1. What are International Financial Services Centers (“IFSCs”)?
IFSCs have been envisioned by the Government of India as a special economic zone and financial center located in India for the provision of various financial services to resident and non-resident participants in foreign currency (ie not Indian rupees).[1] Although geographically located in India, the IFSC is considered to be an offshore jurisdiction under the foreign exchange control laws of India, and thus all entities registered there are legally regarded as foreign entities.[2] Gujarat International Finance Tec-City (“GAVE by”), The first and only IFSC currently in operation in India, was established in 2015.
2. How are IFSCs regulated?
The concept of IFSCs has existed since the adoption of the Special Economic Zones Act in 2005 (“SEZ Act”). In fact, the SEZ Act authorizes the Government of India to approve the establishment of IFSCs and to prescribe requirements for the establishment and operation of such centers subject to sector-specific regulations / guidelines issued by financial sector regulators such as the Reserve Bank of India (“RBI“), Securities and Exchange Board of India (“SEBI”) And the Insurance Regulatory and Development Authority (“IRDA”). When GIFT City became operational in 2015, such financial sector regulators issued sector-specific guidelines that applied to units in IFSC.
The Indian government, at the end of 2019, realized that the dynamic nature of the activities of the IFSCs required a high degree of interregulatory coordination, adopted the International Financial Services Centers Authority Act (“IFSC Act”). The IFSC Act provided for the establishment of the International Financial Services Centers Authority (“IFSCA”) As a unified regulator for all companies set up in IFSCs. Then, in April 2020, the IFSCA was established with the primary goal of improving the overall simplicity of doing business in IFSCs and providing a world-class regulatory environment.[3]
As a sign that this new regulator has come of age, IFSCA has consistently announced new regulations that comprehensively govern various activities in the financial sector such as banking, capital markets, insurance and stakeholders.
2.1 Capital markets
one. IFSCA (Capital Market Intermediaries) Regulations, 2021(“CMI regulations”)
The CMI regulations regulate intermediaries involved in IFSC’s capital market activities such as broker dealers, investment advisers, portfolio managers, investment bankers, custodians, etc. Among other things, these regulations provide a detailed process for registration, net value requirements, appropriate criteria, general and specific liability , provisions for cross-border activities, etc. Consequently, both domestic and foreign entities have been given the opportunity to be registered as capital market intermediaries either by establishing a branch in IFSC or by establishing a legal entity or partnership or an ownership at IFSC.
Although the CMI regulations have limited the scope of IFSC capital market intermediaries to operate only within the framework of the two IFSCA-recognized exchanges (i.e. India INX and NSE IFSC), it should be noted that special provisions have been made through subsequent circulars that give broker dealers incorporated into IFSCs access to global exchanges in compliance with certain prescribed conditions.[4]
b. IFSCA (Issuance and Listing of Securities) Regulations, 2021 (“Listing regulations”)
The listing regulations blue provide for the regulation of initial and follow-up public offerings by Indian and foreign issuers for the issuance of both shares and debt securities on IFSC’s recognized exchanges, including listing obligations and disclosure requirements, together with special provisions for listing special purpose acquisition companies (SPACs), start-ups and small and medium-sized enterprises; companies.
2.2 Financial services
one. IFSCA (Finance Company) Regulations, 2021 (“Finance Company Regulations”)
The Finance Companies Regulations provide a detailed set of regulations for finance companies and financial entities to be set up in IFSCs, including registration requirements, supervisory compliance, Know Your Customer and anti-money laundering requirements along with corporate governance and disclosure requirements. The Financing Companies Regulations also provide a list of permitted specialized, core and non-core activities that financial companies and financial units can undertake. The permitted specialized activities include credit enhancement, factoring and such other activities permitted by IFSCA while the permitted core activities include blue lending, making investments, equipment leasing, financial leasing for aircraft and ship leasing. The permitted non-core activities include, among other things, carrying out activities for a commercial banker, investment adviser, portfolio manager, distributor of mutual funds.
