Friends, today I want to remind you all of one more thing. Today the world... We are witnessing the success of Vibrant Gujarat. The Gibb City Exchange is a very historical moment of our capital market.
Gibb City is making its strong identity in the form of commerce and technology. One of the major points of its success is its world-class infrastructure, many of which have been implemented in the country for the first time. And the vision was to create a financial centre that can compete with the likes of London, Tokyo, Shanghai etc.
How did this happen? transformation happened because of one leader and he is Shri Narendra bhai Modi the most successful Prime Minister in India's history Hi everybody, zero tax policy is one of the most lucrative and perhaps the most impossible policy in the 21st century. And while countries like UAE and Qatar have used their oil money to nullify their taxes, in India, zero taxes is something that nobody could ever imagine. But you know what guys, in 2008, while the entire world was witnessing a financial crisis, Modiji as the Chief Minister of Gujarat was laying the foundation for a financial hub in India which would have zero taxes for 10 freaking years.
India's golden past dreams are also connected. Ease of doing business through single window approvals. Gift City today is recognized by the Global Financial Centers Index. has placed gift city as very progressive and with full of potential.
Sounds crazy isn't it? Well as it turns out after 15 long years that dream is finally coming to reality and as it turns out India India is building an extraordinary city in the state of Gujarat that might go on to compete with legendary places like Dubai and Singapore. And this city is what they are calling the Gujarat International Financial Tech City or GIFT City.
Now even though I have a lot of disagreements with the Modi government, every time I read about Gujarat, I am just fascinated by the visionary governance of Gujarat. The gateway of modern India's growth, Gujarat. Gujarat. decades has accelerated its overall economic development. This state is one of the most progressive states in the country.
It's the fastest growing. It has a government that works. So the question is, what exactly is the Gujarat International Financial Tech City all about? How is the Gujarat government building the next Dubai and Singapore right at the heart of Gujarat?
How will it help India become more powerful at the global stage? And most importantly, what are the challenges of failure that Gujarat government has to overcome to succeed? succeed in this legendary project. Chalo, let's get started on the basics and try to understand what exactly puts India way behind in business as compared to foreign countries.
Firstly, if you look at the average corporate tax in India, it stands at 25.17% whereas Dubai stands at 0%, Malaysia stands at 3% and Singapore stands at 17%. This is the reason why startups often engage in something called startup flipping. And here's how it works out to benefit the startups but eventually harms our Indian economy.
So let's understand this using a story. In this scenario, Think School India makes 200 crores in revenue and 100 crores in profits. Now if I were to pay taxes as per the Indian tax system, we would pay 25.17 crores in taxes. This is a lot of money, right?
So to avoid this, here's how we would find a workaround. Let's consider scenario B. In this scenario, we would form a holding company called Think Singapore and re-register Think School India as a subsidiary of Think Singapore. Secondly, we would transfer our software patents to Think Singapore.
So Think Singapore now will own all of our software. And because Think Singapore owns the software, Think School India will now pay royalties to the holding company for using its software. So let's say the royalty for 2023 is 90 crores. So out of the 100 crore profit that we make, we would pay 90 crores to Think Singapore in royalties. So now our profit has effectively reduced from 100 crores to 100 minus 90 crores to just 10 crore rupees.
And on this 10 crore profit, we would pay 25.17% tax, which is just 2.51 crores. And at the same time, since Think Singapore had made a profit of 90 crores by charging us royalties, we would pay a 17% tax on it in Singapore. So our tax in Singapore would be 15.3 crore rupees.
Now if you compare the tax taxes in scenario A and scenario B, you will see that in scenario A, we had to pay 25.17 crores in taxes, whereas in scenario B, we just had to pay 2.51 crores plus 15.3 crores, which is 17.81 crores in taxes. So even with just 100 crores in profits, we could save 7.36 crores in taxes. Now you can imagine how much money is flowing out of India when companies make 1 and 2 lakh crores in profits.
This is also the reason why VCs often want to fund companies which could get re-registered in the US, UK or Singapore. So in short, our Indian startups either lose funding or they'll have to re-register themselves in other countries because of which our tax money is going outside. This is the startup flipping problem in India. Secondly, when it comes to legal and IP matters, places like Delaware and the US have become startup magnets. Why?
