REGULATORY INNOVATION OR LEGAL EROSION? INVESTIGATING THE ACCIDENTAL ARBITRAGE CREATED BY GIFT CITY’S DUAL FINANCIAL REGIME

This paper provides a comprehensive analysis of the legal and constitutional ramifications arising from establishing and operating the Gujarat International Finance Tec-City (GIFT City) and its International Financial Services Centre (IFSC). Conceived as a flagship initiative to position India as a global financial hub, GIFT City offers a suite of regulatory exemptions, tax incentives, and operational flexibilities designed to attract international capital and financial institutions. However, the paper argues that these exceptional measures have created a parallel regulatory regime that contrasts India’s unified financial architecture.

Through doctrinal and comparative legal analysis, the authors explore how GIFT City’s unique framework facilitates regulatory arbitrage, enabling entities to bypass domestic regulations related to taxation, capital controls, and insolvency. The paper highlights the risks of forum shopping, tax base erosion, and the dilution of investor and creditor protections, drawing on both Indian and international precedents. It further examines the constitutional questions raised by the selective privileges granted to GIFT City entities, particularly about the principles of equality before law, fiscal federalism, and the separation of powers between the legislature and the executive.

The study also assesses the broader policy implications of allowing such regulatory enclaves within the Indian legal system, including potential impacts on market integrity, regulatory coherence, and public accountability. In conclusion, the paper offers targeted policy recommendations to reconcile GIFT City’s operational objectives with India’s constitutional and regulatory commitments. These include enhancing transparency, instituting robust economic substance requirements, and ensuring integrated oversight by domestic regulators to prevent the emergence of enclave exceptionalism and to safeguard the integrity of India’s financial and legal systems.