GIFT City: A New Chapter in the Indian Financial Sector: Part 2

following guest post is contributed by Surbhi
of Vinod Kothari & Co. The author can be contacted at [email protected].
This is
a continuation from the first part, which is available here]
Slew of
To operationalize the IFSC, a notification under the Foreign
Exchange Management Act, 1999 (FEMA) was issued by Reserve Bank of India (RBI)
on March 23, 2015, namely the Foreign Exchange Management (International
Financial Service Centre ) Regulations, 2015, making regulations relating to
financial institutions set up in the IFSC. The key features of these
regulations are that any financial institution (or its branch) set up in the
a. shall
be treated as a nonresident Indian located outside India,
b. shall
conduct business in such foreign currency and with such entities, whether
resident or nonresident, as the Regulatory Authority may determine, and
c. subject
to section 1(3) of FEMA, nothing contained in any other regulations shall apply
to a unit located in IFSC.
For this purpose a financial institution has been defined in
sub-section b of section 2 of the said regulations. It states that:-
2 (b) ‘Financial Institution’ shall include
i. a
company, or
ii. a
firm, or
iii. an
association of persons or a body of individuals, whether incorporated or not,
iv. any
artificial juridical person, not falling within any of the preceding categories
engaged in rendering financial services or carrying out financial transactions.
Explanation: For the purpose of this sub-regulation, and
without any loss of generality of the above, the expression ‘financial
institution’ shall include banks, non-banking financial companies, insurance
companies, brokerage firms, merchant banks, investment banks, pension funds,
mutual funds, trusts, exchanges, clearing houses, and any other entity that may
be specified by the Government of India or a Financial Regulatory Authority.
Given the above context, a financial institution set up in
the IFSC shall be treated as a foreign entity and investment made by it into
India shall tantamount to foreign direct investment. Further loans extended by
it to Indian entities will be covered under the guidelines for External
Commercial Borrowings. Furthermore, for an India entity, including NBFCs and
banks, making investment in an IFSC financial institution, the rules of
Overseas Direct Investment will be applicable, unless amended to allow infusion
of capital without restrictions or conditions.
IFSC Banking Units
Pursuant to the above regulations,
the RBI has formulated a scheme for the setting up of IFSC
Banking Units (IBUs) by banks in IFSCs vide notification
no. DBR.IBD.BC. 14570/23.13.004/2014-15 dated April 1, 2015. Indian banks
allowed to deal in foreign exchange and foreign banks already having presence
in India are allowed to set up IBUs in IFSC. Following are the main highlights
of the scheme:
– Each
eligible bank will be able to set up only one IBU in each IFSC.
– IBUs
of Indian banks shall be treated at par with their foreign branches and norms
as applicable to foreign branches shall be applicable to these IBUs.
– Banks
intending to set up an IBU would require a prior license from RBI before
opening such IBU.
– Respective
parent bank will have to contribute a minimum capital of $20 million.
– IBUs
have been exempted from reserve and priority sector lending requirements.
– They
have been allowed to raise funds only from person resident outside India,
however they can utilize funds with both person resident outside India and in
– They
have been permitted to deal in all types of derivative and structured products
with prior approval of their board of directors. Further, they can deal with wholly
owned subsidiaries or joint ventures of Indian companies registered abroad and
can undertake transactions in currency other than Indian rupee.
– They are not permitted to open any current or savings accounts and are not
empowered to issue bearer instruments or cheques. All payment transactions must
be undertaken through bank transfers.
– Deposits
of IBUs shall not be covered by deposit insurance and they are allowed to have
liabilities, including borrowed funds in foreign currency, which have original
maturity of more than one year.
– All
transactions of IBUs shall be in currency other than Indian Rupee and IBUs will
be required to maintain separate nostro accounts with correspondent banks which
would be distinct from nostro accounts maintained by other branches of the same
– No
support shall be provided to IBUs by RBI in times of crisis, more specifically
RBI shall not be the ‘lender of the last resort for IBUs’. Any kind of
financial crunch will have to be supported by the parent Bank.
Given the above pretext, it is
highly likely that banks would be more than willing to set up IBUs in IFSC as
the capital requirement is not much and there is an exemption from the reserves
and priority sector lending requirements. Moreover as the branches of the
domestic banks in IFSC will be treated as foreign branches, this would increase
access to international banking. However, absence of current and savings
account facilities and any kind of support from RBI may cause reluctance
amongst banks to set up such units in IFSC.
On March 22, 2015, the Securities
and Exchange Board of India (SEBI) approved SEBI (International Financial
Services Centres (IFSC)) Guidelines, 2015 with an aim to facilitate a conducive
environment for setting up of capital market infrastructure like stock
exchanges, clearing houses, depository services in such centres. The guidelines
permit foreign entities to raise capital within the centres through issue of
depository receipts and other securities and entail stock exchanges to do
business with a comparatively low level of capital. Following are the main highlights
of the guidelines:
i. Entities
permitted to operate in an IFSC
Stock exchanges, Clearing Corporations, Depositories,
Intermediaries including stock brokers, merchant bankers, an underwriter, a
portfolio manager, a foreign portfolio manager, an investment adviser and
persons associated with the securities market, and Funds comprising of
Alternative Investment Funds and Mutual Funds have been permitted to operate in
an IFSC.
ii. Criteria for
setting up Stock Exchanges, Clearing Corporations And Depositories
Indian recognised stock exchanges, depositories and clearing
corporation as well as foreign stock exchanges, depositories and clearing
corporation recognised by its country’s regulator, can set up subsidiaries in
