Establishment of the International Finance Services Center (“IFSC”) in Gujarat, positioned as a regulatory island within the borders of India with access to the Indian economy, providing a progressive legal framework compared to the best practices adopted by global financial centers like London, Singapore, New York, Hong Kong, was revolutionary.
The business of the IFSC may be conducted in any freely convertible currency other than Indian Rupee; and under the FEMA (IFSC) Regulations 2015, any financial institution or its branch established within the IFSC must be treated as a ‘person resident outside India’.
It is designed to attract foreign investors by offshoring financial services and financial products that are currently exported to foreign financial institutions.
Doing business from the IFSC comes with the benefit of a relaxed tax regime, i.e. a 10-year tax holiday with no STT, CTT or capital gains tax long-term and a regulator, i.e. the International Financial Services Center Authority (“IFSCA”) which assumes the responsibility of a unified regulator in different areas within the IFSC, otherwise overseen by sector regulators such as RBI, SEBI, IRDAI and the PFRDA in mainland India.
Investors showed increased interest in the opportunities of the IFSC after the operationalization of the IFSCA in the late 2020s. The IFSCA followed a dual course approach – to increase the ease of doing business for existing sectors such as banking and funds, and to simultaneously develop sustainable ecosystems for emerging sectors as well as innovative products such as fintech, insuretech, bullion exchanges, GICs, derivatives.
While the IFSCA provides an enabling framework for the regulatory framework in India, it also needs to change to enable Indian companies/institutions to take advantage of the desired momentum which is absent, among others, to participate in the benefits of the IFSC. For example, Indian Bank Branches (IBUs) cannot offer or invest in structured financial products and derivatives that are not authorized by the RBI.
If the branch was based in one of the other international financial centers, such products could have been offered to its customers. Similarly, to undertake certain activities like commodity trading, banks in India are required to undertake the same through subsidiaries but need regulatory approval.
As a result, while there has been interest in new products like bullion trading, aircraft leasing, etc., participation has been limited. Branches of foreign banks which are not subject to these restrictions and are advantaged over Indian banks. Indian financial institutions/banks should have a level playing field in the IFSC.
In addition, there are restrictions on investments under the Liberalized Remittances (“LRS”) scheme. RBI allowed resident individuals to send remittances under the LRS to Indian IFSCs.
However, residents have been allowed to send funds only for the purpose of investing in IFSC securities and if the investment is not made within 15 days, the funds will have to be transferred to India.
In contrast, under the terms of the RBI LRS Scheme, currently resident individuals are permitted to open foreign currency accounts for various purposes with banks outside India (apart from IFSCA). This limits the scope of products and services that banks can offer under the LRS scheme.
There is also huge scope to develop capital markets in the IFSC and “onshore” some of the offshore capital markets products in the IFSC. The regulatory regime should consider allowing Indian companies to register with the IFSC or allow issuance of instruments/receipts that represent equity in the IFSC.
Among the main concerns of institutional investors are the delays in resolving disputes and the absence of cross-border insolvency legislation in the case of entities and assets in difficulty. The IFSC needs a special dispute resolution branch that is autonomous. Solving some of these problems will provide the necessary impetus for the growth of the ecosystem.
As the Indian government is paving the way for the operationalization of the “IFSC dream” by providing tax incentives, a favorable regulatory regime as well as the introduction of innovative financial products, proactive participation and increased cooperation among major Indian regulators such that SEBI, RBI, IRDAI together with IFSCA will increase investor confidence and ensure that different stakeholders can participate in the IFSC’s opportunity to grow into a global financial center of scale and substance.
(Chacko is a partner at Cyril Amarchand Mangaldas; Dalal is a partner at Cyril Amarchand Mangaldas)
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