I. Introduction

India by setting up its first International Financial Services Centre ("IFSC") in 2015 had facilitated its journey towards economic development. Gujarat International Finance Tec-City ("GIFT City") aspires to become India's gateway for inbound and outbound requirements of the international financial services. In order to  strengthen this vision, Government of India ("GoI") established an unified regulator in the form of International Financial Services Centres Authority ("IFSCA") which will not only regulate the nature of business which will be transacted in IFSC but will also be regulating the functioning of the entities involved with transacting business in IFSC.

In this two-part discussion, the first part gives a general idea about an IFSC, the need to establish an IFSC in India and various legal provisions which were brought into force before establishment of the IFSCA to regulate businesses as well as entities in IFSC. The second part deals with the role, power, functions, funding sources and composition of IFSCA. It also discusses some of the pertinent challenges which lie ahead of the IFSCA in establishing India as a global financial hub.

II. What is an IFSC?

IFSC is a type of financial centre that caters to customers outside the jurisdiction of domestic economy.1 It is considered to be a jurisdiction which provides world-class financial services to non-resident Indians and Indian residents in a foreign currency.2 It is also known as Offshore Financial Centres as such centres deal with flow of finance, financial products and services across borders.3 GIFT City is the sole IFSC established in India till date. It is being developed in order to position India in line with the other reputed IFSCs such as Shanghai, London and Dubai and to also further GoI continuous efforts to promote ease of doing business in the country.4

III. What necessitated setting up of an IFSC in India?

IFSC seeks to attract overseas investors by bringing financial services that are currently being carried outside India by overseas financial institutions. In this age of globalisation, India is considered to be one of the most attractive destinations for foreign investments,5 and similarly foreign securities held by Indians have also expanded exponentially in the recent past.6 Thus, with rapidly increasing foreign investments in India and vice versa, there is an immediate need felt by the stakeholders for an IFSC to be set up for the purpose of, inter alia, fund-raising, corporate treasury management and global tax management.7

IV. Legal Provisions for IFSC in India

Section 18 of the Special Economic Zone Act, 2005 ("SEZ Act") provides for the establishment of an IFSC in India. Pursuant to powers under Section 18 of the SEZ Act, GoI approved GIFT City as a Multi Services Special Economic Zone ("GIFT SEZ") at Gandhinagar, Gujarat and has also notified this zone as India's IFSC.8

Further, various regulations and guidelines have already been issued by different regulators viz. Securities and Exchange Board of India ("SEBI"), Reserve Bank of India ("RBI") and Insurance Regulatory and Development Authority ("IRDAI") in order to regulate their respective sectors. Few such regulations or guidelines are discussed below:

Banking

As per the Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 ("FEM (IFSC) Regulations"), any financial institution or its branch set up in IFSC shall be treated as a "person resident outside India" and is expected to conduct business in such foreign currency and with such entities, whether resident or NRIs as determined by the relevant authority.9 However, the RBI vide Foreign Exchange Management (International Financial Services Centre) (Amendment) Regulations, 2020 allowed financial institutions to conduct businesses even in Indian Rupees but only through general or specific permission from RBI.10

The FEM (IFSC) Regulations also provide that nothing contained in any other regulations shall apply to a financial institution or branch of a financial institution set up in IFSC11 and therefore a transaction between a financial unit established in IFSC and a resident Indian will be treated as a transaction between resident and non- resident and will therefore be subject to the provisions of the Foreign Exchange Management Act, 1999.12

Insurance

IRDAI issued Insurance Regulatory and Development Authority (Regulations of Insurance Business in Special Economic Zone) Rules, 2015 ("IRDAI SEZ Rules"). IRDAI SEZ Rules permits insurer registered with IRDAI and insurer registered with foreign authority to transact the business of insurance and re-insurance within SEZ, domestic tariff area ("DTA") and abroad. 13 It further allows insurer and re-insurers to accept reinsurance business of all classes of business within SEZ and from insurers operating in DTA as well as from outside the country in accordance with the IRDAI regulations on re-insurance.14

Recently, IRDAI inserted new Rule 4 to IRDAI SEZ Rules via Insurance Regulatory and Development Authority (Regulation of Insurance Business in Special Economic Zone) (Amendment) Rules, 2020. Rule 4 permits an intermediary registered with IRDAI or an intermediary from outside the country, to transact business as an intermediary or insurance intermediary in the SEZ subject to certain conditions.

Further, IRDAI {Registration and Operations of International Financial Services Centre Insurance Office (IIO)} Guidelines, 2017 ("IIO Guidelines") had put in place the process of registration and operation of insurers and re-insurers in IFSC. IIO Guidelines superseded the erstwhile IRDAI (IFSC) Guidelines, 201515 issued by the IRDAI to regulate insurance and reinsurance business in IFSC. IIO Guidelines allowed Indian insurer to set up IFSC Insurance Office ("IIO") to carry on insurance and reinsurance business. It also allowed foreign insurer i.e. registered with foreign regulatory or supervisory authority to set up IIO subject to certain conditions such as applicant must be registered or licensed to insurance or re-insurance business in the country of incorporation, applicant has been in continuous operation during the preceding 5 years before making the application and the applicant has satisfactory track record in respect of regulatory compliance.

The sole object of the registered IIO will be to exclusively carry on insurance or reinsurance business from an IFSC. An IIO shall not engage itself in any business other than those permitted by the IRDAI. The registered IIO may also be permitted to transact direct insurance as well as reinsurance business within the IFSC, from other SEZs and from outside India.

