SEBI Chairman’s speech dated August 23, 2019 at the Seminar on “GIFT IFSC: Onshoring the Offshore”
“GIFT IFSC- Onshoring the Offshore”
August 23, 2019; GIFT City, Gandhinagar
1. Ladies and Gentlemen, it gives me great pleasure to be here amongst this august gathering today. I thank GIFT City and the organisers of this event for giving me this opportunity to share some thoughts with all of you.
A. Background on IFSC
2. Globally, the concept of an International Finance Centre or an IFC has been prevalent for quite some time and the experience in various jurisdictions has been quite encouraging. Various IFCs have been set up worldwide, amongst which the centres located in London, New York, Singapore and Dubai are among the prominent ones. These centres have contributed significantly to the GDP and created large employment opportunities in such jurisdictions.
3. The idea to create an International Financial Centre in India has been under consideration for quite some time. The sheer size of the Indian economy, its growing integration with the world, and the high growth rates of cross-border flows imply that India is a large and growing player in the International Financial Services space. Considering that the global market is getting increasingly connected through technology-leaps, it is inevitable that India must figure on the map of the global financial centers network.
4. The Union Government Budget of 2015 announced that India’s first IFSC would be set up in GIFT City. The progress made by GIFT-IFSC in the last few years has been truly praise worthy, but to repeat what Robert Frost had said “Miles to Go before I Sleep”.
B. Regulatory initiatives by SEBI on IFSC
5. IFSC is an overall financial services focused centre involving multiple areas such as banking, insurance, capital markets, etc. Financial sector regulators viz. SEBI, RBI, IRDAI and PFRDA have issued appropriate guidelines/ notifications specific to the IFSC. The Central Government has announced several tax incentives for operations in GIFT IFSC. The State Government has also provided incentives including stamp duty exemption for entities having registered office in GIFT for capital market activities. A draft Bill for setting up a Separate Unified Regulator for IFSC is also under consideration of the Parliament.
6. While I would share my thoughts generally on the IFSC, my focus is more specific to the capital markets and initiatives taken by SEBI on IFSC.
7. The first step taken by SEBI on IFSC was to issue general guidelines on IFSC way back in 2015. Specific guidelines on intermediaries, fund raising, market infrastructure institutions, funds, etc. have also been issued subsequently. To put it honestly, we are still in a learning and evolving stage.
C. “Onshoring the offshore”– various dimensions
8. India is a large purchaser of International Financial Services or IFS from the rest of the world and as markets move offshore, India’s imports of such Financial Services will only grow. Onshoring such IFS is the key to reduce such imports and rather creating job opportunities and capabilities within India. Such onshoring underlies the very idea of an IFSC such as GIFT City and hence, the title of the seminar ‘Onshoring the Offshore’ is indeed quite apt. In the context of capital markets, ‘Onshoring the offshore’ involves certain specific areas which I would like to focus on.
Market Infrastructure Institutions:
9. The first such area which I would like to touch upon is Market Infrastructure Institutions.
10. The key to the success of any financial centre is to have sound and efficient market infrastructure institutions or MIIs such as stock exchanges, clearing corporations and depositories. Onshoring the offshore in this context has two objectives. Firstly, bringing the offshore trading on India-focused products which currently happens in various countries across the world to the IFSC and secondly, making the IFSC a global hub for trading on products from across the world.
11. Keeping these objectives in mind, the broad requirements for setting up of such MIIs in an IFSC including eligibility, shareholding limits, net worth requirements, exemptions from certain requirements, etc. were issued by SEBI in its guidelines on IFSC in 2015. Relaxed net worth and other requirements have been provided for MIIs to be set up in IFSCs to provide a boost to such centres. Foreign exchanges have also been permitted to set up subsidiaries to act as exchanges in the IFSC. I am happy to see that these initiatives have borne fruit.
12. GIFT City has now important MIIs in form of two exchanges and two Clearing Corporations which have been set up and are up and running. We understand that the two depositories in India are also in the process of setting up their branches in GIFT City. We have also enabled arrangements with international depositories and accordingly, the exchanges have tied-up with certain International Central Securities Depositories as well.
13. MIIs at GIFT IFSC have set up world class technology platforms at par with the MIIs at other IFSCs across the world. The exchanges at IFSC have adopted a single segment approach for all asset classes – equities, commodities, currencies and fixed income securities and launched products across the assets classes. Subject to regulatory approvals, other innovative products including Depository Receipts are also expected to be launched. I hope such innovative initiatives continue which will definitely give a boost to the financial markets in GIFT City.
