Case Study – Mlegal – Gift City

What is GIFT City?

GIFT City, short for Gujarat International Finance Tec-City, is India’s first and only International Financial Services Centre (IFSC), located in Gandhinagar, Gujarat. Think of it as India’s answer to Singapore, Dubai, or the Cayman Islands: a specially designated financial zone where businesses operate in US dollars, under a globally benchmarked regulatory framework, with significant tax advantages built directly into Indian law.

The zone is regulated by a single authority, the International Financial Services Centres Authority (IFSCA), which oversees everything from banking and insurance to fund management and FinTech within GIFT City’s boundaries. This unified regulatory model is one of GIFT City’s defining features. Rather than dealing with multiple regulators, entities operating in GIFT City have a single point of regulatory engagement, which reduces friction and speeds up the process of getting a fund off the ground.

For fund managers and investors, GIFT City offers something that offshore jurisdictions cannot match: the ability to manage India-focused capital from within India’s own regulatory perimeter, with statutory tax exemptions that do not depend on tax treaties. As those treaties have eroded over the past decade, and as treaty-based structures have come under increasing scrutiny from Indian tax authorities, GIFT City has grown significantly in strategic relevance. It is no longer a market in development. It is a market in operation, with a growing ecosystem of banks, fund administrators, custodians, law firms, and compliance professionals already established within its boundaries.

Background and Client Context

Our client is a well-established, India-focused investment manager overseeing approximately USD 600 million in assets. The firm has been active for over a decade, with a strong track record of backing growth-stage companies across the technology, healthcare, and consumer sectors. Approximately 85% of their portfolio is invested in Indian businesses, the majority of which are unlisted companies at various stages of their growth journey.

Like many India-focused managers of their generation, the client had structured their fund offshore. The flagship fund was set up as a partnership entity registered in the Cayman Islands, with a General Partner company incorporated in Mauritius holding the regulatory approvals needed to invest in Indian markets. This was the standard approach for years, and for good reason. The Cayman-Mauritius structure offered tax efficiency, a well-understood legal framework, and familiarity for the international institutional investors who formed the bulk of the client’s LP base.

The investment team, however, was based in India. The fund management decisions were made in India. The portfolio companies were in India. The structure was offshore in form, but Indian in substance. For a long time, this arrangement worked well. Then the landscape shifted, in ways that the client had not fully anticipated when the fund was first set up.

The problem: A series of changes to India’s international tax architecture fundamentally altered the economics of the Cayman-Mauritius structure. Most significantly, India amended its tax treaty with Mauritius, with effect from April 1, 2017. Under the revised treaty, capital gains on Indian investments made through Mauritius-based structures were no longer exempt from Indian capital gains tax. The Principal Purpose Test introduced under the OECD Multilateral Instrument added a further layer of uncertainty, enabling Indian tax authorities to deny treaty benefits where the principal purpose of a structure was to obtain a tax advantage.

The practical consequence was significant. Profits from selling stakes in Indian portfolio companies through the existing structure became subject to Indian capital gains tax at rates of up to 20% for long-term gains. For a fund making multiple exits each year across a large portfolio, this was a material drag on net investor returns. It also made fundraising conversations more complicated, as sophisticated LPs began asking questions about the tax efficiency of the structure that were harder to answer than they had been in earlier years.

The client approached M Legal in mid-2025 to undertake a comprehensive review of their fund structure and to assess whether relocating their fund management operations to GIFT City and launching their next fund under the IFSCA (Fund Management) Regulations, 2025 would offer a structurally superior alternative for their next fundraise.

Legal and Regulatory Issues Identified

M Legal’s initial diagnostic identified five key issues to work through. Each required careful analysis before the client could make an informed decision about whether and how to proceed with the transition.

1. Would Capital Gains Be Tax-Free in GIFT City?

This was the central question, and the most important one for the client’s investors. If the new fund was structured as a GIFT City fund qualifying as a “Specified Fund” under India’s Income-tax Act, 2025, would profits from selling Indian portfolio company stakes be exempt from Indian capital gains tax?

The answer was yes, and the distinction from the existing structure matters enormously. The Cayman-Mauritius structure had relied on a tax treaty for its exemption, and that treaty protection had been substantially legislated away. A treaty-based exemption is only as durable as the treaty itself, and India’s recent track record of amending or terminating beneficial treaty provisions is well documented.

The GIFT City exemption works differently. It is written directly into India’s domestic tax statute, the Income-tax Act, 2025, as part of the broader framework of incentives for IFSC-resident entities. It does not depend on a bilateral treaty that can be renegotiated. It does not depend on passing a Principal Purpose Test or satisfying a beneficial ownership condition imposed by a foreign jurisdiction. M Legal confirmed that a properly structured GIFT City Restricted Scheme, meeting the eligibility conditions for “Specified Fund” status, would face an effective capital gains tax rate of nil on Indian portfolio exits. This compared to a rate of up to 20% under the legacy Cayman-Mauritius structure, representing a meaningful improvement in net return for investors across the life of the fund.

