GIFT City has built much of the institutional architecture of an international financial centre. Its bigger challenge now is to develop the regulatory confidence to let financial institutions use that architecture as efficiently as their global competitors do.

GIFT City was conceived with an ambitious purpose: to bring to India financial business that Indian institutions and companies routinely conduct in Singapore, Dubai, Hong Kong, Luxembourg and other international financial centres.

It was never meant to be merely another financial district. The ambition was to create an international financial centre on Indian soil.

There has been considerable progress. Banks, fund managers, exchanges, insurers and other financial institutions have established operations there. The International Financial Services Centres Authority has built an increasingly sophisticated regulatory framework covering banking, funds, capital markets, insurance, bullion and other activities.

The question now is less about whether GIFT is regulated—and more about how it is regulated.

Can an international financial centre compete globally if its regulatory architecture continues to divide complementary financial activities into separate regulatory compartments?

This is not an argument that GIFT has seen no regulatory reform. It clearly has. Nor is every regulatory boundary necessarily inefficient. Different financial activities carry different risks and may legitimately require different capital, governance, disclosure and conduct requirements.

The issue is whether the cumulative effect of those boundaries imposes costs that an international financial centre can ill afford.

Consider fund management.

Fund management is appropriately subject to a separate regulatory framework in GIFT. But the framework itself has become more flexible: qualifying institutions can use branch structures, and a registered Fund Management Entity can undertake several related activities.

The policy question, therefore, is not why fund management is regulated separately. It is whether a well-capitalised and well-supervised financial institution should be able to combine a wider range of complementary activities within a common regulatory architecture, rather than having to reproduce separate compliance and organisational structures for each activity.

This distinction matters because modern financial institutions do not operate in neat regulatory silos.

Banking, wealth management, asset management, custody, derivatives and investment services may be separate businesses legally, but economically they can share clients, technology, data, risk-management systems and human capital.

The greater the regulatory fragmentation, the greater the possibility that these economies of scope are lost.

The same question arises in commodities.

GIFT already has an international bullion exchange and a regulatory framework for bullion markets. But bullion is only one part of the much larger commodity ecosystem.

Indeed, IFSCA itself constituted an expert committee to examine how GIFT could become a global commodity-trading hub. That is revealing. It suggests that establishing the exchange is only the first step; creating the ecosystem around it is a much bigger challenge.

Global commodity business does not migrate simply because an exchange exists. Traders look at products, liquidity, settlement, capital requirements, taxation, market access and, above all, whether related activities can be conducted efficiently within the same jurisdiction.

That brings us to GIFT's larger regulatory paradox.

India wants GIFT to compete with established international financial centres, but the regulatory instinct still tends to be one of controlling the structure of business rather than simply controlling the risks of the business.

There is nothing unusual about prudential caution. Singapore and other successful financial centres are hardly laissez-faire jurisdictions. They have stringent capital, conduct, anti-money-laundering and supervisory requirements.

The difference is that international financial centres also compete on something less visible: regulatory flexibility and predictability.

A regulator can try to prevent every conceivable misuse by prescribing in advance what an institution can do, through which entity and under what conditions.

Or it can establish clear boundaries, monitor behaviour closely and impose predictable and meaningful penalties when those boundaries are crossed.

The first approach seeks to prevent regulatory failure.

The second seeks to make regulation itself more efficient.

This is where the phrase “ease of doing business” is often misunderstood.

Ease of doing business does not mean ease of getting away with wrongdoing. It does not mean weaker prudential standards or lax supervision.

It means making legitimate business easier while making violations harder and more costly.

That requires confidence in surveillance and enforcement.

If a financial institution knows precisely what it can and cannot do, and knows that crossing the line will attract a swift and material penalty, the regulator need not necessarily prescribe every aspect of how the institution organises its legitimate business.

This is not deregulation. It is rules-based regulation.

And that is where GIFT could perhaps think differently about regulatory arbitrage.

Regulatory arbitrage is normally viewed negatively—as though companies exploit gaps between rules to escape regulation. But there is another form of arbitrage that is entirely legitimate: jurisdictional arbitrage.

A global bank or fund manager will naturally compare the cost and flexibility of operating in Singapore, Dubai, Hong Kong, Luxembourg or GIFT. If two jurisdictions provide broadly comparable prudential safeguards but one allows complementary businesses to be organised more efficiently, business will gravitate towards the latter.

There is nothing improper about that.

It is precisely how international financial centres compete.

For GIFT, therefore, the danger is not necessarily excessive regulation in the conventional sense. It is regulatory friction.

Every individual rule may be defensible. But the cumulative effect of separate registrations, compliance requirements, entity-level restrictions and organisational boundaries can create a regulatory tax that is invisible in any single rule.

That tax matters because financial business is exceptionally mobile.

The next stage of GIFT's regulatory evolution should therefore not simply be another exercise in adding permissions and frameworks.

It should include a periodic regulatory spring-cleaning.

Every significant restriction should face three questions: What market failure is it intended to prevent? Is the restriction necessary to prevent it? And could the same objective be achieved through capital, disclosure, governance, supervision and penalties rather than organisational separation?

If the answer is yes, the restriction deserves reconsideration.

This does not mean GIFT should copy Singapore or Dubai. It needs a regulatory architecture suited to India's financial system and its own international ambitions.

But an international financial centre cannot compete merely by offering tax incentives, modern infrastructure and an Indian regulatory home.

It has to offer something financial institutions value just as much: the ability to conduct legitimate business efficiently, within clear and predictable rules.

The ultimate test of GIFT will therefore not be the number of banks, funds or exchanges it attracts.

It will be whether a global financial institution can eventually conduct a meaningful range of related businesses there as one integrated business, rather than as a collection of regulatory compartments.

The question is no longer simply how many new financial activities GIFT can permit.

It is how many unnecessary boundaries it can remove without compromising capital, conduct and financial stability.

That may be the more consequential regulatory reform of all.

For GIFT to become genuinely global, India may have to move from a regulatory philosophy that seeks to ensure “nothing must go wrong” towards one that says: “the rules are clear; legitimate business is free to operate within them; and if the rules are broken, the consequences will be certain.”

That is not weaker regulation.

It is regulation confident enough to trust the rules—and strong enough to enforce them.