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SVB Crisis Tests Indias New Finance Hub Potential

SVB Crisis Tests Indias New Finance Hub Potential

The rapid collapse of Silicon Valley Bank has brought sudden relief to India's fledgling financial hub. Long a minority player in global finance, India has the potential to increase its role, but only if it moves quickly to remove some regulatory hurdles.

This week, many Indian startups rushed to open new bank accounts in Gujarat's GIFT City, India's global fintech city, after receiving SVB deposits. Accounts opened at an International Financial Services Center, or IFSC, are exempt from India's strict capital controls as funds are held in US dollars. And at a time when US banks are under pressure, GIFT Citizens Accounts remain within the safety net of capital adequacy standards set by the Reserve Bank of India.

Harshel Mathur, CEO of the fintech company that helped Indian startups raise money from SVB , SIVB -60.41%, said at least $200 million was transferred to bank accounts managed by Indian banks in GIFT City last week.

Siddharth Pai, founding partner of 3one4 Capital and a member of the Private Equity and Venture Capital Association of India, said Indian startups are rethinking their US headquarters after SVB's collapse.

The GIFT City project, which has been in the works for more than a decade, was designed to experiment with an open capital account, the absence of which has hindered India's risk-free participation in global financial markets. . Related to uncontrolled capital flows. And from the country. The government wants you to be the financial center of the world.

However, despite various tax breaks and incentives, the growth is slow. In the year Financial institutions held assets worth $29.38 billion in the GIFT City IFSC at the end of March 2022, according to government data, nearly double from a year earlier. But this still makes it a bit fishy compared to its peers in Singapore.

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And there are several obstacles to making GIFT City a viable option.

First, most of the companies that invested in SVB were mandated by venture capital investors with significant operations in the United States or headquartered there who preferred the security of a Delaware corporation. This makes it easier for these investors to move funds and ease the path to a US listing.

Another problem is that IFSC banks are dependent on SWIFT, the messaging system used by financial institutions around the world. Transferring money to an account is expensive and time-consuming. SWIFT must also define the six "Know Your Customer" clauses. In comparison, transferring money to the United States is much faster and cheaper.

India established a Financial Controller for IFSC only in April 2020. Earlier, banks, capital market products and funds under IFSC were regulated by regulators in India.

Finally, while it is relatively easy to communicate with foreign counterparts in the IFSC, moving funds between it and the rest of India is difficult because the Indian rupee is partially convertible. And with another global recession looming, a fully convertible currency is a long way off.

As next year's general elections approach, politics may also intervene: the IFSC was founded by current Prime Minister Narendra Modi.

For now, VC-backed startups can opt for GIFT City accounts over other options to transfer funds to their Indian branches. But GIFT City's gains from the SVB fiasco are likely to be temporary unless New Delhi takes swift steps to ease deals there and gets early stage VCs on board.

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Email Megha Mandavia at [email protected]

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