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“The Government would support the development of a world-class fintech hub at the GIFT-IFSC,” – Nirmala Sitharaman, Finance Minister, India

Presenting the Union Budget 2021, Finance Minister Nirmala Sitharaman reaffirmed the Indian government’s commitment to develop the International Financial Services Centre (IFSC) at the Gujarat International Finance Tech City (GIFT City).

In addition to the tax incentives already provided, the FM further proposed a slew of tax measures, including tax holiday for capital gains for aircraft leasing companies, tax exemption for aircraft lease rentals paid to foreign lessors, tax incentive for relocating foreign funds in the IFSC and tax exemption to investment divisions of foreign banks located in IFSC.

The story of GIFT City started when PM Narendra Modi (then chief minister of Gujarat) announced his plans to create Singapore, Shanghai and New York-like smart cities in the state right after his first visit to Singapore in 2006.

In January 2007, a master plan was unveiled for developing GIFT City in Gandhinagar, close to Ahmedabad, another industrial city of Gujarat. Spread over 359 hectares, the development was to be done in three phases and was scheduled to be completed in 2017. The budget allocated for the project stood at INR 70,000 Cr (revised).

A business district initially planned to be jointly developed by the Gujarat Urban Development Company (GUDC) and Infrastructure Leasing and Financial Services (IL&FS), the GIFT City, in its present avatar, contains:

• A Special Economic Zone (SEZ)
• India’s first International Financial Services Centre (IFSC)
• Commercial buildings
• Residential apartments
• Social infrastructure

Besides offering bare, furnished, plug-and-play and press-and-play business units on an outright purchase or lease with guaranteed service agreements, the GIFT City offers a set of advantages that no other location in India provides. For instance, the IFSC benefits include:

• 10-year tax holiday on 100% of the profit for business units in IFSC
• Minimum Alternate Tax (MAT) will be 9% of profit-booking
• Gujarat government exempts entities from stamp duty if they have registered offices in GIFT City for capital market activities
• Zero Commodity Transaction Tax (CTT)
• Zero Security Transaction Tax (STT)
• Zero Dividend Distribution Tax (DDT)
• Extension of long-term capital gains tax exemption to equities, exchange-traded funds, alternative investments and mutual funds
• Zero Good & Services Tax (GST) on transactions carried out in IFSC exchanges

Even then, almost a decade and a half later, GIFT city failed to attract businesses and investments. The first phase of the development has not been completed in spite of full support from the government of India as well as the state government. As of now, around 9,000 people are employed there against the estimated 1 Mn direct and indirect jobs. Again, about 3 Mn of its 62 Mn sq. ft of planned development have been built, and another 3 Mn sq. ft are under construction, according to a Reuters report.

The IL&FS decided to exit the project in 2020 and sold 50% of its stake to co-owner GUDC at INR 32 Cr.

But despite the lacklustre development, the Indian government has already awarded the country’s only IFSC to GIFT City, ignoring Mumbai, the financial capital of India.

Interestingly, despite all the tax holidays, incentives and other perks offered by the new hub, private investments did not flow in as per expectations. So, in the latest Budget, the government not only announced its plans to create a fintech hub at GIFT-IFSC, but also welcomed aircraft leasing companies with more tax incentives.

Does it indicate moving the goalposts from developing a global financial hub to leasing or selling properties to anyone interested? 

“Before luring aircraft leasing companies, the city had offered numerous perks to the IT/ITeS firms. But barring TCS, Oracle and a few others, not many IT companies opened their offices at GIFT, Gujarat. Most of the companies at GIFT City are either public-sector entities (the likes of SBI, LIC, Indian Oil, National Insurance, Bank of Baroda, STPI and Canara Bank) or partner companies who are directly or indirectly associated with the development of GIFT City or working on Gujarat government’s projects,” says an analyst who was earlier associated with the project on behalf of IL&FS.

Among the big deals that the City has successfully sealed in the recent years are Oracle, occupying 100K sq. ft of office space, and Bank of America, leasing another 400K sq. ft.

Setting up a fintech hub at GIFT City may pave the path for further development, but one cannot ignore certain glitches. For instance, India already has the highest concentration of fintech hubs in Asia, and Gujarat is not known for seeding fintech startups except a few such as Lendingkart. In fact, the odds are stacked against such a move, say experts.

