A body representing alternative investment funds (AIFs) at GIFT International Financial Services Centre (IFSC) asked the government to intervene after the RBI mandated in late March that such funds must be treated as ‘resident Indians’ when reporting foreign assets.
In a letter dated 10 April, which Mint has seen, the AIF Chief Financial Officers Association flagged a “critical regulatory overlap” triggered by the RBI’s mandate for filing foreign liabilities and assets (FLA) returns, saying it conflicts with the specialized status usually granted to funds in the international zone. GIFT IFSC is a specialized regulatory zone within GIFT City that’s treated as a foreign jurisdiction for financial transactions.
The association asked the union government to start a dialogue with the central bank and issue a joint clarification circular exempting IFSCA-registered entities from the FLA return rule. Dharmesh Trivedi, promoter and director of AIF CFO Association, said, “We are expecting a clarification from the DEA (department of economic affairs) on the matter. The stated view of the IFSCA (International Financial Services Centres Authority) being the sole regulator for GIFT IFSC should be re-established, for all activities in and from GIFT IFSC across the world.”
There are a total of 314 alternative investment funds in Gift City spanning categories I, II and III, according to IFSCA. Their combined assets under management (AUM) and growth figures are not publicly available.
Regulatory clash
On 25 March, the RBI clarified in an FAQ that entities operating in GIFT IFSC must file annual FLA returns if they have received foreign investments or hold overseas assets. The FAQs also said that subsidiaries set up in the IFSC by foreign entities would be treated as foreign direct investment and be subject to such reporting. This means funds in the GIFT IFSC would be classified as resident Indians – a move that fundamentally contradicts their current status under the Foreign Exchange Management Act (FEMA).
An FLA return is a mandatory annual report submitted to the RBI. It captures the total foreign investment held by Indian entities in a financial year. The return provides the raw data needed to calculate India’s balance of payments and the international investment position (IIP).
Under existing foreign exchange rules, entities set up in GIFT IFSC are treated as non-residents, an important distinction that allows such entities several advantages to help them attract overseas capital. Also, according to the IFSCA Act, 2019, IFSCA is the sole regulator for the Gift City region. The association argues that the RBI’s clarification disrupts this foundation.
The association’s letter read: “While the aforementioned jurisdictional overlap impacts the entire IFSC ecosystem, its application to AIFs and fund management entities (FMEs) is particularly concerning and threatens to create confusion and regulatory issues.”
Legal experts said the RBI’s clarification could trigger confusion among GIFT IFSC entities, which are now uncertain whether they are classified as resident or non-resident Indians for regulatory purposes.
Rajul Bohra, partner at JSA Advocates and Solicitors, said, “The RBI’s clarification requiring IFSC units to make FLA filing could create a lot of chaos if not resolved. Since FEMA treats Gift City as non-resident Indian, the region has a lot of advantages that make it attractive. But if RBI, which helps implement FEMA, treats it as resident Indian for this purpose, then regulations get complicated.”
The AIF CFO Association’s letter warned that the move has implications beyond investment funds, saying the requirement to file FLA returns could affect banks, finance companies, leasing firms and other service providers operating within GIFT City.
Single-regulator model gone?
Another significant concern is the potential erosion of the “single regulator” model. GIFT IFSC was designed to be overseen by IFSCA alone, reducing the need for multiple filings across regulators and improving the ease of doing business.
“If entities must report to both IFSCA and the RBI, the resulting dual compliance burden negates the ease of doing business,” the association said.
Manisha Shroff, partner at Khaitan & Co, suggested that the mandate for FLA return filing should have come from IFSCA, which could have managed any gaps in cross-border investment monitoring raised by the RBI.
The letter also flagged competitive risks, saying other global financial centres such as Dubai and Singapore offer streamlined regulatory regimes, and any reintroduction of onshore compliance requirements could weaken GIFT City’s appeal as a fund domicile.
“If an FME in GIFT City is forced to grapple with RBI scrutiny, reconcile its capital flows with the RBI’s domestic resident reporting standards, and face potential FEMA penalties for clerical mismatches, GPs (general partners) will simply bypass India. They will opt to domicile their India-focused or global funds in Mauritius, Singapore (VCC structures), or Dubai, where regulatory certainty is absolute,” it added.
The changes also come at a time when funds are grappling with geopolitical tensions stemming from the US-Iran war, the association said. “Given the heightened global uncertainty, this additional compliance requirement which is contradictory to established norms comes as a surprise to entities operating in GIFT IFSC,” the letter read.
Queries emailed to the DEA, RBI and IFSCA on Friday did not elicit a response.
