In a significant move aimed at bolstering India's International Financial Service Centre (IFSC), the Reserve Bank of India (RBI) recently announced measures that promise to cement the position of GIFT City (Gujarat International Finance Tec-City, which is India's only IFSC) as a viable financial hub.
On July 10, 2024, the RBI allowed Indian residents, for the first time, to remit funds to GIFT City for all purposes permitted under RBI's Liberalised Remittance Scheme1. This is a significant change from the erstwhile rules which put heavy restrictions on remittance of funds under the Liberalised Remittance Scheme into IFSCs.
Story so far
The Liberalised Remittance Scheme (LRS) was introduced in 2004 by the RBI, to allow remittance of funds by resident individuals for specified purposes. As it presently stands, under the LRS, an Indian resident individual is permitted to remit up to USD 2,50,000 per financial year outside India for any permitted current or capital account transaction or a combination of both2.
Established in 2015, the GIFT City was envisioned as a global financial and technological hub. One of the aims behind setting up of the GIFT City was to bring back to India the numerous financial transactions that were being undertaken in overseas financial centres by Indian corporates and individuals and to further develop the Indian markets. The goal was also to attract Indian corporates and individuals to use GIFT City as a gateway for their outbound investments. However, until February 2021, Indian residents were not permitted by the RBI to remit funds to the GIFT City under the beneficial Liberalised Remittance Scheme.
Recognizing the need to broaden the financial markets in GIFT City and to increase the appeal of GIFT City among Indian residents, the RBI initiated the relaxation of the restrictions on remittance of funds under the LRS.
In February 2021, for the first time, the RBI allowed Indian residents to remit funds under LRS to IFSCs set up in India3. To facilitate such investments, an Indian resident was allowed to open a non-interest-bearing Foreign Currency Account in the GIFT City. However, these funds could only be used for investing in securities issued by non-resident entities in the GIFT City. Additionally, the rules did not permit parking of funds in the foreign currency account and required all idle funds to be remitted back to India within 15 days.
The end-use restrictions and the repatriation requirement made GIFT City unattractive to Indian residents, who seemed to prefer other foreign jurisdictions which offered them the flexibility to use funds as per their requirements and also to park funds for future use.
In response to the feedback received from various stakeholders, the RBI, in April 2023, announced the withdrawal of the repatriation requirement, permitting the parking of funds in the GIFT City4. This change signalled RBI's commitment to bring GIFT City at par with global financial centres.
This was followed by another notification from the RBI in June 2023, allowing Indian residents to use funds in their foreign currency accounts in IFSCs to pay fees to foreign universities or foreign institutions in IFSCs for pursuing courses in financial management, fintech, science, technology, engineering, and mathematics5.
New Regime: July 2024
In a pivotal push to make GIFT City more attractive to Indian residents and to position it competitively alongside global financial centres, the RBI issued a notification on July 10, 2024, whereby all restrictions on remittances by Indian residents under the LRS have been removed ('July 10 Notification'). As a result, now Indian residents are permitted to remit funds to IFSCs (GIFT City) for all permissible purposes under LRS for:
- availing financial services or financial products as per the International Financial Services Centres Authority Act, 2019 within the IFSCs (GIFT City); and
- all current or capital account transactions, in any other foreign jurisdiction (other than IFSCs) through a foreign currency account held in IFSCs.
Impact and Significance
The July 10 Notification represents a watershed moment for the GIFT City. The new regime should usher in business and opportunities for the financial ecosystem that has been painstakingly created over the years in the GIFT City.
RBI reports indicate that in FY 2023-24 remittances under the LRS were in excess of USD 30 billion, with approximately USD 900 million for deposits and USD 1.7 billion for investments in real estate and stocks. The new rules would allow the banking ecosystem in GIFT City to participate in such high volume of outflows, forex transactions and deposits.
In these times of global turmoil, the ability to park funds within the Indian territory, in foreign currency and to protect it against currency fluctuations and inflation, would be a game changer for Indian residents. The new regime will also allow Indian residents to truly leverage the GIFT City as a platform for overseas investments.
Conclusion
The GIFT City offers myriad advantages to Indian residents in terms of a robust regulatory framework, oversight by a vigilant and progressive regulator and a diverse bouquet of services. By easing the flow of funds from Indian residents into the GIFT City under LRS, RBI has brought the GIFT City at par with any other global financial centre for Indian residents. With these changes in place, Indian residents would feel more comfortable in using the GIFT City infrastructure and banking ecosystem for their overseas investments and expenditures.
The new regime will give GIFT City the much-needed push towards becoming a competitive alternative to other global financial centers like Singapore, Hong Kong, and Dubai, for Indian residents, and making it a true gateway for Indian investors seeking international exposure.
Footnotes
2. Master Direction - Liberalised Remittance Scheme (LRS)
3. Notification dated February 16, 2021 for remittances to IFSCs under LRS
4. Notification dated April 26, 2023, for remittances to IFSCs under the LRS.
5. [5]Notification dated June 22, 2023, for remittances to IFSCs under the LRS
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