Abu Dhabi Investment Authority (ADIA), the largest sovereign wealth fund in the United Arab Emirates (UAE), is reportedly in the process of establishing a $4-5 billion fund to invest in India through a tax-neutral finance hub in Prime Minister Narendra Modi's home state of Gujarat. Two sources with direct knowledge of the matter revealed that the regulatory authority for financial services at Gujarat International Finance Tec-City (GIFT City) has granted in-principle approval for ADIA to set up the fund, marking a significant development.

ADIA's intention to establish a presence in the hub was initially announced in July, in a joint statement by India and the UAE. The exact amount of investment planned and the approval from the regulatory authority have not been previously reported. The sources, who declined to be identified, emphasized that ADIA would become the first sovereign wealth fund to invest in India via GIFT City once the plans come to fruition. A spokesperson for ADIA declined to comment, and an email to the International Financial Services Authority (IFSCA), which regulates financial services in the hub, remained unanswered.

The approval comes just days before Prime Minister Narendra Modi is scheduled to visit Abu Dhabi to inaugurate a large temple. Modi's frequent visits to the UAE have played a crucial role in strengthening ties with India's third-largest trading partner. Trade between India and the UAE reached $85 billion for the financial year ending March 2023, according to Indian government data. The UAE is also home to one of the largest Indian diaspora populations globally, comprising approximately 3.5 million individuals, constituting almost 35% of the UAE’s total population.

Sources familiar with the matter stated that ADIA could commence investing through the fund by the middle of this year. The allocated funds are expected to be invested in India over a period of time. Funds established in GIFT City have the flexibility to invest in Indian and foreign equities, debt securities, and various other assets.

In recent months, Modi's government has been actively working to boost activity at GIFT City, including allowing unlisted Indian firms to list shares directly at exchanges within the hub. Finance Minister Nirmala Sitharam, in her recent budget announcement, highlighted the government's aim to position GIFT City as a "gateway for global capital and financial services for the economy."

GIFT City offers a 10-year tax holiday for companies setting up operations, no taxes on fund transfers from overseas jurisdictions, and proximity to Indian markets. ADIA and its wholly-owned subsidiaries have been exempt from long-term capital gains taxes on Indian investments via a special provision introduced in 2020, applicable until March 2025. Fund management activities through the hub have gained momentum, with 95 local and global funds having commitments of $30 billion and investments exceeding $2.93 billion as of December 2023.