the vision of these changes.


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