Fintech Startups and Companies in GIFT City – Explained

Last Updated on: 16th September 2024, 02:54 pm

India’s Financial Gateway: GIFT City Beckons Fintech Startups

With a keen eye on the future, the Indian government is actively shaping Gujarat International Finance Tec-City, or GIFT City, into a premier International Financial Services Centre (IFSC). This burgeoning financial hub is rapidly establishing itself as a fertile ground for innovation, particularly for ambitious fintech startups.

GIFT City’s design centers around attracting both domestic and foreign investment in the financial sector. By fostering a one-of-a-kind ecosystem that prioritizes growth and innovation, it presents an enticing destination for aspiring fintech companies seeking a launchpad to propel their ventures onto the global stage.

 

The Alluring Ecosystem of GIFT City for Fintech

Gujarat International Finance Tec-City (GIFT City) is rapidly emerging as a beacon for fintech innovation, bolstered by a strategic regulatory and supportive ecosystem tailored for financial technologies. Here, we explore how GIFT City’s environment is ideal for fintech startups.

A. Streamlined Regulatory Landscape

Role of International Financial Services Centre Authority (IFSCA) as a Single Regulator

GIFT City, being India’s first operational International Financial Services Centre (IFSC), is regulated by the International Financial Services Centre Authority (IFSCA). This organization functions as the sole regulator for financial activities within GIFT City, overseeing financial products, institutions, and services. The presence of a unified regulator like the IFSCA simplifies the regulatory landscape, replacing the previously complex system where multiple authorities had jurisdiction.

Benefits of a Unified Regulatory Body for Fintech Startups

For fintech startups, a single regulatory body means less bureaucratic red tape and more clarity and efficiency in compliance matters. This streamlined approach enables startups to navigate the regulatory environment more smoothly and focus on innovation and growth without being bogged down by complex and time-consuming regulatory processes.

B. Fostering Innovation: The Fintech Framework

Introduction to the Fintech Framework

The Fintech Framework, established by the IFSCA, aims to encourage innovation within financial services by fostering an environment conducive to the development of cutting-edge financial technologies. This framework serves as a backbone for the creation and implementation of innovative financial products and services, making GIFT City an attractive landscape for fintech ventures.

Framework’s Categories: Financial Services vs. Broader Tech

The framework categorizes eligible activities into two main types: fintech, which includes innovations directly in financial services like neo-banking, digital lending, and InsureTech; and techfin, which incorporates broader technological advancements that support financial services, such as solutions in AgriTech and DefenseTech that intersect with financial technologies.

Eligibility Criteria for Fintech Startups

To qualify under the Fintech Framework, entities must meet specific criteria:

• Indian Entities: These must either be recognized as fintech startups by the Department for Promotion of Industry and Internal Trade (DPIIT) or be Indian companies and LLPs, including those already regulated by domestic financial authorities like RBI, SEBI, IRDAI, and PFRDA.
• Foreign Entities: Must be based in jurisdictions compliant with the Financial Action Task Force (FATF), ensuring a global standard of financial security and integrity.

C. Sandbox Mechanisms: Testing Grounds for Innovation

Introduction to Sandboxes

Sandboxes in the fintech sector provide a structured yet flexible environment where startups can experiment with innovative financial products and services without immediately undergoing the full brunt of regulatory compliance. This concept is crucial as it allows for the testing of cutting-edge technologies and business models in a controlled setting, reducing risks associated with deploying untested solutions directly to the market.

Different Sandbox Options Available in GIFT City

GIFT City offers several types of sandboxes, each catering to different needs and stages of innovation:

• Regulatory Sandbox: This sandbox allows fintech companies to test their new technologies and solutions with real customers but without full regulatory compliance. It’s particularly valuable for those innovations that aim to disrupt the traditional financial services landscape.
• Fintech Innovative Sandbox (FIS): Designed for startups to develop and refine their technologies in isolation from the live market, this sandbox does not offer a reprieve from regulatory norms but provides a safe space for testing.
• Inter Operable Regulatory Sandbox (IORS): This unique sandbox facilitates the testing of hybrid financial products and services that might fall under the regulatory purview of multiple financial authorities, making it ideal for complex fintech solutions looking to operate across borders or in multifaceted regulatory environments.

