SEBI Guidelines for International Finance Centres

[The
following post is contributed by Yogesh
Chande
, who is an Associate Partner with Economic Laws Practice, Advocates
& Solicitors. Views of the author are personal.]
The report (2007) of the High Powered
Expert Committee (HPEC) on ‘Mumbai: An International Financial Centre’ had in
its report suggested the
setting up of International Financial Centre in Mumbai.
The Minister of Finance in his budget
speech (2015-2016) stated that, “While
India produces some of the finest financial minds, including in international
finance, they have few avenues in India to fully exhibit and exploit their
strength to the country’s advantage. GIFT in Gujarat was envisaged as
International Finance Centre that would actually become as good an
International Finance Centre as Singapore or Dubai, which, incidentally, are
largely manned by Indians. The proposal has languished for years. I am glad to
announce that the first phase of GIFT will soon become a reality.
” 
Pursuant to announcement in the Union
Budget 2015-2016 on Gujarat International Finance Tec-City (GIFT), SEBI’s board
on 22 March 2015 approved
the SEBI (International Financial Services Centres) Guidelines, 2015 (“IFSC
Guidelines”). SEBI on 27 March 2015 issued the IFSC Guidelines
for facilitating and regulating financial services relating to securities
market in an IFSC set up under section 18(1) of Special Economic Zones Act,
2005.
In terms of the IFSC Guidelines, the following
entities have been permitted to operate in an IFSC:
Infrastructure Companies in
Securities Market
1. Stock exchanges;
2. Clearing corporations;
3. Depositories.
Intermediaries
4. Includes a stock broker, a
merchant banker, an underwriter, a portfolio manager, a foreign portfolio
manager, an investment adviser and those persons who are associated with the
securities market.
Funds
5. Alternative Investment
Funds;
6. Mutual Funds.
In terms of the IFSC Guidelines, following are
the modes in which capital and debt could be raised / issued:
i) A domestic company including
a body or corporation established under a Central or State legislation can
raise capital in currency other than Indian Rupee in compliance with the
provisions of Foreign Currency Depository Receipts Scheme, 2014;
ii) Companies of foreign
jurisdictions can raise capital in currency other than Indian Rupee in
compliance with provisions of the Companies Act, 2013 and SEBI (Issue of
Capital and Disclosure Requirements) Regulations, 2009 as if the securities are
being issued under chapter X and XA thereof, dealing with issuance of Indian
Depository Receipts (“IDR”) and rights issue of IDR.
iii) A company incorporated in
India or outside India is eligible to issue debt securities subject to certain
prescribed conditions.
Criteria for setting up
of Infrastructure Companies in Securities Market in an IFSC
Formation:
a) Stock Exchange: Can be
formed by an Indian recognised stock exchange or a stock exchange of a foreign
jurisdiction.
b) Clearing Corporation: Can be
formed by an Indian recognised stock exchange or a clearing corporation or any
recognised stock exchange or a clearing corporation of a foreign jurisdiction.
c) Depository: Can be formed by
an Indian registered depository or any regulated depository of a foreign
jurisdiction.
Shareholding:
At
least 51% of the paid up equity share capital needs to be held by those seeking
to form a stock exchange or a clearing corporation or a depository. Change in
equity shareholding merely requires intimation to SEBI within fifteen days of
acquisition of equity shares.
Minimum networth:
In
case of a stock exchange and a depository, the initial minimum networth needs
to be INR 250 million and INR 500 million in case of a clearing corporation.
The initial minimum networth needs be to increased to INR 1000 million over a
period of three years from date of approval in case of a stock exchange and a
depository, and to INR 3000 million over a period of three years from date of
approval in case of a clearing corporation.
Relaxation of certain
provisions:
The
IFSC Guidelines have provided for certain relaxations to stock exchanges,
clearing corporations and depositories to be set up in an IFSC from the provisions
of Securities Contracts (Regulation) (Stock Exchanges and Clearing
Corporations) Regulations, 2012 and SEBI (Depositories and Participants)
Regulations, 1996; dealing with transfer of a certain percentage of profits of
these entities every year to the relevant “fund” prescribed under the applicable
regulations. Infrastructure companies in securities market operating in an IFSC