Additionally, IRDAI issued IRDAI (International Financial Service Centre Insurance Intermediary Offices) Guidelines, 2019 ("IIIO Guidelines") with the aim to grant permission to IFSC Intermediaries or Insurance Intermediaries ("IIIO") registered with IRDAI to undertake operations in IFSC.16 IIIO Guidelines provides that the applicant willing to undertake operations as IIIO may register itself as any of the 5 categories of intermediary viz. Insurance Broker, Corporate Agent, Surveyor and Loss Assessor, Third Party Administrator and any other category of intermediary recognised by the IRDAI from time to time.17 The IIIO registered with IRDAI shall ensure compliance to certain minimum regulatory requirements, inter alia, scope of operations, accounting and foreign exchange requirements. The IIIO will also be responsible for discharge of the duties, functions and obligations as per applicable extant regulations, circular or guidelines notified by the IRDAI.

Applicability of Companies Act, 2013 ("Companies Act") to entities in GIFT City

Companies Act is applicable to all entities established in the GIFT City. However, in order to liberalise functioning of these companies, Ministry of Corporate Affairs vide Notifications G.S.R. 9(E) and G.S.R 8(E) dated January 04, 2017 exempted various provisions of the Companies Act to entities established in GIFT City.18 Some of the exemptions are as follows:

  • an IFSC private company will only be limited by shares;
  • all such companies have to suffix International Financial Services Centres or IFSC in their names;
  • an IFSC companies can make private placement offers and will not be restricted by earlier offers which haven't been completed or withdrawn;
  • an extract of the annual return of the company will not have to be included in the board's report. IFSC companies will not have to comply with the secretarial standards prescribed by the Institute of Company Secretaries of India.

In next part of this paper, we have discussed the need for establishing the IFSCA, various powers and functions of the IFSCA. Further, to emphasise the role of IFSCA in future, we have also discussed some of the recent legal developments by IFSCA in the forms of regulations and circulars to govern the business as well as entities operating in IFSC. Finally we have pointed out certain challenges as well as benefits of establishing the IFSCA which will facilitate India's thrust to establish itself as global business hub.

-10 March 2021

Footnotes

1 IFSC and Government of India's vision for GIT City, ( http://www.giftgujarat.in/documents/Doing-Business-GIFT-V6Final-20APR2020-Final.pdf) (Accessed on December 15, 2020). 

2 Id.

3 International Financial Services Centre, arthapedia, ( http://www.arthapedia.in/index.php?title=International_Financial_Service_Centre_(IFSC)) (Accessed on December 15, 2020).

4 Supra note 1.

5 India still fourth-most attractive market, shows PwC Global CEO survey, ( https://www.business-standard.com/article/economy-policy/india-still-fourth-most-attractive-market-shows-pwc-global-ceo-survey-120012001383_1.html) (Accessed December 15, 2020).

6 India Direct Investment Abroad, ( https://www.ceicdata.com/en/indicator/india/direct-investment-abroad#:~:text=In%20the%20latest%20reports%20of,USD%20bn%20in%20Sep%202020) , (Accessed on December 15, 2020)

7 Report of the High Powered Expert Committee (HPEC) on "Making Mumbai an International Financial Centre", (https://dea.gov.in/sites/default/files/mifcreport.pdf) (Accessed on December 15, 2020)

8 IFSC and Government of India's vision for GIFT City, ( http://www.giftgujarat.in/documents/Doing-Business-GIFT-V6Final-20APR2020-Final.pdf)  (Accessed on December 15, 2020) 

9 Foreign Exchange Management (International Financial Services Centre) Regulations, 2015, Regulation 3.

10 Foreign Exchange Management (International Financial Services Centre) (Amendment) Regulations, 2020, (https://ifsca.gov.in/Viewer/Index/15), (Accessed on December 22, 2020)

11 FEM (IFSC) Regulations, Regulation 5.

12 Foreign Exchange Management Act, 1999, §. 1 (3); Divaspati Singh & Ishita Khare, "Setting up of a unit in IFSC – the procedure and Key considerations", THE CHAMBER'S JOURNAL, (Vol. III, No. 10, July 2020), ( https://ctconline.org/wp-content/uploads/pdf/2020/chamber-journal/CTC-July-2020.pdf) (Accessed on December 15, 2020)

13 Special Economic Zones Act, No. 28 of 2005, §. 2(i) - DTA includes whole of India including its territorial waters and continental zones, excluding SEZ.

14 Insurance Regulatory and Development Authority (Regulations of Insurance Business in Special Economic Zone) Rules, 2015, ( https://taxguru.in/corporate-law/irdai-regulation-insurance-business-special-economic-zone-rules-2015.html) , (Accessed on December 24, 2020)

15 Insurance Regulatory and Development Authority (International Financial Service Centre) Guidelines, 2015 ( https://www.irdai.gov.in/ADMINCMS/cms/LayoutPages_Print.aspx?page=PageNo2465), (Accessed on December 24, 2020)

16 Insurance Regulatory and Development Authority (International Financial Service Centre Insurance Intermediary Offices) Guidelines, 2019, ( https://www.irdai.gov.in/ADMINCMS/cms/frmGuidelines_Layout.aspx?page=PageNo3713), (Accessed on January 10, 2021)

17 Id.

18 Ministry of Corporate Affairs, Notifications G.S.R. 9(E) and G.S.R 8(E) dated January 04, 2017, ( https://www.mca.gov.in/Ministry/pdf/IFSC_Private_04012017.pdf), ( https://www.mca.gov.in/Ministry/pdf/IFSC_Public_04012017.pdf), (Accessed on December 26, 2020)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.