I. The requirement for IFSCA

The IFSCA is a statutory authority established under the International Financial Services Centres Authority Act, 2019 ("IFSCA Act") for the development and regulation of financial products, financial services and financial institutions situated at the IFSC in India.1 It is pertinent to mention here that all the provisions of IFSCA Act have been brought into force by various notifications of the Ministry of Finance.2

Prior to the establishment of IFSCA, multiple regulators viz. SEBI, Pension Fund Regulatory and Development Authority ("PFRDA"), IRDAI and RBI regulated the business in IFSCs. However, in order to facilitate the functioning of the businesses in IFSC, inter-regulatory coordination vis-à-vis existing regulations governing businesses in IFSC was quintessential, as a result IFSCA was established by the GoI to achieve the desired goal.

II. Powers of IFSCA

Section 13 of the IFSC Act vests broad powers with IFSCA to regulate financial products, financial services and financial institutions. The provision empowers IFSCA to exercise all powers exercisable by appropriate regulators viz. SEBI, RBI, PFRDA and IRDAI vis-à-vis regulating securities, banking and insurance sector in India, respectively. From regulating the functioning of stock exchanges and brokers in IFSC to laying down the prudential regulatory requirements for IFSC Banking Units ("IBU") or setting up of Alternative Investment Funds ("AIFs") in IFSC are some of the important powers of IFSCA.3

III. Composition of IFSCA

IFSCA will consist of a Chairperson, who shall be a whole-time member appointed by the GoI.4 It will also consist of one member each to be nominated by RBI, SEBI, IRDAI and PFRDA, 2 officials of the Ministry of Finance as nominated by the GoI and 2 other members appointed by the GoI on the recommendation of a Selection Committee. These members may be appointed either as a whole-time or as part-time members as the GoI may deem fit.5

Curiously, the provisions relating to Selection Committee was brought into effect on April 27, 20206 and it was to be constituted by the GoI under Section 5(4) of the IFSCA Act, however, the constitution of the same is still pending.

IV. Funding sources of IFSCA

Section 14 of the IFSCA Act authorises GoI to grant such sums of money to the IFSCA as it may deem fit. Additionally, a fund by the name of International Financial Services Centres Authority Fund ("IFSCA Fund") will be constituted and all grants, fees, charges and sums (as decided by the GoI) received by the Authority will be credited to the IFSCA Fund.7

V. Functions of IFSCA

Section 12 of IFSCA Act lays down following functions to be performed by IFSCA:

  • to advance and manage the financial products,8 financial services and financial institutions in the IFSCs;
  • to manage financial services, financial institutions and financial products in an IFSC which have been authorised prior to the commencement of IFSCA Act by any regulator of IFSC e. RBI, SEBI etc.; and
  • to manage the financial services, finance institutions and financial products in an IFSC as the GoI may notify from time to time.

Recently, IFSCA issued a circular on "Directions on business in foreign currency at International Financial Services Centres" and prescribed that all transactions in IFSCs shall be undertaken in a freely convertible currency9 and only via bank transfers.10 It also allowed financial institutions to undertake capital account transactions (excluding acceptance of deposits) and current account transactions with a person resident in India or a person resident outside India or another financial institution in any freely convertible foreign currency subject to the directions, if any, issued by the IFSCA from time to time.

VI. Some of the recent legal developments by IFSCA

  1. IFSCA (Banking) Regulations, 2020 ("IFSCA Banking Regulations"): IFSCA issued IFSCA Banking Regulations to lay down various requirements for setting up IBUs, prudential regulatory requirements, KYC etc. It allows NRIs and Indian residents (having net worth not less than USD 1,000,000) to open foreign currency accounts in any freely convertible currency at IBUs. The IFSCA Banking Regulations also prescribe broad set of permissible activities at IBUs, inter alia, credit enhancement, portfolio purchasing and equipment leasing, including aircraft leasing. IFSCA Banking Regulations also repealed and superseded the "Scheme for setting up of IFSC Banking Units" dated April 01, 2015.11 It further mandated IBUs operating in IFSC prior to IFSCA Banking Regulations to comply with additional requirement within three months from date of notification the said regulations.
  2. IFSCA Circular on AIFs in IFSC: Aligning the concept of AIFs with best international practices, IFSCA revised the leveraging and co-investment guidelines as issued vide SEBI (IFSC) Guidelines, 2015 for investment activities by AIFs in IFSC.12 The revised leverage norms prescribe that an AIF in IFSC may borrow funds or engage in leveraging activities provided such leverage is exercised with consent of the investors and the AIF employing leverage must have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund. Similarly, revised investment norms prescribe that an AIF in IFSC is permitted to co-invest in a portfolio company through a segregated portfolio by issuing a separate class of units. Further, the said circular also allowed an AIF in IFSC to invest in an AIF registered with SEBI, alongside other permissible investments. The said circular is more likely to expand the scope of AIFs in IFSC as it provides a level playing field for IFSC registered units across the globe with the AIF in IFSC that now also enjoys tax concessions as an IFSC unit.
  3. IFSCA (Bullion Exchange) Regulations, 2020 ("Bullion Regulations"): IFSCA by issuing the Bullion Regulations has set the ball rolling for International Bullion Exchange to be set up in IFSC. It can be a game changer for India's bullion industry as this platform may put India in a position to set its own price for gold and silver and will also connect India with rest of the world on this aspect. The Bullion Regulations inter alia covers the bullion exchanges, clearing corporations, depositories and vaults. Chapter II to Chapter VIII of the Bullion Regulations deals with the recognition of bullion exchange and bullion clearing corporations while Chapter IX to Chapter XIII pertains to bullion depositories, vault managers and bullion depository receipts.
  4. IFSCA (Global In-House Centres) Regulations, 2020 ("GIC Regulations"): IFSCA by notifying GIC Regulations permitted multinational corporations to set up Global In-House Centres ("GIC") that will be located in the GIFT City. GIC means a unit set-up in IFSC for providing support services, directly or indirectly, to entities within its Financial Services Group. Financial Services Group means "any entity which is regulated by a financial services regulator or any other competent body regulating financial services activities in its home jurisdiction and includes its holding, subsidiary or associate companies, branch, or subsidiary of a holding company to which it is also a subsidiary".13 GIC Regulations tries to provide the framework for recognition and operation of such GICs in IFSC. Some of the key features of the GIC Regulations includes following:
    • A GIC shall provide services to non-resident entities only;
    • GIC should deal in freely convertible foreign currency only. However, it may maintain an INR account for its administrative expenses as specified by the IFSCA; and
    • A GIC may conduct its business in any mode permitted by the IFSCA, including branch mode.

