By Mayank Arora
Companies listing on stock exchanges at the International Financial Services Centre in GIFT City are now allowed to have a lower public float of 10%. Mayank Arora explains how a differential regulatory regime will help attract more entities
l What is an IFSC? How does it work?
With a view to attract global investors and provide an avenue for domestic companies to access funds, the concept of International Financial Services Centres (IFSC) was brought about under the Special Economic Zones Act, 2005. However, it wasn’t until 2015, when the first IFSC— the Gujarat International Finance Tec City (GIFT) was notified.
An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. Services offered by IFSCs include fund raising, asset management, wealth management, global and regional corporate treasury management, risk management operations such as insurance and reinsurance, and M&A activities among transnational corporations.
l Which are the prominent IFSCs globally?
IFSCs have been established in London, Dubai, New York, and Singapore. They have been contributing to their respective country’s economy in different ways.
For instance, the Dubai International Financial Centre (DIFC) has been expanding five times faster than the Emirates’ average GDP growth rate over the past 10 years, contributing about 6% to its GDP. The thrust areas in the DIFC includes financial technology.
l How has GIFT City fared?
As the only operational IFSC in India, GIFT City has a mandate to accommodate units in banking, capital markets, fund management, insurance, bullion, finance company, aircraft leasing, ship leasing, global in-house centres (GICs), fintech, foreign universities and other ancillary services. The GIFT City has achieved a major breakthrough by licensing more than 360 units, generating more than 16,000 employment opportunities. The average daily turnover on international exchanges is more than $20 billion.
Other IFSCs planned in India include setting up one at Bandra-Kurla Complex (BKC) in Mumbai.
l Reasons behind the reduced public float threshold
The government has reduced the minimum public float requirement for IFSCs to 10% from 25% earlier in order to attract more companies to list on exchanges at the IFSCs. This means that the promoters will now be able to retain a larger stake in their entity, thus retaining their control. This is expected to incentivise more entities to list on the IFSCs, offering a more business-friendly environment.
The regulatory regime for IFSCs draws its base from the domestic regulations; however, these are modified and adapted as per the global flavour and the prospective norms shall provide a conducive regulatory environment for IFSCs. It is noteworthy that listing on IFSC Authority-recognised stock exchanges would not equate to listing on domestic stock exchanges. Of course, the IFSC listed firms are not barred from listing on the domestic bourses.
l Potential pitfalls of such regulatory relaxation
There could be certain negative consequences of rolling out a more relaxed regulatory regime for IFSCs. For instance, in decision-making matters involving the sanction of the members of the company, the promoters may have an upper hand at passing such resolutions due to the reduced public shareholding. Again, un-diversified holding reduces market liquidity, affects fair price discovery in an open market and increases the chances of market manipulation. From an economic perspective, the concentration of holding in the hand of the promoters distorts equitable distribution of wealth in the economy.
However, we have seen that the public float thresholds for companies in India have been reduced in a staggered manner, from as high as 40% prior to 1993. Thus, the regulators are keen on prompt adaption to current market scenarios and the merits of the current notification may outweigh the limitations suggested.
l Implementation challenges
The IFSC in India is currently at a nascent stage of development vis-a-vis its foreign counterparts. Further, only one IFSC has been notified in India so far. Also, it has been only four years since the IFSC Authority was established.
Thus, we may see a lot of regulatory hiccups and experiments resulting from implementation challenges faced by the stakeholders before the regulatory environment is well-established. However, considering the government’s dedication towards covering the gaps, we may confidently conclude that the gaps will be satisfactorily taken care of in the coming years.
The writer is director, Nangia Andersen (With inputs from Ridhima Jain, associate, Nangia Andersen)