 

Boosting Innovation: The FinTech Incentive Scheme

Recognizing the importance of financial backing in the initial stages of growth, IFSCA has established a comprehensive FinTech Incentive Scheme. This scheme aims to attract fintech companies by offering grants that can significantly bolster their financial well-being.

The grant range varies depending on the nature of the fintech activity and the stage of development. Here’s a breakdown of the available grants:

• Startup Grant (₹15 lakhs): This grant provides initial support for developing and marketing innovative fintech products.
• Proof of Concept (POC) Grant (₹50 lakhs): Designed to bridge the gap between ideation and implementation, this grant aids startups in conducting POCs for their solutions, both domestically and internationally.
• Sandbox Grant (₹30 lakhs): This grant helps startups refine their solutions within a controlled environment offered by GIFT City’s sandbox mechanisms.
• Green Fintech Grant (₹75 lakhs): Recognizing the growing focus on sustainability, this grant encourages the development of fintech solutions that promote environmentally conscious financial practices.
• Accelerator Grant (₹10 lakhs): This grant supports accelerators within the IFSC, fostering an ecosystem that empowers and mentors aspiring fintech companies.
• Listing Support Grants (₹15 lakhs): This grant helps eligible Domestic FEs (Financial Entities) defray costs associated with listing on stock exchanges recognized by the Authority.

These grants are available to a wide range of entities, including:

• Fintech startups recognized by the Department for Promotion of Industry and Internal Trade (DPIIT)
• Indian companies and Limited Liability Partnerships (LLPs)
• Existing Indian entities operating under domestic financial regulators (RBI, SEBI, IRDAI, PFRDA)
• Foreign entities from FATF-compliant jurisdictions

 

The Future of Payments: Payment Services in IFSC

The future of finance lies heavily on the seamless movement of funds. Recognizing this, IFSCA is actively shaping a robust framework for payment services within GIFT City. The IFSCA (Payment Services) Regulations, 2024, represent a significant step towards this goal.

This framework outlines specific types of payment services that can be offered within GIFT City, including:

• Account Issuance: Establishing and managing financial accounts for customers.
• E-Money Issuance: Issuing electronic money denominated in foreign currencies for convenient digital transactions.
• Escrow Services: Acting as a trusted third party to hold funds or assets securely during transactions.
• Cross-Border Money Transfer Services: Facilitating the efficient and secure transfer of funds across international borders.

Payment service providers in GIFT City operate under a well-defined regulatory structure:

• Authorization: All entities offering payment services must obtain a certificate of authorization from IFSCA.
• Company Incorporation and Net Worth Requirements: Companies must be incorporated within the IFSC and meet minimum net worth requirements based on their designated category. Here’s a breakdown of the net worth requirements:
  • Regular Payment Service Providers: These providers must start with a minimum net worth of USD 100,000, which increases to USD 200,000 by the third financial year of operation.
  • Significant Payment Service Providers: In contrast, Significant Payment Service Providers must reach a net worth of USD 250,000 within 90 days of designation and USD 500,000 by the end of the third year.
• Operational and Security Standards: The IFSCA regulations emphasize stringent operational and security standards:
  • Fit and Proper Criteria: Directors, key personnel, and stakeholders must demonstrate high standards of integrity, financial soundness, and competence.
  • Safeguarding Funds: User funds must be held in segregated escrow accounts within designated banking units in the IFSC, ensuring their protection from operational risks.
  • Risk Management and Cybersecurity: Robust risk management frameworks and robust IT security systems are mandatory for all payment service providers.

