Instability in India’s Gift City could push investors to UAE

Vijay Valecha, AGBI , August 27, 2024

India’s Gift City – a special economic zone located in Prime Minister Narendra Modi’s Gujarat home state – has attracted commitments from backers including sovereign wealth funds from the Gulf.

However a halt in approvals to set up family offices has put the brakes on its ambitions to become a global financial hub after regulators and the Reserve Bank of India raised concerns over potential tax evasion, capital control breaches and money laundering.

This is likely to push increasing numbers of wealthy Indians to the UAE, which is seen as a more reliable alternative for managing their fortunes, observers say.

Stringent foreign exchange regulations in India, which restrict overseas investments to $250,000 per resident, pose a significant hurdle for Indian high-net-worth individuals (HNWIs) looking to invest overseas.

Gift City (or Gujarat International Finance Tec-City) was intended to offer a workaround, allowing family offices to manage substantial sums within its regulatory framework, providing various tax benefits and exemptions for businesses.

Nina Auchoybur, UAE managing director at Ocorian, a global provider of fund administration and compliance solutions, tells AGBI that delays in approving family investment funds for Gift City are likely to accelerate the shift of Indian wealth to the Dubai International Financial Centre and Abu Dhabi Global Market.

These UAE jurisdictions, she says, attract family offices because of their business-friendly environments, tax incentives and established financial infrastructure.

Some of Auchoybur’s clients have been affected by the uncertainties in Gift City, she says, with the main challenges stemming from the interpretation of Gift City’s regulations.

This, coupled with the fact that Gift City has yet to prove its concept, means clients are either awaiting clarity or relocating to other jurisdictions, Auchoybur says.

A report by Henley & Partners forecast that around 6,700 high-net-worth individuals will relocate to the UAE by the end of 2024, nearly double the number expected to move to the United States this year.

Vijay Valecha, chief investment officer at Century Financial in Dubai, says that the UAE’s appeal over Gift City was further boosted by the country’s long-term golden visa residency, making it easier for affluent families to establish a lasting presence.

He warns that while Indian regulators’ concerns were legitimate, limiting the participation of wealthy family offices could also deter other financial companies and investors.

“Gift City faces stiff competition from the UAE, Singapore and Hong Kong,” he says.

“Family offices are instrumental in driving entrepreneurship, innovation, and growth in any financial hub. Unless regulators find alternative ways to address their concerns, such measures could have a long-term economic impact on Gift City’s competitive edge.”

Valecha says the halt on approvals for family offices could also signal “regulatory unpredictability” to Gulf sovereign wealth funds, and delay them making commitments. 

Abu Dhabi Investment Authority in the UAE and Saudi Arabia’s Public Investment Fund both have plans to establish a presence in Gift City as part of broader strategies to invest billions in India, the world’s fifth largest economy.

“These funds typically prefer stable environments with clear, long-term policies,” Valecha says. 

“If Gift City’s regulations seem prone to sudden changes or are overly restrictive, particularly around tax evasion and capital controls, ADIA and PIF might reassess the risks and rewards of investing there.”

However, Devika Raveendran, founder and CEO of the Dubai-based DR Partners, says that regulatory lags were common in new financial centres, especially in a complex environment such as India.

“Although families often find regulatory uncertainties challenging, we don’t see these delays as a major concern,” she says.

“Building a strong infrastructure and regulatory framework to support complex financial operations is essential, though it may take time.”

Raveendran says Gift City could still emerge as a leading centre for family offices if these issues were effectively addressed, capitalising on both inbound and outbound investments. 

“With the right regulatory framework, it has the potential to surpass other financial centres,” she says.

Source

AGBI