Because their legal processes are super fast and the result comes out within weeks. For example, it takes about four to six years in India to settle a case. But in Delaware, it just takes three months to 18 months max.
So if a billion dollar company sues another billion dollar company for $100 million for a software IP, in India, by the time the case is resolved, the software itself might have gone outdated. So with each passing month of delay in IP resolution, it is hundreds of millions of dollars wasted for startups and giant tech companies. This is again the reason why they do not register themselves in India and we lose out on taxes.
But when it comes to India, what we have is the NCLT, High Court and Supreme Court. And here's where the corporate cases are also filed along with thousands of other cases. And you already know how overloaded our judicial system is, right?
More than 40 million cases are pending in India, 40 million pending. More than 70,000 cases are pending in the Supreme Court alone. Well, between 2010 and 2020, pendency across all courts grew by 2.8% annually. It says the average case in the Supreme Court can take 13 and a half years to make it all the way through.
Proceedings in the top court can account for about a third of that time. It's a crisis of the institutional processes and procedures of the court. This is the reason why it takes years to process an IP case and companies again.
prefer to be registered outside of Indian jurisdiction. So again, we lose out on tax money. And lastly, India also has an overseas banking problem.
For example, let's say there is a popular fast food chain in India called Venkat's Idli Company. They make amazing idlis and dosas and have shops all over India. Now, if they want to open up a store in New York, for this big move, Venkat's Idli Company needs money in dollars and not rupees. But when they ask American banks for a loan, The banks say no. Why?
Because the banks don't know anything about Venkat's idli company. And even though the documents can be checked, the trust is low because it has been operating in a different country. This is a very common reason amongst Indian companies trying to grow their business in other countries. So to solve this problem, Indian banking ledgers like HDFC found a way to help them. So what HDFC did is they opened their own branches in the US and converted their rupees into dollars.
This way, they could give loans to Indian companies in dollars in America. So, this looks like the perfect solution, right? Well, not really, because there are three problems with it.
Firstly, setting up a bank branch abroad is a very difficult task and it's a very costly affair. And until now, only a few Indian banks have been able to do it. Secondly, the businesses that these banks generate contribute to the foreign country's economy instead of the Indian economy.
And thirdly, the jobs are again created on foreign land. So while Venkat's Italy company can fulfill its dream of opening a shop in New York, it's very costly, it's very difficult and contributes to foreign economy instead of India even if it is possible. And lastly, as per Indian laws, Indian companies are not allowed to list in foreign exchanges.
And now two questions arise over here. Firstly, why do we need to list our companies in the American stock exchange? And secondly, how does gift city solve this problem?
To answer the first question, extra capital from a different market always helps. So if an Indian company is able to raise money in the American Stock Exchange, that gives them a great edge and gives them a source of money. And this is when you need to understand the concept of Depository Receipts. Now if you know the concept of Depository Receipts and how it works, then please skip to this timestamp.
If you don't, here's a very simple explanation of the same. Let's say Think School wants to get listed in the New York Stock Exchange. So what Think School will do is, it will first sell its shares to a local bank.
Let's say this local bank is HDFC. So now Think School will give 10,000 shares to HDFC to keep them safely in their custody. And simultaneously, there will be another bank called the Depository Bank in the US that will collaborate with HDFC to establish an arrangement.
And As per this arrangement, these 10,000 shares will be traded in New York Stock Exchange as ThinkSchool ADR or ThinkSchool American Depository Receipt. And this DR derives its value from the underlying shares of ThinkSchool in India. So if ThinkSchool shares are worth 10,000 rupees each at a conversion rate of 1 is to 80, ThinkSchool ADR will get listed at $125 a share.
This is how companies like Tata Motors and ICICI have raised money using ADR from the American markets. Now, although this process allows Indian companies to raise capital from foreign markets, it's a long and cumbersome process for companies and involves a very high servicing fee and very high commissions. Similarly, if Indian investors want to invest in a foreign company like Apple, it's again a big headache and investors actually do not get the ownership of shares in his or her DMAT account at all. Now, you might say, bro, what are you saying?
I invest in Apple through so many of these apps in India. So what are you saying? Well, here's the catch guys.
