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Understanding IFSC and its Working in India

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  • Post published:December 7, 2023
  • Post category:General

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Last Updated on January 12, 2024 by Kanakkupillai

Even if they are incorporated in the nation, IFSC businesses function for a jurisdiction that is distinct from their original jurisdiction. Under the SEZ Act, 2005, section 18(1), the central government approves IFSC firms as long as there is only one IFSC in a Special Economic Zone with unlisted business functions in these areas. In essence, it extends the reach of top-notch services to citizens and non-residents by serving those outside the nation’s internal economic jurisdiction. It serves as a hub for facilitating the expansion of export services.

They offer services including raising capital for governments, businesses, and people; managing international taxes and minimizing cross-border tax liabilities; managing risks through insurance and other risk management activities; and facilitating mergers and acquisitions of multinational organizations, among other things. 

What services is an IFSC able to offer?

  • Services for raising money for people, businesses, and governments
  • Global diversified portfolios and asset management practices used by mutual funds, insurance firms, and pension funds
  • Wealth management —Optimization of cross-border tax liabilities and global tax management presents a commercial opportunity for financial intermediaries, accounting companies, and legal practices.
  • International and local company treasury management activities, including asset-liability matching, fund-raising, and stability investment and management
  • Operations related to risk management, including reinsurance and insurance, as well as merger and acquisition activity involving multinational firms

Is it appropriate for an IFSC to be housed in a SEZ?

An SEZ can act as an evaluation centre for financial sector reforms before their implementation throughout the country, given the numerous restrictions India has placed on the financial sector, including limitations on foreign investment, stringent standards for the SLR, and partial capital account convertibility. In addition to SEZ-specific benefits, the SEZ Act exempts non-residents who engage in taxable financial transactions via an IFSC from the equity transaction tax imposed under Section 98 of the Finance Act, 2004.

Why are banks using up GIFT SEZ space?

SEZs permit commercial banks to open offshore banking units (OBUs), which are equivalent to foreign branches. These OBUs can raise foreign currency through deposits and loans from non-resident resources, deal in foreign currencies on global exchanges and with Indian banks, and offer loans and liability products to their clientele. In 2003, the State Bank of India opened its first OBU in Mumbai’s Santacruz Electronics Export Processing Zone.

How are businesses at IFSC run?

IFSC functions as a foreign territory subject to Indian legal jurisdiction. It enables businesses not established in India to raise capital in foreign currencies by registering shares on the IFSC stock market, where personal or institutional Indian investors, including non-resident Indians, can trade. Securities mentioned here can also be purchased by mutual funds and other investment funds established in an IFSC. There are two zones in GIFT City: special and domestic. You can conduct any transaction using rupees from the GIFT domestic region. A special economic zone is a region inside a nation’s borders where trade and business regulations differ from those in other parts of the nation. 

Its primary goals are to improve trade balances, stimulate investment, and create jobs. Any intermediary operating under the IFSC must offer financial services to non-resident Indians, non-resident individuals, and financial institutions that meet the FEMA requirements for offshore fund investments. Securities listed in the IFSC are accessible for investment by mutual funds and alternative investment vehicles as well.

Why were the IFSCs implemented? 

Establishing a world-class smart city that offers international financial services is the goal of IFSC. Indian Corporate Entities or banks with branches and financial centres abroad provide these services. IFSCs offer services internationally. GIFT City Co. Ltd. is responsible for carrying out the GIFT City project. Many real estate investors have been drawn to Gujrat’s smart city GIFT, the country’s first IFSC, and have inked memorandums of understanding to establish medical facilities, lodging facilities, residential complexes, and commercial buildings. 

Additionally, the RBI has developed a Draft Scheme, the general parameters of which may be summed up as follows, allowing banks to establish IFSC Banking Units (IBUs): 

