Informist, Wednesday, Apr 24, 2024

--IFSCA head: Working on plan to allow CP, CD issuances in GIFT City

--IFSCA head: A few foreign bks have applied to set up GIFT City unit

By Sunil Raghu, Asmita Patil, and Subhana Shaikh

MUMBAI – The market regulator at the Gujarat International Finance Tec-City, or GIFT City, is drawing up a plan to allow for the issuance of short-term debt instruments by corporate entities at the finance hub, International Financial Services Centres Authority Chairman Kalyanaraman Rajaraman said.

The proposed move to allow issuance of commercial papers and certificates of deposit will enable Indian companies and banks to tap foreign capital to meet their short-term funding needs, a provision that is currently not available. However, it would require considerable regulatory changes. "The capital markets team has begun to work on it," Rajaraman told Informist.

The Gandhinagar-based GIFT City is a financial special economic zone set up by the government to boost foreign investments in Indian assets. It is a deemed foreign jurisdiction within the Indian territory, offering investors relaxation on regulatory requirements as well as taxation. The capital gains are taxed at 9% in GIFT City. However, outside the International Financial Services Centre, the dividend income of foreign portfolio investors is taxed at the treaty rate of the country where the investor is based, or at 20%--India's withholding tax rate, whichever is lower.

Currently, the issuance and listing regulations of IFSCA allow listed as well as unlisted entities to raise long-term funds through equity and debt instruments at GIFT City. "As far as ILS (the issuance and listing of securities) regulations are concerned, there are a few amendments that will be happening in the next couple of months," an official aware of the development said.

Any regulatory changes would require permission of the Reserve Bank of India and the Department of Economic Affairs, the official quoted above said, adding that fundraising through short-term debt instruments at GIFT City would be allowed by the end of the current financial year.

IFSCA wants to create an ecosystem under which entities can choose to raise funds for their long-term as well as short-term obligations, the official said.

For the financial year ended Mar 31, funds raised through CDs reached an all-time-high of 9.6 trln rupees against 7.2 trln rupees in 2022-23 (Apr-Mar), according to data compiled by Informist. Fundraising through CPs rose marginally on year to 13.65 trln rupees in 2023-24.

The proposal to allow issuance of CPs and CDs at GIFT City comes at a time when Indian authorities have been stepping up efforts to increase market participation at the international financial centre. The availability of short-term debt instruments issued by domestic companies would diversify the product offerings at GIFT City. As of now, foreign investors at GIFT City are offered a wide range of financial products, including dollar-denominated products, external commercial borrowing, loan syndication and trade finance. On Apr 5, RBI Governor Shaktikanta Das had announced that foreign investors will be allowed to invest and trade in sovereign green bonds at GIFT-IFSC.

Other ongoing initiatives to invite more participation at GIFT City include the proposed establishment of a new clearing house at the finance hub, likely by this calendar year, Informist had reported on Mar 18. Additionally, RBI officials have indicated to market participants that the central bank might tweak some norms regarding trading of rupee NDF (non-deliverable forwards) and ease some foreign exchange management rules to make it a more attractive trading venue, Informist had reported on Mar 12.

REGULATORY IMPLICATIONS

Allowing companies to issue short-term debt papers in GIFT City might work in favour of market development, but it is opposite to the RBI's regulatory stand with respect to foreign investment.

If issuance of CPs and CDs at the international centre is allowed, it may bring in a gush of hot money into the Indian financial system, something that the RBI has traditionally been opposed to. At present, foreign investors are not allowed to invest in Indian corporate debt with maturity of less than one year.

Additionally, banking regulations will have to be tweaked to enable CD issuances by banks in the offshore jurisdiction, sources told Informist. The provision to tap the market at GIFT City could make short-term debt financing available for a wider range of issuers, although it is hard to predict how lucrative the new avenue would be in terms of cost of borrowing, industry players said.

Non-banking finance companies owned by foreign entities could find ready investors for their CPs in banks belonging to the same corporate group as them, experts said. At present, 28 banks operate in GIFT City, of which 12 are foreign banks. Applications from a few foreign banks are in the pipeline, Rajaraman said.

Currently, all external commercial borrowings should have a minimum average maturity period of three years, according to the RBI's external commercial borrowing guidelines. Only offshore borrowing by manufacturing companies of up to $50 mln or its equivalent per financial year can carry a maturity period of one year. End

US$1 = 83.34 rupees

Edited by Tanima Banerjee

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