A recent Securities and Exchange Board of India (SEBI) circular allowing foreign portfolio investors based out of the Gujarat International Finance-tech City’s (GIFT) International Financial Services Centre (IFSC) to receive up to 100 per cent of their investments from NRIs, overseas citizens of India and resident individuals is a step in the right direction as it will augment inflow of investments into India’s IFSC. Thus far, if fund managers in the GIFT IFSC wished to invest into India, they would register with SEBI as foreign portfolio investors, and would be governed by the SEBI’s foreign portfolio regulations. These regulations lay down that the investment of a single NRI or overseas citizens of India (OCI) or resident Indians (RI) shall be below 25 per cent of the total assets of the FPI and aggregate contribution of this category should be below 50 per cent of the total assets. Now, SEBI says that FPIs investing through the GIFT IFSC can have all the assets owned by NRIs, OCIs and RIs. These investors are likely to be more aware of the investment opportunities in India and may take the GIFT IFSC route to enjoy the tax benefits that the offshore centre offers. Once the fund management industry in the GIFT IFSC attains scale, investors from other countries could follow. Around 114 fund management entities have already registered with the GIFT IFSC and they aim to raise about $8.4 billion from global investors.

The regulator has, however, built in several checks so that identification of the ultimate beneficiary in opaque investment vehicles is possible. SEBI has laid down two options for FPIs from GIFT IFSC who wish to get all their funds from NRIs/OCIs/RIs. One, they can provide copies of PAN or other identification proof all the investors along with their economic interest in the FPI to the depositories. This will ensure that the ultimate owners of the funds in the FPI will be known to the regulator. Two, FPIs which do not want to submit the documentary proof should ensure that the investment vehicle is simple with a single pool of investments. Such funds should be well diversified with at least 20 investors and should not invest more than 20 per cent of the assets under management in a single company.

It is just as well that the regulator has learnt from the past mistakes, when opaque structures in other offshore jurisdictions led to rampant misuse. Checks on round-tripping are indispensable. GIFT City is beginning to attract the attention of domestic and global businesses and investors. At this juncture, it is important that regulators such as SEBI and the Reserve Bank of India contribute to the development of this eco-system through suitable changes in rules, so that the Indian offshore centre offers an environment which is at par with counterparts in other jurisdictions. These relaxations should, however, be accompanied by adequate checks to prevent misuse for nefarious purposes.