14. To create a global financial hub targeting global investors, having trading hours suited to global investors is important. Accordingly, SEBI permitted the stock exchanges in IFSC to decide the trading hours based on cost-benefit analysis which may extend upto 23 hours and 30 minutes in a day for all product categories. The exchanges have accordingly implemented extended trading hours enabling international investors to trade from anywhere across the world through multiple time zones.
15. An important aspect to assess the success of the MIIs is the turnover on various products on the exchanges. It is encouraging to see that the Average Daily Turnover on both the exchanges on GIFT IFSC is around three USD billion. With new products being launched and the existing products picking up, I expect the turnover to only increase.
16. It is encouraging to see that the equity index derivatives market has picked up quite well on both the exchanges. 2018-19 saw a turnover of USD 179 bn across both the exchanges. The first four months of 2019-20 have already seen a turnover of USD 183 bn which is quite encouraging.
17. On the commodity front, the turnover on the gold futures has seen significant pick-up. The turnover stood at USD 52 bn for FY 2018-19 and this year i.e. 2019-20 has already seen a turnover of USD 15 bn in the first four months.
18. An important object of the IFSC is to bring trading of Indian products in other countries to India on IFSC platform. In this context, NSE and SGX had submitted proposals to SEBI and Monetary Authority of Singapore (MAS) to enable shifting of trading in Nifty and Bank Nifty futures contracts from Singapore to GIFT IFSC. SEBI coordinated the matter with MAS and these proposals have since been approved. NSE IFSC- SGX connect would enable SGX members and NSE IFSC members to access Nifty products through GIFT IFSC. This would enable a single pool of liquidity of the Nifty contract in GIFT City as opposed to having fragmented liquidity in India and Singapore. Once implemented, it would be a big boost to the growth of GIFT IFSC.
19. On USD/INR currency products, such products are widely traded in jurisdictions such as Singapore, Dubai, etc. Incidentally, RBI had set up a Task Force on Offshore Rupee Markets which has recently submitted its report. One of the terms of reference of the Task Force was to make recommendations to enable Rupee derivatives (settled in foreign currency) to be traded in the IFSC in India, to begin with on exchanges in the IFSC. On this term of reference, the Task Force has given positive suggestions for the introduction of such products in IFSC. Subject to the decision of RBI in the matter, I do hope that introduction of this product in IFSC will truly facilitate onshoring of such markets.
20. Second, I would like to focus on developments and issues pertaining to intermediaries in IFSC.
21. We have permitted all SEBI registered intermediaries including stock brokers, depositary participants, merchant bankers, debenture trustees, registrars to issue, investment advisers, portfolio managers, CRAs, etc. to provide financial services in IFSC. Except Trading and Clearing Members, all such intermediaries can provide financial services in the IFSC without forming a separate company for the purpose.
22. I am glad to see that on the broking front, there has been a significant uptake in activity in GIFT City. Around 40 Brokers have obtained membership with each of the exchanges. We have also permitted IFSC Banking Units to act as Trading members of an exchange or Professional Clearing Members of a clearing corporation in IFSC without forming a separate company. Further, a subsidiary of an IFSC exchange has also been permitted to acquire trading membership of global exchanges. Accordingly, one of the exchanges has already floated a subsidiary as a single centralized platform through which hedgers, traders and investors can access international exchanges from GIFT IFSC.
23. Innovative mechanisms for market access such as the Segregated Nominee Account Structure (SNAS) have been permitted which are at par with pooled nominee account structures as those prevailing in developed markets such as South Korea, Singapore, Hong Kong, etc.
Alternative Investment Funds:
24. The next aspect I would like to touch upon relates to Alternative Investment Funds (AIF) which I believe is an important topic for deliberation in this Seminar.
25. Let me put some numbers to substantiate my view regarding the increasing importance of AIFs in India. In the past 5 years, investments by AIFs have grown 35 times i.e. from INR 3181 crore as at the end of Mar 2014 to around INR 1.1 lakh crore as at the end of Mar 2019. While Category II AIFs account for lion’s share i.e. 62% in the total investments by all AIFs, the growth in Category III AIFs has been substantial in the last 5 years to the tune of around 65 times increase in amount invested. This has led to a rise in Category III AIF’s share in the total amount invested by all AIFs to around 28% as compared to 15% just 5 years ago.