2. Foreign Exchange and Investment Compliance (FEMA)

Moving the fund management function to GIFT City while retaining an investment advisory team in India required careful navigation of India’s foreign exchange laws, governed by the Foreign Exchange Management Act (FEMA). The regulatory architecture here is nuanced. GIFT City entities are treated as persons resident outside India for FEMA purposes, which gives them significant flexibility for cross-border transactions, but also creates compliance obligations that must be mapped carefully.

The proposed structure involved three connected entities working together. First, the Indian advisory team would continue to provide investment research and advisory services from India under a formal advisory agreement. Second, a new Fund Management Entity (FME) would be incorporated in GIFT City as the IFSCA-registered fund manager, responsible for investment decisions and regulatory compliance. Third, the GIFT City Restricted Scheme would be the vehicle through which investors participated in the portfolio.

M Legal advised in detail on the flow of management fees and carried interest between the Indian advisory entity and the GIFT City FME, ensuring that the arrangement was structured at arm’s length and supported by appropriate transfer pricing documentation. The team also advised on the mechanism for the fund to invest into Indian unlisted companies through the Automatic Route under the FEM Overseas Investment Rules, and on how distributions back to investors, both Indian and international, would be treated under FEMA. The structure was confirmed to be fully compliant, with no risk of the capital being characterised as impermissibly round-tripping through GIFT City back into India.

3. What Happens to the Existing Portfolio?

One of the most practically complex aspects of the transition was managing the client’s existing Cayman fund alongside the new GIFT City vehicle. The existing fund held an active portfolio of 12 Indian unlisted investments, several of which were at relatively early stages in their holding period and not yet ready for exit. The client needed a clear strategy for these legacy assets.

Simply merging the existing Cayman fund into a new GIFT City vehicle was not a viable option. Such a merger would have constituted a “transfer” under FEMA, potentially triggering tax consequences for the fund and its portfolio companies, and creating significant regulatory complexity. The income-tax implications of a deemed transfer of portfolio assets at market value would have been costly and difficult to manage.

M Legal recommended a parallel run approach. The existing Cayman fund would continue operating under its current structure, receiving no new investor capital, and winding down gradually as portfolio companies matured and were exited over the coming years. At the same time, the new GIFT City fund would be launched to receive fresh investor commitments and make new investments going forward. This approach preserved the existing fund’s structural integrity while allowing the client to move decisively to the GIFT City model for all new activity.

For investors in the old Cayman fund who wished to gain earlier exposure to the new structure, M Legal designed a secondary transfer mechanism that allowed them to transfer their interests in the Cayman fund to the new GIFT City scheme in a manner that was compliant with both IFSCA requirements and FEMA. Several existing LPs took up this option.

4. Registering the Fund Management Entity and the Fund

M Legal led the end-to-end IFSCA registration process, which covered both the FME and the Restricted Scheme. This was a detailed and iterative process, involving close engagement with IFSCA at multiple stages.

For the FME registration, the team prepared the full application package, including verification of prescribed net worth, credentials and background checks for key management personnel, and documentation of the compliance and risk management framework that the FME would operate under. IFSCA’s registration process has become more streamlined in recent years, with online filing and faster query resolution, though the quality and completeness of the application materials remains critical to avoiding delays.

For the Restricted Scheme, M Legal drafted the Private Placement Memorandum (PPM), the primary document through which the fund is offered to investors. The PPM incorporated IFSCA’s prescribed disclosures alongside the client’s specific investment strategy, target sectors, fee structure, governance arrangements, and investor rights. The document was reviewed by counsel in multiple investor jurisdictions to ensure it met local placement requirements for the fund’s target LP base.

Two non-standard structural features required direct negotiation with IFSCA. The first was a co-investment vehicle, a separate GIFT City LLP established alongside the main fund to allow anchor investors to participate directly in selected portfolio company investments on customised economic terms. The second was a management fee rebate mechanism for anchor investors committing above a specified threshold. Both features were agreed with IFSCA following a period of engagement and regulatory discussion.

M Legal also drafted the Limited Partnership Agreement (LPA) for the fund, constituted as a Limited Liability Partnership under GIFT City law. The LPA was negotiated with anchor LPs over several rounds, covering governance, key person provisions, investment restrictions, reporting obligations, and exit mechanics.