Speaking to Inc42, fintech founders have welcomed the government’s decision to set up a fintech hub at GIFT City but also pointed out several disadvantages due to which businesses may not consider GIFT City as another possible home in the near future.

What are the odds against GIFT City? Inc42 dives deep into the arguments to analyse the pros and cons.

Is GIFT City The Right Location To House Fintech Startups?

Recognising that a fintech hub is the focal point for fintech activity within a region or a network and an ecosystem encompassing the entire infrastructure, Deloitte analysed as many as 44 fintech hubs across the world and identified four fundamental building blocks for a fintech hub to thrive. These include:

1. Talent
2. Capital
3. Demand
4. Policy and Regulation

Out of these four, GIFT City has only one building block in its favour: Policy and regulation. The city does not have a readymade and growing talent pool that can compete with Mumbai, Bengaluru and New Delhi. And one is not likely to find a pool of VCs/investors based out of GIFT City or nearby locations. Similarly, being a purpose-built city, it does not generate sustainable demand that may attract fintech startups to set up base in the new location. Incidentally, the Asian Development Bank (ADB) has committed INR 1,000 Cr towards the fintech hub at GIFT City. Aimed to address the skill development, new technologies and resource mobilisation at large, the capital is least likely to be used for startup funding.

A look at the state’s talent pool will not be out of context, either. Gujarat is home to several premier institutions, including the Indian Institute of Management-Ahmedabad, arguably the country’s finest B-school, the National Institute of Technology, Surat, and the Indian Institute of Technology-Gandhinagar. However, IIM-Ahmedabad does not meet the bulk of fintech talent requirements while the alumni from Surat and Gandhinagar mostly move to other metros for employment or pursue management courses for better career options. None of these institutions has a  strong entrepreneurship ecosystem like IIT-Bombay’s  Shine or IIT-Delhi’s Entrepreneurship Development Cell, argue experts.

Inc42 spoke to more than a dozen fintech startups regarding the government’s proposed fintech park at GIFT City. While many of them declined to speak on the record for obvious reasons, several leading founders spoke on the condition of anonymity and came up with a slew of reasons as to why the location would be a misfit.

The founder of a Bengaluru-based fintech startup that deals in B2B payments said, “Most of our clients are based in Bengaluru, Mumbai and Delhi-NCR. Some of them are planning to extend their presence to GIFT City, but then, unlike IT/ITeS companies, we don’t need to move to client sites.”

Another major concern is the lack of talent required by fintech startups. Unlike IT giants like TCS and Infosys which hire freshers en masse and have developed a robust infrastructure to train them before deploying them across the country, startups cannot afford such luxuries. They always prefer to hire locally to avoid job relocation packages which may arise if they are sourcing talent from outside.

A blockchain startup that has tied up with several banks for developing fintech solutions said, “Back in 2018, our team in Ahmedabad was working on a blockchain project that required three-five blockchain developers. We immediately posted the requirement on various platforms. But most of the applications came from Bengaluru, Mumbai and Pune. Local candidates who applied for those jobs had a very limited understanding of the subject matter and lacked the exposure we were looking for. Finally, we had to outsource it to Bengaluru.”

One of the biggest advantages that Bengaluru offers over other locations is the availability of readily available skill sets, the founder argued. “Even if the GIFT City succeeds, it will take at least another decade to have in place the ecosystem that Bengaluru has today. After all, it took the IT/ITeS companies decades to build the Bengaluru ecosystem and it is equally apt for the Bengaluru startup ecosystem.”

The Gujarat government is reportedly working on a fintech policy that will soon be rolled out in sync with the announcements made in the Union Budget 2021.

But what should be the state government’s priorities?

Harshvardhan Lunia, cofounder and CEO of Ahmedabad-based fintech startup Lendingkart,  termed the latest development as “definitely a very promising opportunity for the entire financial industry and technological innovations disrupting the segment” and mentioned the following points for better implementation.

• Technology grants: Allocation of funds to fintech players to encourage innovations and solution development; also, extension of digital reach to onboard more small businesses
• Job creation subsidy: Local employment generation subsidies for job opportunities created by fintech companies in Gujarat
• Funding support: Funding support from government institutions will help fintech to invest in experiments and contribute to the success of Make in India and Atmanirbhar Bharat campaigns.