an IFSC where 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. They can undertake the same business subject to relaxed norms.
– A stock exchange, local or foreign, can be set up with a net
worth of rupees 25 crores as against the normal requirement of rupees 100 crore
rupees, however, they would have to raise their net worth to 100 crores within
a span of three years and they would also be given a time span of three years
within which they would have to complete de-mutualisation
– A Clearing Corporation can be set up with a net worth of
rupees 50 crore rupees as against the normal requirement of rupees 300 crore,
however, they would also have to raise their net worth to 300 crores within a
span of three years.
– A depository, local or foreign, can be set up with a net
worth of rupees 25 crores as against the normal requirement of rupees 100 crore
rupees, however, they would have to raise their net worth to 100 crores within
a span of three years.
Further these guidelines have provided exemptions to stock
exchanges, clearing corporations and depositories, to be set up in an IFSC,
from certain provisions of Securities Contracts (Regulation) (Stock Exchanges
and Clearing Corporations) Regulations, 2012 and SEBI (Depositories and
Participants) Regulations, 1996 which requires them to transfer every year a
certain percentage of profits of these entities to the relevant “fund”
prescribed under the applicable regulations. However, these entities in IFSC
will have to comply with the IOSCO principles and Principles for Financial
Market Infrastructures (FMIs) and such other governance norms specified by
Furthermore these guidelines also provide for trading in
securities and products in such securities in any currency other than Indian
rupee such as equity shares issued by companies incorporated outside India,
depository receipts, debt securities, currency and interest rate derivatives,
index based derivatives and such other securities as may be specified by SEBI
from time to time
iii. Operations of
Intermediaries in an IFSC
A recognized intermediary or any foreign intermediary
recognized by its country’s market regulator will be allowed to operate as
securities market intermediaries in IFSC only in the form of a company. Further
they shall extend their services to prescribed category of clients which will
include person resident outside India, a non-resident Indian, institutional
investors, and resident Indians eligible under the FEMA. Furthermore investment
advisory or portfolio management services shall also be provided to the above
named clients only. Permitted intermediaries in an IFSC are also required to
appoint a senior management person as a ‘Designated Officer’ to ensure
compliance with all the regulatory requirements.
iv. Issue of
Domestic companies intending to raise capital in an IFSC, in
a currency other than Indian Rupee, shall comply with the norms Foreign
Currency Depository Receipts Scheme, 2014 and Companies
of foreign jurisdiction, intending to raise capital, in a currency other than
Indian Rupee, in an IFSC shall comply with the provisions of the Companies Act,
2013 and relevant provisions of Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements) Regulations, 2009. Further these
companies have an option of listing their securities on stock exchanges set up
in an IFSC.
v. Issue of Debt
Issue of debt securities shall be permitted only to those
issuers who are eligible to issue debt securities as per its constitution.
Further these securities are required to be mandatorily listed on stock
exchanges set up in an IFSC. The requirements pertaining to credit rating,
appointment of trustees, creation of debenture redemption reserve, agreement
with a depository/custodian, reporting of financial statements shall have to be
complied with. The debt securities shall be traded on the platform of
securities exchange and shall be cleared and settled through clearing
corporations set up in an IFSC.
vi. Funds in an
Investment in Mutual Funds (MF) and Alternative Investment
Funds (AIF) set up in IFSC can be made only by person resident outside India, a
non-resident Indian, institutional investors, and resident Indians eligible
under the FEMA and these investments can be made in foreign currency. Further
these guidelines require that an Asset Management Company (AMC) of a MF
operating in IFSC is required to have a minimum net worth of USD 2 million,
which should be increased within three years of commencement of business to USD
10 million.
On April 7, 2015 Insurance Regulatory Development Authority
of India issued guidelines with regard to regulate the insurance offices set up
in the IFSC. According to these guidelines domestic insurance companies have
been permitted to set up IFSC Insurance Office (IIO) in SEZs to carry on
Reinsurance business and foreign insurance companies can do the same if they
meet the following conditions and obtain prior approval of IRDA:
i. It is registered or licensed for doing Insurance or
Reinsurance business in the country of incorporation;
ii. If they have been duly authorized by the Regulatory or
Supervisory Authority of that country to set up such office;
iii. the proposed firms must be in continuous operation for
at least five years, and
iv. must have a satisfactory track record in respect of
regulatory or supervisory compliance
v. If they have net owned funds as specified in the
Insurance Act, 1938.
For reinsurance business, section 10 of the regulations
state that the companies should
 “demonstrate an assigned capital of Rs 10 crore which may be held in
the form of Government Securities issued by the Government of India or held as
deposits with scheduled banks in India and shall be maintained at all times
during the subsistence and validity of its registration under these guidelines”
Further in case of direct insurance, the Indian insurers
(except a statutory body) may also establish an IIO to transact a specified
direct insurance business within the SEZ. 
IFSC in Gujarat will aim to get back
some of the financial businesses that has drifted to Dubai and Singapore due to
the absence of any IFC in India and will also provide a level playing field to
domestic entities to be competitive globally. To ensure the smooth functioning
of the IFSC it is important that all regulators involved in the functioning of
an IFSC, develop, monitor and review the regulatory framework on a regular

– Surbhi Jaiswal

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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