2.3 Insurance
one. IFSCA (Registration of Insurance Business) Regulations, 2021 (“Insurance Business Regulations”)
Regulations on insurance activities have been notified with the intention of establishing the process of registration and operation of insurance companies and reinsurance companies in an IFSC. It should be noted that upon registration, Indian insurance companies are permitted to provide life insurance, general insurance, health insurance or reinsurance business to entities located in an IFSC and individuals operating in the IFSC, as well as to companies and individuals present in any offshore location including global subsidiaries of Indian conglomerates.[5] However, foreign insurance companies are limited to having customers located within the IFSC.
b. IFSCA (Insurance Intermediaries) Regulations, 2021 («II Regulations»)
The II regulations provide for the regulation of insurance intermediaries in two classes, namely- (i) insurance distributors which include compound brokers, corporate agents, direct brokers and reinsurance brokers; and (ii) insurance claims service providers such as surveyors and loss assessors and third party administrators. Consequently, Indian direct insurance brokers, compound brokers and reinsurance brokers are allowed to conduct business in India and at any offshore location.
Opportunities for the FinTech sector
The main objective behind the establishment of IFSC in GIFT City was to bring back financial service transactions currently carried out by foreign financial institutions and foreign branches / subsidiaries of Indian financial institutions to the Indian coasts.[6] The establishment of IFSCA together with the recent positive regulatory movement gives domestic and foreign stakeholders in the fintech sector a golden opportunity to take advantage of the positive sentiment of the government in obtaining approvals and registrations to set up units in GIFT City. By leveraging their technological capabilities and combined with the regulatory benefits of setting up IFSC operations, the fintech sector in India is well equipped to cater to a global market from GIFT City. The simplicity of obtaining regulatory approvals is especially improved now that fintech units only need to communicate with one regulator with great regulatory powers and discretion instead of having to deal with multiple regulators depending on the type of services offered by them.
In line with the government’s intentions above, IFSCA issued a framework for regulatory sandbox in 2020[7] (“Regulatory sandbox”) And more recently a fintech incentive scheme[8] (“Incentive scheme”) To promote growth and innovation in the fintech sector. Under the Regulatory Sandbox, IFSCA has authorized units (both foreign and domestic) operates in the capital market, banking, insurance and financial services sectors to access certain facilities and flexibility to experiment with fintech solutions in a vibrant environment with a limited set of real customers in a limited time frame. Fintech units have also been allowed to test their solutions in isolation from the live market, based on market-related data made available to them by market infrastructure institutions such as stock exchanges and clearing companies under the said sandbox. Furthermore, the incentive scheme, which applies for a period of 3 (three) years from the date of adoption (ie until 2 February 2025) allows both foreign and domestic applicants to receive six different types of grants, namely: (i) fintech start-up grants; (ii) proof of concept grant; (iii) sandbox allocation; (iv) green fintech grants; (v) accelerator allocation; and (vi) list support grants.
In addition, given the unique selling point that IFSCs are an offshore jurisdiction geographically located in India, foreign investors can establish business in GIFT City to invest in India seamlessly, without having to comply with the strict currency controls that otherwise apply in India. Furthermore, regulated Indian fintech units may also set up units in GIFT City to attract foreign capital, subject to compliance with the prescribed conditions. Resident Indian investors have also recently been allowed to make transfers to IFSCs under the liberalized remittance scheme with the aim of making portfolio investments within IFSCs, thus opening up an additional source of investment for foreign and domestic fintech units in GIFT City.
4. INDUSLAW
The recent wave of IFSCA regulations that directly affect the fintech sector, together with the introduction of the Regulatory Sandbox and the incentive scheme and the government’s positive prospects for nurturing GIFT City, seem to provide a great opportunity for domestic and foreign fintech entities to establish and flourish in IFSCs. That said, given that the IFSC regime and the IFSCA are still in their early days, occasional regulatory barriers and unexpected practical difficulties are likely to exist. The same is expected to be resolved in the time to come, given the goal behind the establishment of IFSCA and the regulatory efforts to build a favorable growth environment for fintech units since its inception.