26. In order to encourage on shoring of AIFs, guidelines have been issued by SEBI for AIFs to be set up in IFSC. These guidelines provide clarity on several aspects with respect to setting up and operation of AIFs in GIFT City including on investment conditions, fund raising, reporting requirements, registration, etc. The limits with respect to minimum investment amount, minimum corpus, continuing interest by sponsor/manager, etc. have been largely aligned with the corresponding rupee amounts for domestic AIFs. AIFs set up in GIFT City have been considered as offshore entities and have been permitted to invest in Indian securities through all the three routes viz. FDI/FVCI/FPI, as applicable. Substantial flexibility has been provided for AIFs in IFSC to invest globally, in India and within IFSC.
27. Several Indian AIFs have offshore feeder funds in various countries where money from foreign investors is pooled in order to feed into the Indian funds. Further, there are also Asia-focused and global funds which are set up in various countries through which funds flow to different countries including India. In all these cases, an AIF in GIFT City can be considered as an alternative, more so since the costs of setting up such fund is expected to be lower than setting up offshore funds. Further, Indian fund managers looking to set up offshore funds to invest outside India may find an AIF in IFSC as a viable alternative due to relaxed conditions on investments abroad. These measures are expected to result in on shoring of the offshore fund management industry within the IFSC.
Listing of debt securities:
28. Last but not the least, the area I would like to focus on is listing of debt securities.
29. Issuance, listing and trading of debt Securities have been permitted by SEBI. Accordingly, the exchanges have launched their debt securities market. This platform has seen many issuances and listing of Medium Term Notes, masala bonds and green bonds.
30. Till date, GIFT City has seen listing of Medium Term Notes worth more than USD 42 billion and Masala Bonds worth INR 5950 crore on both the exchanges. The debt platform has also seen Green bond issuances worth USD 1.6 bn. Increasing interest in issuances and primary listings in the debt platform will provide a boost to the fund raising activity in GIFT City.
D. Road Ahead:
31. While several initiatives have been taken by SEBI to encourage activity in IFSC, there is a lot more to be done.
32. Apart from AIFs, there are other fund management related services such as investment advisers and portfolio management services which can provide a significant boost to on shoring the fund management industry in India. A priority area for SEBI is to issue operating guidelines for both these activities. With respect to the operating guidelines that SEBI had issued for AIFs, a consultative approach was adopted with GIFT City and other stakeholders. On similar lines, with respect to investment advisers, SEBI and GIFT City are already in advanced discussion stage for issue of operational guidelines for provision of such services in the IFSC. On portfolio management services, we are awaiting a proposal from GIFT City. Once these guidelines are issued, it would encourage onshoring of advisory and portfolio management services into India.
33. We have seen a pickup in the equity derivatives and gold futures trading. While the exchanges have launched several other products, they are yet to get traction. Going forward, I hope to see other segments and products also flourish in GIFT IFSC.
34. One of the products which had been requested by market participants was USD-INR currency pair which has been positively recommended by a task force set up by the RBI, as I mentioned earlier. As the NSE IFSC- SGX connect enters implementation phase, I see huge potential for growth in the index derivatives segment. On development of any other product or segment, if there is any constructive suggestion, we are quite open to it.
35. On the trading front, the pool of participants currently appears to be limited. I hope to see broadening of the investor base and wider participation which will enable deepening of the markets in the IFSC. With respect to Eligible Foreign Investors (EFI), SEBI has received certain representations seeking clarity on some aspects which we are examining and would be clarifying shortly.
36. While we have seen several debt listings in IFSC, many of them have been secondary listings. I feel that the market has significant potential for more primary listings on the debt segment. It would also be encouraging to see some traction in the equity segment going forward.
37. While GIFT City has seen increase in broking activity, SEBI has also permitted other intermediaries to provide services in the IFSC. Activity by other intermediaries in the IFSC would broaden the nature of financial services being provided in the IFSC.
38. Overall, going forward, I see a lot of scope for both widening and deepening of the financial markets in GIFT City.
E. Concluding Comments
39. I would like to conclude by reminding that the role of IFSC will be multifold in the years ahead. I compliment all the stakeholders of IFSC who have contributed to the growth of IFSC, so far. However, as the economy progresses, there will be both demand and supply push in the IFSC space. The development and expansion of IFSC will bring in new challenges. This space is likely to be very dynamic and constantly evolving in terms of innovative products. As India is poised to become a major economy in the world, I am sure IFSC will have a major role to play. At SEBI, as a Regulator, it will be our endeavor to go for a consultative approach and introduce measures with a view to further developing the GIFT-IFSC. We look forward to suggestions and continued engagement with all the stakeholders.
I convey my best wishes for the event. Thank you.