As published in the Business Standard, India.
Written by Ashley Coutinho
The Indian government’s move to notify global in-house centres (GICs) as financial services at the International Financial Services Centre (IFSC) – set up at the Gujarat International Finance Tec-City (GIFT City) – may prompt several foreign banks, asset managers and insurance companies to set up subsidiaries there.
On Friday, the government notified GICs – service delivery operators that are typically in low-cost geographies – as financial services within the GIFT City. This will allow multinational corporations (MNCs) to set up subsidiary firms at the IFSC to serve their global operations.
The entities will enjoy a tax holiday of 10 years, which companies can choose from within a block of 15 years. The IFSC Authority is expected to come out with detailed regulations on GICs soon.
We welcome move of the ministry of finance notifying the setting up of GIC as a financial service. This will help attract large global financial institutions to set up operations related to high-end financial services at IFSC in GIFT City.”
The Indian GIC landscape has evolved significantly over the last two decades. Originally called captive centres in the early 1990s, GICs are offshore units that perform designated functions for large organisations.
They are distinct from third-party outsourcing as the service delivery centres provide services to entities only within the group.
Cost pressures have led financial institutions to separate their front-office operations located in the US, Europe, Japan and Southeast Asia. They are shifting to centres in India, Central and Eastern Europe as well as other low-cost regions or countries.
Many of these institutions already have substantial operations in India. Prior to the pandemic, they had plans to increase use of Indian resources for both cost and quality reasons. The nod for GICs at IFSC will help attract jobs from many in this region.
GICs can easily create a few thousand jobs which, in turn, is likely to help build the much-needed social infrastructure in and around Gift City. This is also likely to have a rub-off effect on banking, asset management and insurance companies. People may be more open to taking up employment in GIFT City.”
The decision is a step-up for India as the central government has been making efforts to attract a lot of interest globally. It brings India more in line with competing financial centres.”
The success of GICs at IFSC will hinge on a number of factors, though. The operating guidelines for GICs, for instance, will need to be business friendly. Robust infrastructure and availability of local talent will also be key considerations for MNCs.
“The shift is likely to be gradual as companies will have to find the relevant talent. For example, if a company wants the activity of high-end derivatives to be insourced to GIFT City, then it has to find enough people with that skillset,” said a person familiar with the matter.
According to a 2017 report by National Association of Software and Services Companies (NASSCOM) and Bain & Company, GICs in India numbered about 1,100, employing more than 8,00,000 individuals and generating approximately $23 billion in revenue.
“GICs’ ability to create cost savings for an enterprise—while tapping India’s talent pool—have led to that impressive growth. However, due to unprecedented digital disruption in industries worldwide, the role of Indian GICs needs to evolve,” the report had noted.
A global report by consultancy PwC observes that Indian employees and outsourced providers of major financial institutions have performed remarkably well during the current pandemic, despite experiencing one of the most extensive lockdowns in the world. Nonetheless, de-globalisation could lead to a renewed focus on nearshoring and the diversification of offshore locations.
“At a minimum, we will likely see institutions with scale operations increasingly focused on diversifying within India, particularly if they are adding new capacity,” the report said.
The government has been easing regulatory restrictions at IFSC in the past few months. Recently, it sweetened the deal for category III AIFs on the taxation front with benefits such as zero tax on bond trading or derivative trading and reduced tax rates on interest and dividend.