Technology is such a thing that any boundaries do not bind it. But in March 2023, the tech sector was hit hard by a major bank collapse - Silicon Valley Bank.
Silicon Valley Bank (SVB), once counted as one of the major American Banks that helped millions of Indian American and Indian startups for almost four decades and became the largest bank in Silicon Valley because of its huge funds, went from solvent to bankrupt within no time on 10th of March, 2023.
The collapse of Silicon Valley Bank opened up the wounds of the world’s biggest bank failures - the collapse of Washington Mutual Fund in 2008 of $307 million and the collapse of First Republic Bank in 2023 of $212 million.
What Made Silicon Valley Bank Collapse?
There are multiple reasons responsible for one of the world’s largest bank collapses - the Silicon Valley Bank collapse. Silicon Valley Bank was a bank located in the world’s tech center, Silicon Valley, California. Being one of the tech valley’s residents, most of the bank’s depositors were tech companies. Hence, the cash flow was from one industry only.
Only one cash flow stream was one among the other red flags. Another one was the rising inflation rates, which gave the tech companies more funds. But the companies did not get the extra funds and started to withdraw money. But as SVB had only one cashflow stream, and the bank invested the cash that came in into uninsured long-term investments that charged high-interest rates due to new interest rate laws, resulting in SVB being out of cash-on-hand.
The lack of cash on hand made Silicon Valley Bank sell its bonds at lower rates than its actual rates and face huge losses on it. The last option left to them was to sell those bonds in the open market, and the sudden flow of large SVB bonds stressed its investors taking this step as ringing bells of the bank collapsing. And fatefully, the bank did collapse.
Why Did Startups Choose GIFT City?
After the collapse of the Silicon Valley Bank, many startup founders showed up and claimed to be pressured by the investors to invest in US banks like Silicon Valley Bank even though they did not have much of a presence in the US territory. As a result, startups had to display them as a US-based company and their Indian company as their wholly owned subsidiary.
In addition to these claims, the rising interest rates and the ratio of liquidity crunch made the Asian PE/VC (private equity and venture capitals) and startups find a robust alternative to Silicon Valley Bank.
One such alternative to Silicon Valley Bank was to seek support from International Financial Centers (IFCs) in the Asia-Pacific region like UAE, Singapore, Hong Kong, and India’s IFSCs and GIFT City.
Of all the shortlisted alternatives, the startups selected GIFT City because of the minimal interference from government authorities in the business/industry operations. In simple words, the regulatory framework and rules imposed on businesses or financial activities are less complex and burdensome, allowing for more flexibility and autonomy.
A light-touch regulatory approach can attract businesses and investors when considering financial hubs like the International Financial Services Center (IFSC) situated in India's GIFT City. Hence, companies operating in the IFSC may experience a less rigid and more business-friendly regulatory environment compared to other financial centers with more strict regulations.
This flexibility can make it easier for businesses to operate, launch new financial products, and adapt to changing market conditions. However, it's important to strike a balance with necessary safeguards to protect investors and ensure financial stability.
Effects of SVB’s Move to GIFT City
GIFT City was an infrastructure project whose foundation was laid by present Prime Minister Narendra Modi in 2008, when he was Gujarat’s, Chief Minister. GIFT City is now the house of the largest public and private sector banks, making it the right time for investment in GIFT City.
The real estate sector is the sector that is affected the most by this million-dollar move after Google announced moving to GIFT City. Also, the million-dollar move skyrocketed real estate prices. The boost in the real estate sector also made the demand for office for sale go up in GIFT City within no time.
Despite statements from Indian bankers and regulators denying any potential secondary effects on the Indian economy due to the collapse of SBV, it is important to consider the recent injection of funds by RBI. This move by the central bank is advantageous for India during these uncertain times, as it helps stabilize the financial sector and ensure the economy's overall health.
While the full extent of the impact of SBV's collapse remains to be seen, the proactive measures taken by the RBI are a positive step towards mitigating any potential negative effects.
Over to You
Based on current estimates, it has been reported that Indian and Indian American startups have invested a substantial amount, ranging from $150 to $200 million, in GIFT City. This investment has brought a significant boost to the city's real estate sector and created a favorable investment climate for those interested in investing in GIFT City's real estate market.
If you are considering investing in commercial spaces or offices in GIFT City, consult with RES Management, who can provide you with information on the best available commercial properties and office for sale in the Gift City area.