1. What are International Financial Services Centres ("IFSCs")?
IFSCs have been envisioned by the Indian government as a special economic zone and a financial centre located within India for the provisioning of various financial services to resident and non-resident participants in foreign currency (i.e., not Indian Rupee).1 Although geographically located within India, IFSCs are considered to be an offshore jurisdiction as per the foreign exchange control laws of India and thus all entities registered therein are legally deemed as foreign entities.2 The Gujarat International Finance Tec-City ("GIFT City"), the first and only IFSC currently operational in India, was established in 2015.
2. How are IFSCs regulated?
The concept of IFSCs have been around since the enactment of the Special Economic Zones Act in 2005 ("SEZ Act"). As a matter of fact, the SEZ Act empowers the Indian government to approve the setting up of IFSCs and to prescribe requirements for the setting up and operation of such centres subject to sector specific regulations/guidelines issued by financial sector regulators such as the Reserve Bank of India ("RBI"), the Securities and Exchange Board of India ("SEBI") and the Insurance Regulatory and Development Authority ("IRDA"). Accordingly, when GIFT City was operationalised in 2015, such financial sector regulators issued sector specific guidelines that were applicable to units in the IFSC.
The Indian government, in late 2019, realising that the dynamic nature of business in the IFSCs required a high degree of inter-regulatory coordination, enacted the International Financial Services Centres Authority Act ("IFSC Act"). The IFSC Act provided for the establishment of the International Financial Services Centres Authority ("IFSCA") as a unified regulator for all businesses set up in IFSCs. Subsequently, in April, 2020, the IFSCA was set up with the primary goal of holistically improving the ease of doing business in IFSCs and to provide a world class regulatory environment.3
As a sign of this new regulator coming of age, the IFSCA, has consistently notified new regulations that comprehensively govern various financial sector activities such as banking, capital markets, insurance and the stakeholders therewith.
2.1. Capital Markets
- The IFSCA (Capital Market Intermediaries) Regulations, 2021("CMI Regulations")
The CMI Regulations, regulate intermediaries involved in the capital markets business within the IFSC such as broker dealers, investment advisers, portfolio managers, investment bankers, depository participants etc. Among other things, these regulations provide a detailed process for registration, net worth requirements, fit and proper criteria, general and specific obligations and responsibilities of capital market intermediaries, code of conduct, provisions for cross border business etc. Accordingly, opportunity has been provided for both domestic and overseas entities to be registered as capital market intermediaries either by establishing a branch in the IFSC or by setting up a body corporate or partnership firm or a proprietorship at the IFSC.
Although the CMI Regulations have limited the scope of capital market intermediaries in the IFSC to just operate within the ambit of the two IFSCA recognised stock exchanges (i.e., India INX and NSE IFSC), it is to be noted that special provisions have been made through subsequent circulars allowing broker dealers incorporated in IFSCs to access global stock exchanges subject to compliance with certain prescribed conditions.4
- The IFSCA (Issuance and Listing of Securities) Regulations, 2021 ("Listing Regulations")
The Listing Regulations inter alia provide for the regulation of initial and follow-on public offers by Indian and foreign issuers for the issue of both equity and debt securities on IFSC's recognised stock exchanges including listing obligations and disclosure requirements along with special provisions for listing by special purpose acquisition vehicles (SPACs), start-ups and small and medium enterprises.
2.2. Financial Services
- The IFSCA (Finance Company) Regulations, 2021 ("Finance Company Regulations")
The Finance Company Regulations provide a detailed set of regulations for finance companies and finance units to be set up in IFSCs including registration requirements, prudential compliances, Know Your Customer and Anti-Money Laundering requirements along with corporate governance and disclosure requirements. The Finance Company Regulations also provide a list of permissible specialised, core and non-core activities that finance companies and finance units can undertake. The permitted specialised activities include credit enhancement, factoring and such other activities that are permitted by the IFSCA while the permitted core activities include inter alia lending, undertaking investments, equipment leasing, financial lease transactions for aircraft and ship leasing. The permitted non-core activities include undertaking activities of a merchant banker, investment adviser, portfolio manager, distributor of mutual funds among others.
