It has been written by Esha Devchandra Mandal, a second-year LLB student of Symbiosis Law School, Pune

Introduction-

International financial centers can be understood as financial centers which caters to customers outside the jurisdiction of any domestic economy. An International Financial Services Centre (hereinafter referred to as IFSC) will basically deal with flow of finance, financial products and services. The globe’s leading IFSCs are stationed in New York, Shanghai, Dubai, Singapore, and Hong Kong, to name a few.

India’s first IFSC, established in the multi-services Special Economic Zone (SEZ) in Gift City is a new competitor added to the list of IFSCs which will be a space for foreign investors, financial institutions and banks to deal in foreign denominated currency in sectors of banking, insurance, capital markets, products like stocks, shares and securities, Information Technology and Information technology enabled services (IT & ITeS), and other allied financial services. In order to bring a high degree of inter-regulatory coordination within the financial sector, a separate authority called the International Financial Services Regulatory Authority (IFSCA) was established which would act as a unified regulator with a vision to promote ease of doing business in IFSC and provide business-friendly regulatory environment and cutting the time- consuming formalities prescribed by sectoral regulatory practices. Regulatory powers of four financial services regulators in India is vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the IFSC (Section 13, IFSCA Act, 2019).

It is known that the key factors, namely, business friendly regulations, competitive tax regime, efficient dispute resolution mechanism, ease of doing business, skilled manpower and high- quality infrastructure contribute to the success of an IFSC. So has been the case in India since the establishment of her maiden IFSC in GIFT City in 2015. The Government of India introduced a host of tax incentives for the entities set up within an IFSC and also enumerated a list of exemptions under the Companies Act, 2013, for public and private companies setting up offices in the IFSC, for their businesses. Apart from tax holiday and creation of a unified regulator for regulation of the IFSC, the Government of India plans to establish a separate dispute regulation mechanism for the ventures.

A first of its kind venture by Government of India, calls for a rudimentary understanding of the concept of IFSC, and identification of potential concerns which comes with it. We intend to focus on concerns which are outside the control of any government or a State, i.e., the external factors, namely economic and political stability which might arise as a result of domestic or international disturbances or events.

Issues addressed –

Interrelationship between an IFSC and a country's economic and political condition.

1. The impact of an IFSC in an economy

2. Analyzing the impact of an economy and its political scenario on an IFSC

Objective -

The objective of this article is to evaluate, assess and learn from the models adopted by other offshore financial centers in their respective jurisdictions. India, being a late entrant in the global IFC ecosystem could pose as a spin-off advantage in terms of learning from the international financial centers which are already in place. Assessing the factors which led to development of the offshore financial centers and analyzing the causes behind its condition as of now would also help us narrow down the possibility of the Indian IFSC from failing.

Analysis -

Studies show that in present times, global capital acts as an important driver for economic growth of a country, in a globalized world. Global capital is mainly attracted through Foreign Direct Investment schemes and Foreign Portfolio schemes post liberalization, in various countries, across the globe. With globalization, other ways to raise the capital were also introduced. Ventures like IFSCs have known to contribute largely towards economic development of a nation and create employment opportunities for its citizens. While IFSC’s have multiple advantages, they mainly have a positive impact on an economy through its fundraising services, risk management operations, international tax management & cross- border tax liability providing excellent opportunities for financial intermediaries and law firms.

Strengthening a country’s financial and IT sector becomes pertinent to determine success of an IFSC in a country. A vibrant IFSC has the potential to act as a catalyst for growth of an economy, as the economic activities within an IFSC (. Banking services, asset management, stock market, FinTech, Insurance), attracts huge amount of global capital inflows. This can be further channelized in an economy for the developmental and welfare purposes. Studies also show that it creates employment opportunities for young talented professionals in a country, (especially for a country like India which has a favorable demographic dividend).

We intend to understand and analyze factors that impact an IFSC by looking at a few cases.

Hong Kong's historical strength as a financial Centre is rooted in its ability to serve China's international financial needs (Montes 1999). Traditionally dominant in personal finance, Hong Kong anticipated that China's economic growth would create demand for more complex investment instruments, benefiting its financial sector (Montes 1999). However, Shanghai's rapid rise as a financial hub has complicated this picture. A 2003 survey of business leaders found that Shanghai is gaining on Hong Kong in terms of economic factors crucial for attracting business (Montes 1999). This shift suggests that instead of bolstering Hong Kong's standing, Shanghai is emerging as a direct competitor. Further complicating matters, China's WTO membership opens Shanghai to foreign companies seeking to tap into China's markets, potentially sidelining Hong Kong's intermediary role. Hong Kong also faces domestic challenges, including a struggling economy and political instability that are less favorable compared to other financial hubs like Singapore and Australia. These threats underscore the intensifying competition from Shanghai and the challenges ahead for Hong Kong as a financial Centre.