If you use any application to buy foreign shares, what actually happens is this. Let's call this company Indian Wall Street Company. So when you and 10 other investors place the order for 10 Apple shares on the Indian Wall Street app, the Indian Wall Street Company will place the order for 100 Apple shares from its brokerage account to the broker in the US.
And then... This broker in the US will buy the shares and record it in the name of Indian Wall Street company and not with the name of specific investors like you and me. And these shares will sit in the brokerage account of the Indian Wall Street company and not in the name of the investors.
Now you might say, so what bro, I am able to buy and sell shares and make a profit. So who cares whose name the shares are in? Well, there is no problem at all, but there is a certain amount of inefficiency. For example, if the price of Apple shares increases by $10, the Indian Wall Street company will get all the money in its brokerage account and then it will distribute it to the investors. But if there is any issue with the broker sitting in the US or if the broker in the US goes bankrupt, then Indian laws will not protect you for your shares.
And not just that, over time, there is a lot of servicing fee and commission fee which is paid to foreign brokers, which is again very costly for both Indian companies as well as Indian investors. This is where Singapore or Dubai's financial centers outperform India by a large large extent because with these financial centers an investor can invest in multiple markets across the world very very easily. So long story short there are four problems that we face in India currently which requires a financial center.
Number one taxes and startup funding, laws and slow legal system, overseas banking and investing abroad. So the question over here is how on earth is India going to solve this problem? Well, this is the reason why the Prime Minister of India launched the Gift City. And this project is considered to be one of the most important pillars to turn India into a $5 trillion economy. Gift City is making its strong identity in the form of commerce and technology.
And the vision was to create a financial center that can compete with the likes of London, Tokyo, Shanghai, etc. Gift City is now home to 23 international... banks such as JP Morgan, Barclays and HSBC. So the question is, how will Gift City solve these financial problems of India? Well, Gift City is India's first smart city and an international financial services centre.
It has two zones. One is the domestic zone, which is similar to any other city in India. And the other is the multi-services special economic zone.
which is specially notified as India's only IFSC or International Financial Services Centre. IFSC in India is an offshore zone within onshore India under the foreign exchange laws of India. So the IFSC zone is treated as a foreign territory.
So today if Think School opens up a subsidiary or a branch in the IFSC zone of Gift City, it would be treated as an entity set up outside of India under the forex laws of India. And this is what brings some game-changing benefits to businesses and the economy of India. So let's dig deep and try to understand this master's talk of Indian government properly. Let's start with startup flipping. In gift city companies can get a 10-year tax holiday out of 15 years.
On top of that there is no GST, no stamp duty and a very competitive tax regime for capital market businesses. In simple words the export of financial services from gift city is tax free. This is how the government is trying to make our institutions more competitive in the international market. Secondly, Gift City has a single window clearance system for most of its processes. So businesses can get approval for all the things they need from just one regulatory body instead of going to different places.
So if you're a founder or a business owner, you should definitely check out Gift City and its opportunities. Then we come to banking. You remember how Venkat's company needed to take a loan in dollars to Open a store in New York? Well now, with Gift City in India, instead of opening up a branch in New York, an Indian bank can set up an international banking unit in Gift City itself. And with this IBU or International Banking Unit, they can still give the same loan in dollars to Venkat's Idli company and do their operations from India itself.
Now you might say, bro, if the business that needs this loan is set up in the US, the money is still going out, na? Then what's the point of having this in the Gift City? Well, you are right. The loan amount is definitely going out of the country. But it has three benefits.
Firstly, the loan approval, administration and documentation are managed from Gift City itself. So the transaction fees and revenue is generated in India itself. Secondly, having an international banking unit makes it super easy for Indian banks to engage in international financial transactions without having to bear the high cost of setting up branches in foreign land. And most importantly, because these international banking units are in India itself, It becomes very easy for an Indian business to expand in foreign land because now they can get loan in dollars very very easily. Cherry on the cake, because the branch is now based out of India, it will also pay taxes here and contribute to the Indian economy.
So jobs, ease of business and revenue benefits stays in India only for Indian business specifically. If this is very very clear to you, let's come to the banking. The gift city has its own international exchange. So now...
