Look a GIFT IFSC horse in the mouth

The move to allow non-bank FPIs domiciled in GIFT IFSC to issue offshore derivative instruments (ODIs) is expected to cash in on the surge in investments after they were introduced last year. Till now, the facility in Gujarat was restricted to banks domiciled in IFSC, and the interest in ODIs among non-resident investors (NRIs) to gain exposure to Indian securities is strong. These instruments also provide issuing FPIs a hedging tool, which enhances their appeal. ODIs, or P-notes, were once the dominant channel for routing overseas investments into Indian markets. But they have lost their lustre after disclosure rules were tightened. ODIs, however, retain a draw among investors seeking confidentiality.

Alongside easing of ODI issuance in IFSC, there is a need to address tax treatment of these instruments. They become even more appealing to NRIs if capital gains are exempted on their transfer. Income from ODIs issued by banks domiciled in IFSC carry this exemption. The main attraction for NRIs of ODIs issued by IFSC entities is certainty under Indian tax law, instead of reliance on treaty benefits. Tax benefits can be denied on issue of beneficial ownership for ODIs issued abroad. Treaty abuse conditions don’t apply to ODIs issued in IFSC.

This should make for a compelling case to investors seeking confidentiality, certainty and, of course, post-tax returns. The regulatory structure is built to favour IFSC as a gateway for capital to India. Aside from policy support, IFSC must build a full suite of financial services offerings to be able to take on older, more established, financial centres to become a significant node for routing capital. Phased policy reduction should increase the level of engagement NRIs will seek from IFSC.


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