are required to adopt the broader principles of governance prescribed by
International Organization of Securities Commissions (IOSCO) & principles
for Financial Market Infrastructures (FMI), and such other governance norms as
may be specified by SEBI, from time to time.
Trading
on stock exchanges:
The
stock exchanges operating in an IFSC can provide platform for trading in
securities and products in such securities in any currency other than Indian
rupee such as: (i) equity shares of a company incorporated outside India; (ii) depository
receipt(s); (iii) debt securities issued by eligible issuers; (iv) currency and
interest rate derivatives; (v) index based derivatives.
Operations
of intermediaries in an IFSC
Intermediaries seeking to operate in an
IFSC which are intending to provide financial services relating to securities
market need to be formed as a “company” form of organisation. The IFSC
Guidelines currently do not envisage any other form of organisation like a
“limited liability partnership”. Intermediaries operating within the IFSC can
provide financial services to prescribed categories of clients only, such as a
person not resident in India or a non-resident India. A person resident in
India cannot be a client of such an intermediary. Similar requirement is also
applicable to those who intend to avail investment advisory or portfolio
management services from intermediaries operating as such in an IFSC. The IFSC
Guidelines permit a portfolio manager operating in IFSC to invest in securities
which are listed in IFSC, and also in unlisted securities issued by companies
incorporated in IFSC, or those issued by companies belonging to foreign
jurisdiction. Intermediaries are obliged to appoint a senior management person
as “designated officer” to ensure compliance with the regulatory requirements.
Issue of capital and
issue of debt securities
Unlike in case of entities mentioned in the
first two paragraphs under the section relating to modes of raising capital, in
case of issue of debt securities, Chapter V of the IFSC Guidelines does not
expressly state that, such debt securities should be in a currency other than
Indian Rupee. Companies mentioned in the first two paragraphs above have an
option to list their securities on stock exchanges set up in an IFSC, unlike in
case of an issuer issuing debt securities which needs to be mandatorily listed.
In case of issue of debt securities, the requirements relating to appointment
of trustees, creation of debenture redemption reserve, entering into an
agreement with a depository/custodian, reporting of financial statements and
trading on stock exchanges including clearing & settlement of debt securities
through a clearing corporation set up in an IFSC is mandatory.
Funds operating in IFSC
A person resident in India is not eligible
to make an investment in an alternative investment fund (“AIF”) or a mutual
fund (“MF”). It appears that, this condition on investment in an AIF or a MF is
in relation to investing in the units of a scheme of an AIF or a MF, and does
not prohibit investment by a person resident in India in the AIF as a sponsor,
or in the asset management company (“AMC”) of the MF as a shareholder. An AIF and
a MF are permitted to accept money from eligible investors only in foreign
currency. As regards the capitalisation norm of a MF, the IFSC Guidelines
prescribes that the AMC of a MF needs to have a minimum networth of USD 2 million,
which should be increased within three years of commencement of business to USD
10 million.
Conclusion
An IFSC caters to a person resident outside
the jurisdiction in which it is set up. An IFSC plays a significant role in
development and penetration of capital markets and contains a large number of
internationally significant financial institutions. It is expected that, IFSC
Regulations will enable India to garner billion of dollars worth financial
services business that is otherwise lost to foreign countries. To ensure that
the IFSC Guidelines are effective and achieve the intended objective, it will
be critical that, apart from SEBI, the concerned agencies in the government
machinery and the Reserve Bank of India work relentlessly in periodically
reviewing the regulatory structure pertaining to functioning of IFSC, evolve a
smooth mechanism for dispute resolution, develop an effective bankruptcy
procedure and above all provide a predictable and a stable tax regime.

– Yogesh Chande

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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