Indian investors can trade the shares of foreign companies in the US and foreign investors can trade in Indian companies share in the same exchange in the gift city. Now you might ask how is it possible and what exactly did India change? Well as it turns out we changed nothing much.
It's just that instead of the Dias trading in the New York stock exchange they will now be traded in the gift exchange. So Indian investors who want to invest in Apple stock will buy shares through the broker sitting in the gift city and not in New York. So now if something goes wrong, investors can rely on gift regulations instead of a foreign country's regulation.
And the best part is to make this offer even more lucrative, the funds or portfolio managers who set up their account in gift city can claim a tax deduction for 100% of their income owned for 10 freaking years. This is how the gift city is laying the foundation to revolutionize overseas banking in India. And lastly, when it comes to legal and IP protection, Gift City has collaborated with Singapore International Arbitration Center or SIAC and using their support the dispute resolution could be done very very quickly and experts from diverse fields from across the globe have come together to resolve the disputes faster and this fast dispute resolution will help them attract more firms to set up offices in Gift City. So this is how we are trying to compete with Delaware in terms of the speed of dispute resolution. This is how gift city is solving for four critical problems in the Indian economy, which are taxes and startup funding, laws and slow legal system, overseas banking and investing.
And this provides three magical superpowers for Indian businesses that they have never had. Firstly, it will incentivize Indian companies to be registered in India because of which all the tax money eventually will stay in India. Secondly, if Indian companies want to expand abroad, The infrastructure and facilities at gift city will make it very easy for them to secure financial support so that they can expand abroad without any hassle. And lastly, if Indian companies can easily get listed abroad, and if they can raise money from American and European markets, that is going to give them extraordinary access to capital.
As a result, it's going to be amazing for our economy. And if you look at the result, it's absolutely mind blowing. The International Financial Services Center already hit a monthly turnover of $62.8 billion, has an asset banking size of $48 billion, and $632 billion of banking transactions have already been done. So now the question is, in 2023, are we ready to compete with Dubai and Singapore already?
Well, as of now, there are three major challenges that the gift city needs to tackle. The first challenge would be talent pool. You see, While Mumbai and Delhi are aspirational places for bankers, Gift City is located in Gandhinagar. So Gandhinagar needs to have world-class facilities for employees, companies and the families of these employees such that they can have the same standard of living that they would otherwise have in a place like London or Dubai.
And currently, we are far from that. So right now, Gandhinagar does not have an aspirational ecosystem or image for a banker to shift his base from Dubai or London to Gandhinagar. For that matter, even from Mumbai to Gandhinagar.
But at the same time, the government is working extremely hard to make sure that they turn Gandhinagar into a conducive ecosystem. As of now, they've already allowed alcohol and they've laid some crazy foundations for their infrastructure. For example, Gift City has placed all the utilities like drainage and electricity in a single tunnel that goes all across the city. city.
So unlike Mumbai, there is no need to excavate the roads for renovation, repair, maintenance or upgradation. So whatever gets built in gift city, first of all, it will get built very, very quickly. So the infrastructure growth is expected to be extremely rapid.
And secondly, it will happen with minimal chaos. And if you look at cities like Mumbai or Delhi, chaos is the number one reason why the standard of living in these cities goes down. Secondly, Dubai and Singapore are innovating at a tremendous pace and they are coming up with new financial services and products almost every few years. So Gift City has to keep pace with them and without that, Gift City will again become an old school financial center. And lastly, many products are currently not traded in Gift City.
So investors might not want to trade some products in Gift City because of which they might again move to New York Stock Exchange. And when we spoke to the MD of Kotak Mutual Funds, he told us, that there are several products like forwards, swaps and SPACs that are yet to be introduced at Gift City. So if an ecosystem for talent and its families is built to make Gandhinagar as lucrative as Delhi, Mumbai, London and Dubai, and if we keep innovating at the same pace as Singapore and Dubai, Gift could become a game changer for the Indian economy. So as usual, what we need to wait and watch is whether Gift City remains as a revolutionary idea or goes on to become a revolution itself. That's all from my side for today guys.
If you learned something valuable, please make sure to hit the like button in order to make YouTube ever happy. And for more such insightful business and political case studies, please subscribe to our channel. Thank you so much for watching.
I will see you in the next one. Bye bye.