Monday, 28 November, 2022
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Indian residents can now invest in GIFT City under LRS, but RBI isn’t thrilled about it

The IFSC regulator has approved banking regulations for IBUs. It has allowed resident Indians, with a net worth of not less than $1 million, to invest in IBUs.

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Mumbai: The International Financial Services Centres Authority (IFSCA), the regulator for IFSCs in India, has allowed resident Indians to use the Liberalised Remittance Scheme (LRS) to invest in the IFSC at GIFT City in Gujarat. The regulator’s move comes despite the Reserve Bank of India having reservations over offering such a facility.

The IFSCA approved the International Financial Services Centres Authority (Banking) Regulations, 2020, last month laying down the requirements for setting up IFSC Banking Units (IBUs).

According to its 11 November statement, resident Indians, with a net worth of not less than $1 million, are now allowed to open foreign currency accounts in any freely convertible currency at IBUs to undertake any permissible current or capital account transactions under LRS.

Under the central bank’s LRS, banks can freely allow remittances by resident individuals up to $250,000 per financial year for any permitted current or capital account transaction or a combination of both. The scheme is not available to corporates, partnership firms, HUFs, trusts, etc.

The IFSCA move paved the way for retail participation in GIFT City for the first time since its inception in 2015, following demand from banks.

Also read: Wave of foreign money threatens RBI’s tight grip on rupee

RBI’s issues with the facility

The RBI has several reservations over allowing the scheme for GIFT City. Firstly, it defeats the purpose of setting up an IFSC — attracting foreign investment, and not investments by Indians. “GIFT City is meant for getting dollars from the rest of the world, not from India,” a central banking source said.

Secondly, allowing LRS would lead to unmanageable growth as individuals could be misled thinking they are investing in India.

“Today, a person may not invest in say stock listed in say New York or London, because there is a natural hesitation. The person does not know the foreign market. Just because it is permitted, one does not invest in foreign stock in foreign markets. So, there is a natural, inherent risk management available,” said the source.

“If LRS is allowed for GIFT City, because of the proximity people can be misled easily. Indian entities are allowed to operate there, banks, brokers etc. Citizens may not easily understand the difference. They will think GIFT City in Ahmedabad is an Indian location. But legally it is not. They may not appreciate the difference. That can lead to over risk-taking,” the source added.

But the central bank’s biggest concern is round tripping — money that leaves the country through various channels but comes back as foreign investment.

“We want FDI and FPI from foreign citizens, not Indian citizens,” a second RBI source said. “Once you send money via LRS in GIFT City and buy shares in the stock exchange there, it will amount to round tripping.”

Also read: India, US are world’s most investor-friendly for portfolio disclosure by funds, study finds

Level playing field

GIFT City officials, however, view the concerns of round tripping as overplayed. According to them, it was only fair to include LRS for an IFSC.

“LRS allows residents to invest up to $250,000 outside India. One can buy properties, shares, any other investment products available outside India. What is happening now is that with more and more exposure to global markets, people sitting in India can invest in Dubai or Singapore,” said a GIFT City source, who was in favour of allowing LRS.

One of the main reasons for allowing this facility in an international financial centre is to have a level playing field for the banks operating there.

“The banks and investors were asking for this LRS activity. A bank’s Dubai branch can handle the LRS money but the same bank’s IFSC branch cannot handle it. This is not parity. This way the bank is better off in Dubai or Singapore than India,” said the source.

According to Tushar Sachade, Partner, PwC India, “There was no reason for IFSCA not to allow this because today LRS is allowed in all offshore centres like Singapore or Mauritius. There is no reason for not allowing it in the GIFT City.”

He said the facility will increase retail participation from India in the GIFT City and some new products could emerge like LRS funds, which could focus on investment in offshore markets.

On round tripping, Sachade said there should be less concern if the LRS money is going to an Indian IFSC rather than a foreign country where the regulators will have no oversight.

“I don’t think that (round tripping) should not be a concern. Because the IFSC Authority is set up under Indian laws. So, there will be better governance. In fact, the concern over round tripping may be more prominent in offshore centres where the Indian regulators have no say. They should be more comfortable with the IFSC Authority on this issue which is set up more near to the shore under Indian laws,” he added.

Earlier in August, the government had appointed four members to the IFSCA, who are the representatives of four financial services regulators — RBI, Insurance Regulatory and Development Authority of India, Securities and Exchange Board of India, and Pension Fund Regulatory and Development Authority.

Safeguards in place

The GIFT City source pointed out that safeguards are in place for the activity as a category of qualified investors were defined as an individual with a net worth of $1 million.

“If someone’s net worth is $1 million, then it is assumed the person is better informed, he can utilise this platform knowing what the products (are), what risk is there… he will be aware,” the source said.

Sachade also said the IFSC was not only meant to attract foreign capital as the aim was also to bet outbound money (from India) going to offshore centres.

“IFSC is basically to onshore the offshore financial services. Whether the services are rendered to a resident or a non-resident is not important. The foreign offshore financial centre are meeting the needs of the Indian residents for investing in the offshore market. The same should be extended for the purpose of IFSC also,” he said.

“It is not only to get offshore money into India but also for offshore money going abroad. It is to replace the financial services being rendered out of other offshore centres like Singapore, Hong Kong. It is not only to do with in-bound but also to do with outbound,” added Sachade.

When the GIFT City was created, RBI initially allowed only wholesale banking activity and not retail. It wanted on-ground activities to stabilise first before opening up for individual participation.

“Banks and investors were asking for retail operations for a long time. The banks in IFSC will not be able to grow without retail. With the retail ecosystem now being allowed, it will help the IFSC to grow,” the source said.

So far, 15 banks have been given approval to set up banking units in the GIFT City and 13 have started their operations. Foreign lenders like Citibank and HSBC have also now been allowed to set up their banking units in the city.

Also read: Inflation targeting ‘loses meaning’ if band is made too wide – RBI Governor Shaktikanta Das


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