- IFSCA (Registration of Insurance Business) Regulations, 2021 ("Insurance Business Regulations")
The Insurance Business Regulations have been notified with the intention of putting in place the process of registration and operations of insurers and re-insurers in an IFSC. It ought to be noted that Indian insurers upon registration are permitted to provide life insurance, general insurance, health insurance or business of re-insurance to entities located in an IFSC and individuals working in IFSC as well as to companies and individuals present in any offshore location including global subsidiaries of Indian conglomerates.5 However, foreign insurers are limited to having clients located within the IFSC.
- IFSCA (Insurance Intermediaries) Regulations, 2021 ("II Regulations")
The II Regulations provide for the regulation of insurance intermediaries of two classes, namely- (i) insurance distributors which include composite brokers, corporate agents, direct brokers and reinsurance brokers; and (ii) insurance claim service providers such as surveyor and loss assessors and third-party administrators. Accordingly, Indian direct insurance brokers, composite brokers and re-insurance brokers are allowed to undertake their business within India and at any offshore location.
3. Opportunities for the FinTech Sector
The main objective behind setting up of the IFSC at the GIFT City was to bring back financial services transactions that are currently being carried out by overseas financial institutions and overseas branches/ subsidiaries of Indian financial institutions to the Indian shores.6 The establishment of the IFSCA along with the recent positive regulatory movement provides domestic and foreign stakeholders in the fintech sector a golden opportunity to capitalise on the positive sentiment of the government in gaining approvals and registrations for setting up units in GIFT City. Leveraging their technological capabilities and coupled with the regulatory benefits of setting up operations in the IFSC, the fintech sector in India is well poised to cater to a global market from the GIFT City. The ease of gaining regulatory approvals has especially been enhanced now that fintech entities only have to interface with one regulator with vast regulatory powers and discretion instead of having to deal with multiple regulators depending on the type of services offered by them.
In congruence with the above intent of the government, the IFSCA issued a framework for regulatory sandbox in 20207 ("Regulatory Sandbox") and more recently, a fintech incentive scheme8 ("Incentive Scheme") to foster growth and innovation in the fintech sector. Under the Regulatory Sandbox, the IFSCA has allowed entities (both foreign and domestic) operating in the sectors of capital market, banking, insurance and financial services to access certain facilities and flexibilities to experiment with fintech solutions in a live environment with a limited set of real customers for a limited time frame. Fintech entities 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 corporations under the said sandbox. Further, the Incentive Scheme, which is applicable for a period of 3 (three) years from the date of its adoption (i.e., till February 2, 2025) allows both foreign and domestic applicants to be beneficiaries for six different kinds of grants namely: (i) fintech start-up grant; (ii) proof of concept grant; (iii) sandbox grant; (iv) green fintech grant; (v) accelerator grant; and (vi) listing support grant.
Additionally, given the unique selling point of IFSCs being an offshore jurisdiction geographically located in India, foreign investors can set up operations in the GIFT City to invest in India seamlessly, without having to comply with the stringent foreign exchange controls otherwise applicable in India. Further, regulated Indian fintech entities can also set up units in the GIFT City to attract foreign capital, subject to complying with the prescribed conditions. Resident Indian investors too have recently been allowed to make remittances to IFSCs under the liberalised remittance scheme for the purpose of making portfolio investments within IFSCs thereby opening up an additional source of investment for foreign and domestic fintech units in GIFT City.
4. INDUS LAW VIEW
The recent flurry of regulations by the IFSCA that directly affect the fintech sector along with the introduction of Regulatory Sandbox and the Incentive Scheme and the government's positive outlook towards nurturing the GIFT City, seems to put in place a great opportunity for domestic and foreign fintech entities to establish themselves and flourish in IFSCs. That said, given that the IFSC regime and the IFSCA are still in their early days, occasional regulatory hurdles and unexpected practical difficulties are likely to exist. The same is expected to be resolved in the times to come, given the objective behind setting up the IFSCA and the regulatory efforts towards building a conducive growth environment for fintech entities since its inception.
2 Regulation 3 of the Foreign Exchange Management (IFSC) Regulations, 2015
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