  • Establishment of IBUs: By Section 23 of the Banking Regulation Act of 1949, eligible banks wishing to establish IBUs (which will be subject to RBI regulation and supervision) must apply to the DBR of RBI. IBUs could initially only be established by international banks with an office in India and Indian public and private banks that are authorized to trade in foreign exchange. The preference would be given to banks with an offshore presence, and every bank would only be able to establish one IBU per IFSC. 
  • IBUs and foreign bank branch locations: In terms of applying prudential standards, adhering to the 90-day Income Recognition Asset Classification and Provisioning standards, adopting liquidity and interest rate risk control regulations, and other procedures, IBUs and foreign bank branches will be handled similarly for the most part. 
  • The Parent Bank’s Board’s Function: The Board of the bank would establish thorough overnight limitations for every currency for IBUs, establish suitable exposure limits and policies for credit risk management, and oversee the IBU’s entire risk control and ALM framework. 
  • Capital Requirements: The IBU must constantly keep up minimum capital as may be stipulated, and the parent bank has to offer a minimum of USD 20 million upfront. 
  • Obligations and Advances: Both CRR and SLR will not apply to the IBU’s obligations. However, only obligations with an initial maturity time longer than a year are allowed, while short-term obligations may be obtained from banks within the RBI-mandated parameters. Deposit insurance will not protect deposits, and the RBI will not back lenders of last resort or offer liquidity. Funds may only be generated from non-Indian organizations, while FEMA, 1999 permits deployment with Indian entity participation as well. Parent banks’ Net Bank Credit does not include advances made by IBUs. 
  • Permissible Activities: It is not permitted to open savings or current accounts or to issue bearer securities. Only bank transfers are accepted for payment transactions. In addition to dealing with retail clients and HNIs, IBUs can trade with WOS and joint ventures of Indian corporations operating overseas. They are not permitted to conduct cash transactions but to factor in or forfeit export receivables. 
  • Ring Fencing: IBUs will only keep and operate their financial records in foreign currencies, except for a Special Rupee Account to cover legal and administrative costs. All of their transactions must be made in currencies other than Indian rupees. IBUs will need to keep separate Nostro accounts with the correspondent banks. Domestic call,  term, FX, money, additional offshore markets, and domestic payment methods will not be open to IBU participation.

Regulation

The 2013 Companies Act applies to private and public companies that are IFSC. The issuers of IFSC securities are required by the Companies Act of 2013 to submit a statement of accounts. The policy has softened some Act restrictions and other rules to promote businesses’ participation in IFSC related to financial services. These regulatory agencies include India’s Reserve Bank, India’s Stock Exchange Commission, and India’s Insurance Regulator.

Several modifications to the IFSC have been implemented in Budget 2019 to support the regulatory framework and increase business-friendliness. Authority for International Financial Services Center Act, 2019 Strong inter-regulatory cooperation is required due to the dynamic nature of IFSCs. This bill aims to establish a single body that will oversee all IFSC financial services.

Private and public firms established in the IFSC are eligible for several perks, including:

  • The Securities Transaction Tax is a charge imposed on the buying and selling of stock, units, equity-oriented funds, and any other securities registered on an Indian stock exchange. On the other hand, securities transactions made by non-residents through the IFSC are free from the asset transaction tax.
  • The IFSC-affiliated firms are also free from various taxes and customs charges, including VAT, stamp duty, customs duty, excise duty, commodity transaction tax, and VAT.
  • The government has further released Global Depository Receipts issued by non-residents on IFSC-recognized stock exchanges from the fee.
  • As per the Companies Act, every firm with a net worth of Rs. 500 crores, an annual revenue of Rs. 1000 crore, or an annual profit of Rs. 5 crores is required to fulfil its corporate social responsibility by contributing. IFSC-affiliated businesses, however, are excused from CSR requirements for five years. 
  • Exemption from needing NCLT permission to adopt a fiscal year other than April–March. Not even when an IFSC accounting business is a foreign corporation’s subsidiary.

Conclusion

IFSC businesses are essential to the flow of offshore financial transactions into the Indian Territory. Restoring the financial operations and transactions that Indian firms were conducting in offshore financial hubs was the primary goal. The IFSC has the authority to establish financial institutions, including banks, insurance providers, stock exchanges, alternative capital funds, and various other SEBI-registered establishments. These tax breaks, together with those offered by SEBI, IRDA, and other laws, provide IFSC the boost it needs to be successful in India. Through IFSC, Indian businesses may more easily access international financial markets and apply for positions in the financial industry.

Gaurvi

Welcome to www.kanakkupillai.com! Greetings, I'm Gaurvi, a Regulatory Compliance Manager deeply committed to ensuring that businesses meet and exceed regulatory standards in their operations. With a wealth of experience in navigating complex regulatory environments across various industries, I am here to be your trusted advisor in achieving and maintaining regulatory compliance. In today's dynamic business landscape, regulatory compliance is not just a legal requirement but a critical component of sustainable success. My mission is to help your business thrive by ensuring it adheres to all relevant regulations and standards. Diversity and inclusivity in the business world are paramount, and I firmly believe that every business, regardless of its size or background, should have access to the expertise needed for seamless regulatory compliance. I am honored to embark on this regulatory journey with you through this blog, where I will provide valuable insights, best practices, and strategies tailored to your compliance needs. Thank you for entrusting me with the opportunity to contribute to your path to regulatory excellence. For more information and resources, please visit www.kanakkupillai.com.