A corridor to new Singapore economic partnerships

Singapore’s strategic maritime location, well-respected diplomatic links and excellent treaty network make it the gateway to Asian markets. With 29% of foreign direct investment (FDI), it heads the list of investors in India. The city-state’s contribution to FDI in the past two decades totals USD95 billion.

The Gujarat International Finance Tec-City (GIFT City) has been launched as India’s International Finance Services Centre (IFSC), a global financial and IT services hub greatly benefitting the India-Singapore relationship. The attractions of the IFSC regulatory framework include special economic zone status for units, exemption from goods and services taxes, a 10-year tax holiday for business incomes, and the status of persons resident outside India under foreign exchange regulations, allowing capital account convertibility. GIFT City has achieved an international financial centre ranking and is likely to rise up the table. Three developments in the IFSC legal regime create opportunities for businesses and investors of both nations.

NSE IFSC, a subsidiary of the National Stock Exchange (NSE), established an international exchange in the IFSC (NSE-IFSC) to deal in equity index derivatives, commodity derivatives, interest rate derivatives, currency derivatives and depository receipts. In 2020, the Singapore Exchange and NSE-IFSC created the SGX-NSE Connect, to bring together international and IFSC-based participants and create a unified order book at NSE-IFSC for USD-denominated Nifty, a benchmark NSE index, based products. The SGX has proposed in a consultation paper that it incorporate a special purpose vehicle, SGX India Connect IFSC Private Limited (SGX-SPV). Under the Connect, SGX-SPV will become a trading member of NSE IFSC and a clearing member of NSE IFSC Clearing Corporation Limited. This will enable the trading and clearing of Nifty products and should begin by the end of 2021.

Investors will benefit from greater liquidity, and the extended trading hours of NSE-IFSC, which overlap the trading hours of other significant economies. Exemptions from securities transaction tax, commodities transaction tax, dividend distribution tax and capital gains tax will apply to investments on IFSC stock exchanges. Facilitating trades in index-based derivatives products will attract hedge funds and other investors.

The Variable Capital Companies Act 2018, enacted in Singapore in 2020, introduced a new corporate structure for fund vehicles. Variable capital companies (VCC) offer flexibility in the issuance and redemption of their shares, in the ability to pay dividends out of capital, which gives fund managers flexibility to meet dividend payment obligations, and in enabling open- and closed-ended strategies.

Last year, the IFSC Authority set up a committee on the adoption of VCCs in the IFSC. The committee recommended implementing the broad framework of VCCs, including the incorporation of sub-funds, capital funding and corporate governance. These proposals provide a robust and gold-standard alternative for fund managers.

To prevent the assets of one sub-fund from being used to offset the liabilities of another, the committee recommended that asset and liability segregation should be the priority. Each sub-fund of a VCC will be a separate entity, with a unique permanent account number, thus protecting sub-funds from cross liability contagion and permitting access to the tax treaty network.

A VCC fund in the IFSC offers flexible forex convertibility, mitigation of the risks attendant on the creation of a place of effective management or permanent establishment, while offering treaty protection. Global investors and managers will continue to enjoy the IFSC’s beneficial tax regime.

In 2018, GIFT City and the Singapore International Arbitration Centre (SIAC) signed a memorandum of understanding to promote SIAC’s dispute resolution mechanisms in international commercial disputes. SIAC has now opened representative offices, and SIAC and the IFSC will promote SIAC as the preferred seat for dispute resolution. The use of SIAC arbitration clauses by IFSC entities will reassure global participants using the IFSC as a gateway to domestic markets.

Regulatory co-operation between the IFSC authority and Singapore is increasing. The momentum of regulatory and tax reforms means that GIFT City is likely to become the jurisdiction of choice for crossborder trade and investment activities.

Vivaik Sharma is a partner and Apeksha Sonawale is an associate at Cyril Amarchand Mangaldas