Seconding this, Suhail Sameer, group president of BharatPe, added that a GST waiver for startups setting up their offices at GIFT City would also help. The fintech policy should entail a lot of incentives for fintech companies setting up shop in the location. These could include tax holiday, extra floor space index (FSI) for buildings and support for workforce training. The policy should do away with MDR for merchants on any digital payment acceptance (Gujarat can lead the way).

Lifestyle Issues Keep Top Talent Away From GIFT City

Speaking to Inc42, several employees from different companies currently operational at GIFT City, expressed their disappointment with the quality of life. A networking engineer said, “The local shops are nearly 2 km away, but they are hardly of any use. Even when you want to buy some clothes or shoes, you have to go to Ahmedabad, which is almost 17 km away.”

In January this year, the foundation of the 28.25-km-long phase-2 connecting Ahmedabad and Gandhinagar was laid by PM Modi. Phase-2 covers two corridors. Corridor-1 is 22.8 km long and stretches between Motera Stadium and Mahatma Mandir. Corridor-2 is 5.4 km, running between the Gujarat National Law University (GNLU) and the GIFT City. Phase-2 is expected to be completed by 2026 and hence, does not resolve the communication issues which residents have to face now.

“State government buses are available here as well as Ola and Uber. But the cab services are usually costlier than what they charge in other parts of the country,” complained a TCS employee.

Clearly, such issues have hindered companies from acquiring and retaining the best talent.

A Scam-Tainted Project? 

At the time of presenting the master plan in 2007, the cost of setting up the GIFT City was estimated to be INR 25,000 Cr. A few years later, the cost shot up nearly three times to INR 70,000 Cr. Was there any scam involved that resulted in a cost hike of that magnitude?

Speaking to journalist Paranjoy Guha Thakurta on NewsClick, D.C. Anjaria, who originally developed the GIFT City plan and was the first independent director of the project, said, “I would say, yes. Because this threefold or fourfold increase was not necessarily due to inflation or price rise. It simply happened due to taking over more and more land. It started with a project that would have needed, let us say, 250 acres for a special economic zone. IL&FS was interested in getting more and more land until it got to almost 900 acres of land instead of 250 acres.”

It is worth noting that as part of the project, the land was virtually gifted to IL&FS by the state government. Otherwise, it would have cost more than INR 1,000 Cr. The company also had the rights to sell these land parcels at a commercial price, which must have gone up significantly by now.

In 2015, Anjaria had filed a petition in the Gujarat High Court against the irregularities in awarding the contracts to various partner companies and forming a joint venture with IL&FS.

There were issues galore. For instance, Fairwood Consultants was awarded a contract even before the project took off. The company was a close associate of IL&FS and the latter had even given Fairwood small offices to operate from. Thakurta also stated that the company received a consultancy fee of INR 20 Lakh a month, excluding taxes and out-of-pocket expenses. Besides, one of the contract clauses said that the advances, once paid, could not be recovered, even if the services were not provided. According to Anjaria, Fairwood got more than INR 400 Cr. Later in 2014, its contract was terminated as the company failed to deliver.

By that time, IL&FS was plagued by massive scams within the organisation. Although its auditing firm Deloitte had reported no adverse findings even in FY 2017-18, IL&FS said in April 2019 that more than 90% of its loans had turned bad, a shocker that suddenly shook the entire lending sector. The company exited the GIFT City project amid bankruptcy scare..

The lack of transparency and not following due process could be crucial for many company’s decisions.

The Anatomy Of The GIFT City: Will It Evolve? 

As mentioned before, most of the companies currently housed at the GIFT City are either government-owned entities, which were, in a way, compelled to set up their offices. Others are just partner companies working on government/GIFT projects.

Barring a few corporate giants like Oracle and Bank of America, the city has failed to attract fintech and financial companies at large. According to a fintech founder who caters to banks, “Most of our clients are served remotely. We do not need to be there (at their locations) to serve them. As far as PSUs or government-owned companies are concerned, they have entirely different rule books regarding the vendor-hiring process.”

Currently, GIFT City houses more than 40 banks and other financial institutions. However, fintech startups, which cater to a wide range of consumer base, say that it is nowhere near a deciding factor for them to shift or expand their base to GIFT City.