 

Why Fintech Startups Should Consider Gift City

Gift City presents a compelling landscape for fintech startups seeking to flourish and disrupt the financial sector. Here’s a breakdown of the key advantages that make Gift City an attractive launchpad:

 

Reduced Operational Costs: Lucrative Tax Benefits

Gift City offers a significant financial advantage through its tax breaks:

• Consecutive Tax Exemption: Units operating within the International Financial Services Centre (IFSC) enjoy a 100% tax exemption for ten consecutive years out of a fifteen-year period. This translates to substantial savings that can be reinvested in growth and innovation.
• GST Exemption: Fintech startups benefit from a complete exemption on Goods and Services Tax (GST) for services received within the IFSC. This eliminates a layer of indirect taxation, further reducing operational costs.
• Additional Tax Benefits: Gift City offers a bouquet of other tax incentives, including exemption from Minimum Alternate Tax (MAT) for companies opting for the new tax regime, and exemptions from stamp duty and taxes on security or commodity transactions. These benefits significantly lighten the overall tax burden for startups.

 

Access to a Skilled Talent Pool

India boasts a vast pool of highly skilled engineers, making it an ideal location for fintech startups. Here’s what Gift City offers:

• Large Talent Pool: India is a global leader in producing skilled IT professionals. Gift City’s strategic location leverages this national advantage, allowing startups to tap into a readily available talent force. This reduces recruitment costs and expedites the process of building a strong development team.
• Access to India Stack: India’s robust digital infrastructure, including Aadhaar (unique identity system) and UPI (Unified Payments Interface), provides a strong foundation for fintech solutions. Gift City allows startups to leverage these resources efficiently, fostering innovation in areas like digital lending and mobile payments.

 

Recognition by Global Players: A Sign of Promise

GIFT City has garnered significant attention from global corporations, affirming its potential as a prime location for fintech startups. Notably, major institutions like HSBC, IBM, Bank of America, and Oracle have established a presence in the city, demonstrating the trust and investment these giants are willing to commit. Google’s establishment of a global fintech operations center here is particularly noteworthy, serving as a testament to the city’s promising future in the financial technology sector​

 

Modern Infrastructure: A Flourishing Business Environment

The development plans for GIFT City are indeed ambitious and expansive. According to current projections, the total planned built-up area amounts to approximately 62 million square feet. This includes substantial allocations for commercial, residential, and social facilities. Specifically, commercial space is set to encompass about 67% of the total area, translating to roughly 42 million square feet, while residential areas will cover 22% or approximately 14 million square feet​.

These developments are backed by significant financial commitments, with the GIFT City project attracting substantial investments aimed at transforming it into a world-class finance and IT hub. The presence of major global firms and ongoing large-scale infrastructure projects underpin GIFT City’s emergence as a significant player in the global financial services sector​

 

Gift City: A Launchpad for the Future of Fintech

Gift City presents a compelling opportunity for fintech startups seeking to disrupt the financial landscape. Here’s a recap of its potential:

Advantages:

• Reduced Operational Costs: Lucrative tax breaks like 100% tax exemption for ten years and exemption from GST significantly reduce costs, allowing startups to reinvest in growth.
• Access to Skilled Talent: India’s vast pool of skilled engineers and access to India Stack (Aadhaar, UPI) provide a strong foundation for innovation.
• Streamlined Regulatory Environment: A single regulator (IFSCA) offers clarity and efficiency compared to the previous complex landscape.
• Fintech Framework and Sandbox: The framework encourages innovation with clear categories and testing options through regulatory and innovation sandboxes.
• Fintech Incentive Scheme: Grants of up to INR 75 lakhs provide financial support for research, development, and expansion.

Overall, Gift City presents a promising launchpad for fintech startups. The supportive regulatory environment, financial incentives, and access to talent and digital infrastructure position it to be a prominent global fintech hub. However, startups should carefully consider the challenges and strategically plan their entry into this dynamic ecosystem.

Gift City stands poised to shape the future of Indian and global fintech, offering a platform for innovation and disruption within the financial services sector.