The financial hub at GIFT City (Gujarat International Finance Tec-City) IFSC has become a focal point for offshore asset managers looking to establish a stronghold in India’s global financial ecosystem. However, industry experts are now urging the International Financial Services Centres Authority (IFSCA) to introduce regulatory relaxations that would enhance the ease of doing business and make GIFT City more competitive compared to international counterparts like Mauritius, Singapore, and Dubai.
Calls for Reduced Substance Requirements and Higher Migration Limits
Asset managers are seeking two major modifications to the existing IFSCA framework:
- Lowering the substance requirements related to personnel and operational infrastructure at GIFT City.
- Increasing the upper limit of funds that can migrate into a Fund Management Entity (FME) at GIFT IFSC.
Currently, the IFSCA mandates that FMEs must have a genuine physical presence at IFSC, ensuring that key management personnel (KMPs) operate from GIFT City itself. While this rule aims to prevent the establishment of ‘letterbox’ entities, asset managers argue that the stringent requirement makes it costlier for offshore players to establish a base in GIFT City.
In addition, fund managers are requesting an increase in the fund migration threshold, allowing larger funds to transition into an FME without excessive regulatory hurdles. The current $10 million threshold for migration into an FME is seen as too low compared to global offshore standards, and asset managers have proposed raising it to $50 million.
Platform Play: A Step Towards Flexibility
To align its regulations with other leading financial hubs, IFSCA introduced the ‘platform play’ model in its August 2024 consultation paper. The move allowed FMEs to leverage existing infrastructure to provide third-party fund management services to offshore asset managers. This initiative was aimed at reducing entry costs for foreign funds and increasing GIFT IFSC’s attractiveness as a fund management hub.
Under the platform play model, FMEs can not only manage their own funds but also offer services to other asset managers who wish to establish a fund at IFSC without requiring a separate FME license. However, industry players now seek further relaxation of the regulatory framework to reduce operational costs and compliance burdens.
Reducing the Burden of Compliance: The Two-Employee Rule
The existing regulations require each FME to appoint a principal officer and a compliance officer for every new fund launched. This rule ensures regulatory oversight but increases the cost burden on fund managers. Industry stakeholders are now pushing for a single-employee requirement, arguing that maintaining two dedicated personnel per fund is financially unsustainable.
A regulatory expert noted that international jurisdictions offer more relaxed compliance structures. Dubai Financial Services Authority (DFSA), under the DIFC regulatory framework, permits one compliance officer to serve multiple entities—up to five—provided the activities are closely aligned. Industry leaders argue that similar relaxations should be introduced in GIFT City to boost its competitive standing.
Challenges in Obtaining an FME License
Another major concern raised by asset managers is the complexity and time-consuming process of obtaining an FME license. The current process involves multiple steps:
- Securing office space in GIFT City.
- Setting up a corporate entity.
- Submitting applications via IFSCA’s single-window IT clearance platform.
- Obtaining IFSCA’s administrative approval.
- Completing additional registrations, including the eligibility certificate, bond cum legal undertaking, GSTIN, and importer-exporter code.
- Signing and registering a lease deed with the developer.
Only after completing these steps can an asset manager begin operating as an FME. The industry is calling for a simplified and expedited licensing process to attract more fund managers to GIFT IFSC.
Employment vs. Cost: Finding the Right Balance
One of the reasons behind the IFSCA’s insistence on substance requirements is to promote employment at GIFT City. However, industry leaders argue that excessive operational costs deter offshore funds from setting up shop. A flexible regulatory approach—such as allowing a single compliance officer for multiple funds—could lower costs while still ensuring regulatory oversight.
Additionally, asset managers believe that the minimum $10 million asset requirement to migrate to a distinct FME is too restrictive. Increasing this threshold to $50 million would better align with global financial hubs and accommodate larger institutional funds.
Future of Fund Management at GIFT City
While IFSCA is not currently planning to discuss modifications to the platform play framework, industry pressure is likely to push regulators toward a more business-friendly stance. The primary goal of the August 2024 consultation paper was to foster a cost-effective, flexible environment where fund managers could test strategies and scale operations efficiently. However, the current concerns highlight areas where further fine-tuning is required.
Industry leaders and compliance experts agree that balancing regulatory oversight with business flexibility will be crucial in positioning GIFT City as a premier offshore financial hub. The upcoming months will be critical in determining whether IFSCA adopts these proposed relaxations, shaping the future of fund management in India’s only International Financial Services Centre (IFSC).