Is The GIFT City’s Fintech Park Doomed To Fail?

“The infrastructure cost at the GIFT City is shooting up. Moreover, companies like TCS, Infosys, Wipro and Salesforce have accepted the work-from-home (WFH) mode as the new and permanent workplace culture. Numerous fintech startups have also made similar decisions. Take, for instance, Paytm where more than 75% of the employees are reportedly working from home. Companies, especially startups, have adopted WFH not only as part of the social distancing measures but also because they want to control their operating costs,” said the analyst mentioned above.

He is not wrong. The emergence of WFH as the new culture could only reduce the GIFT City fintech hub’s chance of success. In fact, one can understand it better by drawing an analogy between the Mumbai Fintech Hub and the Fintech Valley, Vizag.

In 2007, a high-powered expert committee (HPEC), formed by the ministry of finance to oversee the proposal of making Mumbai an IFSC hub, had listed more than 48 measures needed to be implemented for this purpose.

Among these, the most crucial points were:

• Achieving and maintaining a growth rate of 9-10%
• Reducing the gross consolidated fiscal deficit
• Reducing the backlog of legal cases involving financial contract disputes
• Adopting a principle-based regulatory regime
• Giving banks more flexibility
• Ensuring that the Indian government reduces equities in all PSBs
• Making sure that the GoI permits wholesale asset management regulated by SEBI
• Ensuring that the GoI brings forward liberalisation of the financial sector in keeping with the commitments to WTO Agreement on trade in financial services
• Providing better transport infrastructure

Going by this action list, it is easy to understand that many of these developments had to be implemented by the Indian government and the rest by the state government of Maharashtra. However, the Manmohan Singh government could not take these initiatives due to the global recession. On the other hand, right after coming to power, the Modi government wasted no time to make sure that the GIFT City would be the new home to IFSC, entirely ignoring the candidature of Mumbai in the process.

Does GIFT City have better transportation than Mumbai or a more evolved financial ecosystem? After coming to power, the Modi government announced the Ahmedabad Metro project to connect the industrial hub with GIFT City and the bullet train project to connect Ahmedabad with Mumbai.

Even then (we are talking of 2014), Mumbai had its metro and the monorail running, and developments were slotted for further expansion.. Infrastructure aside, Gujarat does not meet many of the critical criteria listed by the HPEC back in 2007. Under such circumstances, whether the GIFT City can house the IFSC and attract adequate investments and transactions (through its international stock exchange) remain doubtful, think several analysts.

Besides the IFSC, GIFT City has also been recognised as a special economic zone (SEZ). But unlike China, SEZs in India have become centres of corruption and an embarrassment globally. Presenting a report on India’s SEZs, Meir Alkon of Princeton University observed that two key patterns are evident here. First, there is a substantial imbalance in the number of SEZs and their extent. Gujarat and a few southern Indian states account for most SEZs and most land allotted to SEZs. Second, there is an indication of the importance of state-level politicians’ initiative in determining the existence and location of SEZs. Despite the fact that SEZs are a national initiative, the programme’s structure indicates that state politicians technically have a tremendous ability to target these export zones’ location and, therefore, can potentially target the development in certain areas.

This shows that subnational initiatives to promote export-led growth do not necessarily produce localised spillover effects, especially when there are opportunities for local rent capture.

It is worth noting that 101 SEZs have been denotified between April 1, 2008, and February 29, 2020. But 71% of SEZs in Haryana and 60% in Rajasthan are now defunct. Speaking in Rajya Sabha, Piyush Goyal cited reasons behind the de-notification as an inadequate market response, lack of demand for space and change in the fiscal incentive regime for SEZs.

Similar is the case with fintech hubs in India. Various state governments have time and again proposed to turn their key markets into fintech hubs. One of these is the Vizag Fintech Valley. Initially aspiring to become the next IT Hub of India after Bengaluru and Hyderabad, the Fintech Valley project seems to have slowed down with very few fintech startups considering to set up their base in the city.

Meanwhile, GIFT City may witness tough competition from Hyderabad, which houses some of the biggest companies such as Microsoft, Facebook, Google and Amazon. In 2019, Hyderabad Fintech Forum was launched to enable and strengthen the city’s fintech ecosystem.

Given this scenario, what do you think are GIFT City’s chances to become the next fintech hub of India?