VII. Challenges

While setting up of an IFSC in India is a welcome step and will bring more and more opportunities for the Indian economy, there also lie few challenges in achieving this dream. First and foremost being the fight against money laundering and financial crimes. In author's opinion, an efficient fight against financial crime requires two specific rules: first, the application of strict due diligence procedures that includes careful identification of the customers, i.e. of the beneficial owners of the assets involved; second, the obligation, imposed to the market intermediaries like the stock exchanges, stock brokers, clearing houses etc. to inform the authorities in case of any founded suspicion of money laundering. Therefore, an active cooperation between financial institutions and authorities should be promoted.

VIII. Conclusion

The idiom "better late than never" aptly describes India's current position vis-à-vis IFSC regime. Despite being a late entrant in setting up its first IFSC, India is gaining momentum in the IFSC space with much faster speed and is poised to win the race globally. GoI's relentless efforts in the form of tax incentives or liberal approach towards IFSC units are a step in the right direction. Further, abundant availability of rental places with world-class amenities, seamless dispute resolution mechanism (Singapore International Arbitration Centre has set up its representative office in GIFT City), a unified regulator in the form of IFSCA to balance the inter-regulatory coordination are some of the features which will help revolutionise the conduct of financial services activities in India.

-10 March 2021

Footnotes

1 IFSCA Act, §. 12 (1) (Ind.)

2 Ministry of Finance's Notification S.O.1383 (E). dated April 27, 2020, Notification S.O. 2844(E) dated August 21, 2020 and Notification S.O. 3374 (E) dated September 29, 2020.

3 "IFSC (Banking) Regulations, 2020 – Prudential regulatory requirements", F.No.110/IFSCA/Banking Regulation/2020-21/5, (https://ifsca.gov.in/Viewer/Index/125) (Accessed on December 15, 2020); "Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015", Chapter VI,  ( https://www.sebi.gov.in/legal/guidelines/mar-2015/sebi-international-financial-services-centres-guidelines-2015_29457.htmlc (Accessed on December 17, 2020)

4 IFSCA Act, §. 5 (1) (a) read with §. 5 (2).

5 IFSCA Act, §. 5 (1) (b), (c) and (d) read with §. 5 (2).

6 Ministry of Finance, Notification No. S.O. 1384 (E) dated April 27, 2020, ( https://www.indiainx.com/download/IFSC_Authority_Act_Date_of_Establishment_of_Authority.pdf) (Accessed on January 11, 2021)

7 IFSCA Act, §. 15.

8 Such as Non-deliverable derivative contracts, Interest Rate Swaps and Forward Rate Agreement

9 Exchange Control Manual, Chapter 2 - Permitted Currencies and Methods of Payment, Paragraph 2.1 – defines freely convertible foreign currency as "a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies."  (https://www.rbi.org.in/scripts/ECMUserView.aspx?Id=19), (Accessed on December 22, 2020)

10 "Directions on business in foreign currency at International Financial Services Centres", F.No. 110/IFSCA/Banking Regulation/2020-21/4 dated December 04, 2020, (https://ifsca.gov.in/Viewer/Index/121), (Accessed on December 23, 2020)

11 IFSCA (Banking) Regulations, 2020, Regulation 22.

12 "Alternative Investment Funds (AIFs) in International Financial Services Centres (IFSC)", (https://ifsca.gov.in/Viewer/Index/122) (Accessed on December 15, 2020)

13 IFSC (Global In-House Centres) Regulations, 2020, Regulation 2 (1) (c).

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