5. FPI Registration for Listed Market Access

The client’s investment mandate included the ability to invest in Indian listed securities alongside their primary unlisted portfolio, for liquidity management and opportunistic exposure to listed growth companies. This required the GIFT City fund to obtain registration as a Foreign Portfolio Investor (FPI) under SEBI’s FPI Regulations.

A GIFT City-registered FPI benefits from certain procedural advantages relative to FPIs registered from Mauritius or the Cayman Islands. As an IFSCA-regulated entity, the GIFT City FME is treated as an appropriately regulated intermediary for KYC and AML purposes, which simplifies the onboarding process with designated depository participants and reduces the disclosure burden in certain circumstances.

M Legal coordinated the FPI registration application with the client’s domestic Indian legal and compliance team, managing the interface between the IFSCA regulatory framework and the SEBI FPI Regulations to ensure a smooth and timely registration.

The Structure Implemented

Following completion of M Legal’s analysis and the IFSCA registration process, the following structure was put in place.

The GIFT City Restricted Scheme was established as a Limited Liability Partnership under GIFT City law, with the GIFT City FME as the managing partner responsible for fund management, investment decisions, and regulatory compliance. The scheme qualified as a Specified Fund under the Income-tax Act, 2025, securing the statutory capital gains exemption on Indian portfolio exits.

The FME maintained substantive operations in GIFT City, including a registered office, a full-time compliance officer, and a risk management function staffed with appropriately qualified personnel. This substantive presence is a requirement both under the 2025 FM Regulations and under the Income-tax Act, 2025 for the purposes of qualifying for the IFSC tax incentives. It is not a letterbox arrangement.

The Indian advisory entity provided investment advisory services to the FME under a formal, arms-length advisory agreement, supported by transfer pricing documentation prepared in accordance with the Income-tax Act, 2025. The advisory fee was benchmarked against comparable arrangements in the market and documented accordingly.

A co-investment vehicle, structured as a separate GIFT City LLP, was established alongside the main fund to allow anchor investors to participate directly in select deals. This vehicle was registered separately with IFSCA and operated under a co-investment policy agreed with the FME’s investment committee.

Outcome and Key Learnings

Tax efficiency: The new structure eliminates Indian capital gains tax on portfolio exits, representing a structural improvement of up to 20 percentage points in net return compared to the Cayman-Mauritius structure. For a fund of this size, the aggregate tax saving across a typical portfolio lifecycle runs into tens of millions of dollars.

Regulatory compliance: The structure was designed and implemented without triggering any adverse foreign exchange characterisation. There were no round-tripping concerns, no deemed transfer issues, and no FEMA violations arising from the transition.

Investor response: The fund documents were well received by the client’s existing LP base, which includes institutional investors from the United States, Europe, and Asia. Several investors who had been in the old Cayman fund committed fresh capital to the new GIFT City fund, and a number transferred their legacy interests through the secondary mechanism M Legal had structured.

Timeline: From the date of first instruction to IFSCA registration of the FME and first close of the Restricted Scheme, the process took approximately 22 weeks. This is broadly comparable to a Cayman Islands fund formation timeline and significantly faster than many clients initially expect when they first consider GIFT City.

Four things this transaction taught us about the market:

1. The statutory tax exemption for GIFT City Specified Funds is structurally more durable than treaty-based protection. For India-focused managers, this is now the decisive factor in any fund formation conversation, and the gap between GIFT City and traditional offshore jurisdictions on this point is only widening.
2. The parallel run is the right transition strategy for managers with active offshore portfolios. Attempting a direct merger or transfer of the legacy fund creates regulatory and tax problems that far outweigh the administrative convenience of a single consolidated vehicle.
3. IFSCA’s registration process has improved significantly since 2022, with online filing, faster query turnaround, and clearer regulatory guidance. That said, specialist legal advice remains essential, particularly for funds with non-standard structural features that require direct engagement and negotiation with the regulator.
4. Transfer pricing documentation for the FME and Indian advisory arrangement must be robust, properly benchmarked, and kept current. It is not sufficient to put an agreement in place at inception and leave it unchanged. As the fund grows and the advisory relationship evolves, the documentation must keep pace.

M Legal’s Role

M Legal provided end-to-end advisory services across the full lifecycle of this transaction, from initial diagnostic through to fund launch and first close. The scope of work included regulatory strategy and IFSCA engagement, FEMA and overseas investment structuring, income-tax analysis and Specified Fund qualification, FME and Restricted Scheme registration, PPM and LPA drafting, FPI registration coordination, and investor communication and LP negotiation support.

This case study is an anonymised and composite representation of M Legal’s advisory experience in the GIFT IFSC fund formation space. It is intended for illustrative and informational purposes only and does not constitute legal advice. Specific facts and circumstances will vary. For tailored advice, please contact the M Legal GIFT IFSC practice team.

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