FPI: After getting FPI ‘Visa’ for D-Street, Russians move to open GIFT shops

Just a few months after half a dozen Russian institutions were permitted by the Indian capital market regulator to trade as foreign portfolio investors (FPIs) on local stock exchanges, three Russian entities are learnt to have applied for different licences with the GIFT City authorities.

Two of these units would be set up as ‘fund management entities’ and another as a ‘brokerage’ once they get the go-ahead from the International Financial Services Centres Authority (IFSCA), the unified regulator for services, products, and institutions in GIFT City, two persons told ET.

A fund management outfit in GIFT is typically organised as an alternative investment fund, akin to a pooled vehicle, which can subsequently obtain an FPI licence from the Securities and Exchange Board of India (Sebi). Such an entity can invest stocks and debt listed on bourses in India as well as in other jurisdictions. Such a fund management body can directly receive money from overseas investors or have the money pooled in a feeder vehicle set up in one of the free trade zones in centres like Dubai and Abu Dhabi before remitting it to the AIF in GIFT City.

At present brokerages in GIFT City are largely arms of Indian groups. To encourage the participation of broker-dealers from foreign jurisdictions, IFSCA in December 2020 permitted eligible foreign entities to set up branch offices in IFSC and operate as broker-dealer/clearing members subject to a few conditions like fulfilling anti-money laundering measures laid down by the Financial Action Task Force (FATF).While FATF suspended the membership of the Russian Federation a year after the invasion of Ukraine, Russia remains accountable for its obligations to implement the FATF standards.

Once the IFSCA gives its green signal, these foreign applicants would mark the first entry of Russian investors in GIFT City. Since the outbreak of the Ukraine war, large Russian institutions and oligarchs have been searching for new markets and offshore financial centres which are not politically hostile.A week ago, a Russian delegation visited the GIFT City to explore business opportunities such as bullion trading among other things.

An investor planning to offer financial services may incorporate a local entity, hire office space on lease, and register itself with the special economic zone authority; after this, it applies to the IFSCA for a specific financial service licence.

IFSCA’s approval takes a longer time as the regulator examines the nature of the foreign investors, their source of money, matching bank accounts, shareholders etc. The three Russian entities are awaiting the IFSCA’s response to their applications.

While foreign investors in an AIF in GIFT are not required to obtain permanent account numbers (issued by the Indian Income Tax Department), the enhanced disclosure requirements related to beneficial owners in an FPI would apply.

IFSC units can hold foreign currency accounts with banks operating in GIFT IFSC. “As far as FEMA (Foreign Exchange Management Act) is concerned, GIFT is a foreign territory. A foreign entity can hold money in foreign currencies and convert it freely. Since GIFT City has the blessings of New Delhi, some of the foreign investors probably feel they would be welcomed in GIFT. Russian investors and institutions untouched by the US sanctions should not have any problem,” said a banker.

Till now 7 Russian investors – five institutions (including the country’s largest lender Sberbank) and two individuals – have been given FPI from SEBI between February and October 2023. The licenses are valid for 3 years. “Planning entities in GIFT is interesting as it would have the flexibility to invest in other markets as well,” said the person.