Updated: Aug 21
The International Financial Service Centres ("IFSC") facilitates the rerouting of financial services and transactions that are currently carried out in offshore financial centres by Indian corporate entities and overseas branches/subsidiaries of financial institutions (such as banks, insurance companies, etc.) to India.
Currently the banking, capital market and insurance sector are governed by RBI (Reserve Bank of India), SEBI (Securities and Exchange Board of India) and IRDAI (Insurance Regulatory and Development Authority). The dynamic nature of business demands inter-regulatory coordination. Hence a need was felt for having a unified regulatory system for IFSCs in India. Accordingly, IFSC Authority Act was introduced on December 19th, 2019 after the assent of the president. The Act shall apply to the IFSCs set up under SEZ Act, 2005. The powers of IFSCA came into effect from September 29, 2020, while some provisions of the International Financial Services Centres Authority (IFSCA) Act were made effective from April 27, 2020 and August 21, 2020
The goal of the IFSC is to build a smart city of world-class financial services, as part of a Special Economic Region, India’s first IFSC is Gujarat International Finance Tec-city (GIFT City) in Gujarat. It is pertinent to note that Indian Corporate Entities or financial institutions from other branches and financial centers around the world provide these services. IFSCs are providers of cross-border services. The community project GIFT is carried out by GIFT Community Co. Ltd., 50:50 Infrastructure Leasing and Financial Services Ltd., and Gujarat Urban Development Company Ltd. joint venture. In Gujarat, GIFT city is a clever move, moreover India’s first IFSC, has resulted in many real estate developers signing Memorandum of Understanding (MoU) to construct hospitals, hotels, residential complexes, and commercial buildings.
Companies Act, 2013, extends to both IFSC private and public corporations. IFSC securities issuers are expected to file a statement of accounts under the Companies Act, 2013. Policy, however, has relaxed some provisions of the Act and other regulations to encourage the involvement of organizations in IFSC as it applies to financial services, three regulatory bodies, i.e., India’s Reserve Bank, India’s Stock Exchange Commission, and India’s Insurance Regulator.
Budget of year 2019 introduced several IFSC changes that will promote the regulatory system and boost business-friendliness. Promulgation of International Financial Services Center Authority Act, 2019 has been done bearing in mind the IFSCs’ fluid existence which makes it necessary to have a high level of inter-regulatory coordination. This Bill seeks to introduce a single authority to control all IFSC financial services.
Distinction between IFSC company and a normal business structure?
· IFSC companies can only be set up if shares are restricted.
· Each company shall have ‘IFSC’ in its name.
· IFSC’s object clause must state that ‘they will carry out the objects as necessary and specified in SEZ activities and in compliance with SEZ Laws.
· IFSC’s registered office must be in a Special Economic Zone.
The fundamental idea behind setting up an IFSC is attracting foreign investors (and with them, their investments) either for investment in India or anywhere in the world. While the inflow of foreign funds surely benefits the Indian corporate sector, just acting as a stopover for foreign investments also has its benefits in the form of new employment opportunities, better tracking of global flow of funds, improved IT infrastructure, global recognition for India as a financial hub thereby resulting to increasing confidence of the global investors. Another vital purpose can be to facilitate those transactions through IFSC which are currently carried out by foreign arms of domestic entities. Routing these transactions through IFSC can be operationally beneficial for such entities since IFSC is close to home; and with the existing tax benefits it may very well be more beneficial to operate from IFSC than other global financial centres. To attract the global participants, there was a need to provide a platform tantamount with global standards in terms of infrastructure facilities, technological capabilities and regulatory requirements. An IFSC is set up with the intention to provide a swift and simplified regulatory regime to reduce the bottlenecks that a foreign investor may face while investing in India. These can be in the form of relaxed foreign exchange norms, various exemptions under Income tax, GST laws, stamp duty and other miscellaneous fees/charges, simplified procedural requirements, etc.
· Buying, selling, and or subscribing to a financial product or agreeing to do so
· Acceptance of deposits
· Safeguarding and administering assets consisting of financial products belonging to another person
· Effecting insurance contracts
· Management of assets that consists of financial product or financial services
· Establishing or operating an investment scheme
· Maintaining and transferring records of ownership of a financial product
· Underwriting the issuance or subscription of financial products
· Providing information about a person’s financial standing and creditworthiness
· Selling, providing or issuing stored value or payment instruments or providing payment services
· Making arrangements for carrying on any of the services above
· Rendering advice or soliciting for the purpose of buying/selling/subscribing to a financial product or availing any services above or exercising any rights related to the same
Any other services as notified by the Central Government
The IFSCA consists of nine members appointed by GOI. The members are:
· 1 member from RBI
· 1 member from SEBI
· 1 member from PFRDA (Pension Fund Regulatory and Development Authority)
· 1 member from IRDAI
· 2 members from the Finance Ministry
· 2 members appointed on recommendation of a Selection Committee
The term of each member is three years subject to reappointment.
ADVANTAGES OF IFSCs
· They seek to attract overseas investors by bringing financial services that are currently being carried outside India by overseas financial institutions
·· In this age of globalization, IFSCs serve many purposes including fundraising, global tax management and corporate treasury management.
·· An IFSC facilitates, the rerouting of financial services and transactions that are currently carried out in offshore financial centres by Indian corporate entities and overseas branches/subsidiaries of financial institutions i.e., banks, insurance companies, etc. to India.
·· The business and regulatory environment offered by an IFSC in India would be comparable to that of London, New York, etc. attracting investors.
·· It can also provide enhanced access to global financial markets for Indian corporates
· There are also many tax benefits for entities set up in the IFSC.
· Services an IFSC can provide:
- Fundraising services for corporations, individuals and governments.
- Wealth management.
- Asset management and global portfolio diversification undertaken by pension/mutual funds and insurance firms.
- Global tax management and cross-border tax liability optimization, providing a business opportunity for financial intermediaries, law firms and accountants.
- Risk management operations (insurance and reinsurance).
- Global and regional corporate treasury management operations.
- Mergers and acquisitions between trans-national corporations.
· IFSCs help in the creation of fintech hubs. With many Indians outside India working in fintech’s, India can be positioned as a fintech hub
Ultimately, it is a model that can be used by any big organization looking to leave a footprint in the diverse and global business landscape, leading to a holistic and sustainable growth that helps them move up the value chain.
In order to carry offshore financial transactions to the Indian Territory, IFSC companies play a key role. The main objective was to bring back the financial services and transactions carried out by the Indian corporations in offshore financial centers. Currently, IFSC is entitled to create institutions within the financial sector, such as banks, insurance companies, stock exchanges, mutual funds, alternative capital funds, and other registered SEBI institutions. With the aid of these tax incentives, SEBI, IRDA, benefits, and exemptions provided by various regulations, IFSC is given the necessary impetus to succeed in India. RBI opened opportunities for IFSC units for all Indian and foreign banks operating in India. IFSC provides easier access for Indian companies to global financial markets and opens the door to financial sector jobs.