Have IFSC offer capital opportunities

The International Financial Services Centre (IFSC) is yet to clear applications by family offices to hold a part of their assets in securities overseas. IFSC is meant to provide an alternative to setting up offshore family offices in Singapore or Dubai, and regulatory uncertainty over the treatment of outflows makes it less attractive. Ideally, families routing a chunk of their wealth through IFSC would prefer it to be treated as portfolio investment with fewer strings attached than if it were to be treated as direct investment. For IFSC to mature as an offshore investment destination, it needs to offer capital opportunities to diversify across geographies, currencies and asset classes. The concern should not be so much as where the capital is originating as in ensuring optimum risk management.

The rules for capital flowing out of India‘s jurisdiction have been designed to favour IFSC as an offshore destination. The bigger challenge is to draw capital away from existing offshore centres for which regulations have been harmonised. This will be driven by the range of services on offer in IFSC, which, in turn, will depend on the size of the capital pooled there. Demand from family offices of Indian business groups should help IFSC acquire critical mass. It needs to be encouraged within overarching capital controls. Regulatory ambiguity must not be allowed to linger.

IFSC represents one step in India’s extremely gradual relaxation of capital controls. Indian financial intermediaries need to play a bigger role in channelling credit, investment and remittances from overseas. This becomes more difficult if their capacity to serve outflows is constrained. Increasing access to cheap international financial flows is necessary to improve productivity in the real economy. This can be accomplished by relaxing controls at a pace that does not make the economy more vulnerable to financial shocks. Return on Indian investments can provide the cushion needed.