Gift City may have a surprise in store for mutual funds

: Mutual funds may get to invest in companies traded in Gujarat’s Gift City exchanges beyond the normal cap that applies for their overseas investments. The move comes at a time the government is opening up the special economic zone for direct listing of Indian firms. A 16 member expert panel appointed by the International Financial Services Centres Authority (IFSCA) last week recommended a special carve out for mutual funds wanting to invest in Gift City.

has seen a copy of the report. Currently, any investments made by mutual funds are considered overseas investments, which are subject to various investment limits. The Reserve Bank of India (RBI) allows the entire mutual funds industry to invest up to $7 billion in overseas companies. Also, no individual fund is allowed to invest more than $1 billion in foreign securities.

The expert committee recommendation, if implemented, will ensure that their investments in Indian companies in Gift City are not considered overseas investment and, instead, a separate limit will be put in place for Gift City. To be sure, Gift City currently offers only derivatives trading, and does not have any listed companies.

The government is working to allow Indian firms to list directly from Gift City, before opening up direct overseas listings. The move aims to deepen liquidity in Gift City, given that mutual funds have been a key factor behind the rise of India’s onshore capital markets, where they manage assets of 50 trillion.

Companies listing in Gift City will help both the special zone and the domestic funds such as mutual funds by providing them greater investment opportunities. The move may benefit the mutual fund industry, which is constantly looking to broaden investment horizons. “The potential inclusion of Indian companies listed on the IFSC as investment options for mutual funds presents a significant opportunity.

It would not only benefit investors but also contribute positively to the development of the Gift City IFSC ecosystem," said Suresh Swamy, partner, Price Waterhouse & Co. Llp. “This initiative is poised to pave new investment avenues, bolster the flow of capital, and catalyse economic growth within the IFSC framework." However, allowing such a framework will need coordination between multiple regulators.

“This will be a pathbreaking reform for various stakeholders. It will allow Indian companies to access foreign capital in a much familiar setting. It will provide a conducive regulatory framework and tax concessions coupled with trading in foreign currency," said Jaiman Patel, partner, EY India.

“Having said this, a lot will depend on the finer aspects in terms of implementation. It requires effective coordination among quite a few government ministries along with sectoral regulators in India to amend the existing regulations in a manner which translates the intended vision into reality." “In the current scheme of thinking and structure, the limit cannot be outside, as Gift City is an offshore destination," said A.

Balasubramanian, managing director, Aditya Birla Sun Life AMC. “What could be considered is easing the TCS (tax collected at source) restrictions on investments by mutual funds in Gifty City." The Securities and Exchange Board of India regulates mutual funds’ onshore investments, while RBI sets rules for remittance of funds outside by mutual funds.

Creating a special carve out will need amendments to several laws that are overseen by different regulators, market participants said. In November, the ministry of corporate affairs allowed certain unlisted firms to list overseas. As a first step, the overseas listing framework is being put in place for Gift City where Indian companies will be able to raise dollar funding.

The IFSCA is also considering providing a similar carve out to alternative investment funds to attract money from wealthy investors into Gift City..