Further, Japan is still regarded by many scholars as the main financial center of the Asia-Pacific region. Despite its historical prominence, Japan's position as the leading financial center in the Asia-Pacific region faces significant challenges including Japan's negative and slowing economic growth and high, making Tokyo's future as the world's leading financial hub less certain. These developments are concerning because a declining capital pool in Japan would make it impossible for the nation's financial institution to continue operating on the current scale abroad and would make its markets less appealing to lenders. Furthermore, Japan's financial regulations have hindered its growth. Overly restrictive policies have driven up transaction costs through limitations on financial activities, broker fees, and interest rates. These constraints have hampered the banking system's ability to finance certain projects and discouraged foreign investment in Japanese bonds due to high currency exchange costs.

The situation has been further exacerbated by a series of financial crises that have shaken Japan's banking system. Major institutions, including Yamaichi Securities and Hokkaido Takushoku, have succumbed to bankruptcy, burdened by a surge in bad debts stemming from the weak economy. These failures have eroded investor confidence and cast a shadow over Tokyo's financial stability.

Therefore, even though Japan has the biggest financial market in the region, its institutional and structural rigidities, combined with the recent weakening of economic fundamentals, may make its size essentially irrelevant. But if the economy manages to overcome its institutional and structural problems, the financial institutions might start to express the same unwavering faith in Japan as they did a long time ago.

Singapore's financial sector, on the other hand has seen impressive growth, with assets under management experiencing a significant rise. The country is also a leader in mergers and acquisitions within the region. This success can be attributed to its liberal approach. Singapore's dominant financial center, the Asian Dollar Market, thrives on minimal restrictions for foreign investment and currency exchange.

The government actively supports the financial industry. Recent reforms allow for more freedom in investment choices, empowering individuals and businesses to manage them

finances better. This, coupled with government aid and tax benefits, has attracted a diverse range of financial services to Singapore, including commodity trading and derivatives markets.

Singapore boasts superior infrastructure and a strong foundation for financial activities, surpassing even Hong Kong. Additionally, its political and economic stability, along with a booming financial sector and open economy, solidify its position as a dominant player in the regional financial arena.

The gap in established research lies in absence of a deeper understanding of factors other than the ones enumerated which affect the functioning of an IFSC. There is no clear-cut formula in place to understand how an IFSC is affected by factors external to a country. In order to address the aforementioned issue, this research paper analyses cases of different IFSCs spread across the globe, in various countries, which have been impacted by international events, political events or disturbances, or any other external factors.

Conclusion

The rise and fall of financial centers throughout history offer valuable lessons for India's own IFSC. Four key factors influence success: trust in the center's abilities, a strong central bank and financial regulations, overall stability, and continuous innovation. While location, language, and rule of law are important, additional elements are crucial. These include clear and consistent regulations, tax incentives, a skilled workforce, efficient dispute resolution, and government support.

Further, Globalization is shaping the future of finance, potentially leading to a consolidation of mega-centers alongside specialized regional hubs. Thereby hinting a need for The Indian IFSC to define its niche in this evolving landscape.

While predicting the future is difficult, some potential paths can be identified based on current trends. However, by implementing the right strategies, like channelizing the global capital flows into the country and bridging the investment gap, GIFT IFSC, the India’s maiden IFSC will make India a major exporter of international financial services in times to come and emerge as an engine of growth to take India forward.

References and Footnotes

Dipesh Shah and Dr. Pawan K. Chugan, Key Determinants Behind An International Financial Services Centre: An Exploratory Study Of India’s Maiden IFSC at Gandhinagar, Gujarat, 9 PDEU Journal of Energy and Management 13, 14-16 (2023).

Injeti Srinivas, Role of IFSC in India’s globalization, The Journal of Indian Institute of Banking & Finance 5, 6-10 (2023).

Sarah Hall, Rethinking international financial centres through the politics of territory: renminbi internationalisation in London's financial district, 42 Royal Geographical Society 489, 491-492 (2017).