Empowering Financial Innovation: IFSCA FinTech Incentive Scheme

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The FinTech industry in India is experiencing exponential growth, positioning the country as a global leader in financial innovation.
India Technology
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The FinTech industry in India is experiencing exponential growth, positioning the country as a global leader in financial innovation. With the third-largest ecosystem and the fastest growth rate, India's FinTech sector is projected to reach a valuation of $150-160 billion by the year 2025. Recognizing this potential, the International Financial Services Centres Authority (IFSCA) established under the International Financial Services Centres Act, 2019 has launched the FinTech Incentive Scheme, 2022 ("Scheme"), to further boost the development of the FinTech sector in India.

The Scheme aims to establish a world-class FinTech hub in GIFT City, India's first international financial services centre. The scheme provides support and incentives to both domestic and foreign fintech companies/entities ("FEs") operating within the IFSC, with a focus on targeting international markets, IFSC stock exchange listing, and accessing the Indian IFSC market. The scheme encourages the use of technology as a core aspect of products, services, business models, and distribution methods to address financial challenges.

Qualification: To be eligible for the Scheme, (a) Indian FEs must operate as a company, LLP, or branch within the IFSC. They must be registered as FinTech startups with the Department for Promotion of Industry and Internal Trade (DPIIT) and possess prior experience in regulated ecosystems such as RBI, SEBI, IRDAI, or PFRDA. (b) Foreign FEs must be FATF-compliant, with non-resident individuals holding at least 51% ownership. Further, both Indian and Foreign FEs must use technology as a core product/service, model (business & distribution), or methodology to tackle the problem. Grants are available for new projects only. Exclude competition winnings, founder allowance, etc. Submit separate proposals for each project/innovation, as they will be evaluated individually.

The Scheme offers a range of grants to support various stages of FinTech projects:

  1. Product and Service Development: Startups with novel ideas can receive grants of up to INR 1.50 million to develop their product, service, and go-to-market strategy, with a focus on converting them into Minimum Viable Products (MVPs).
  2. Innovation and Experimentation: Grant of up to INR 3 million is available for experimentation and the development of innovative products or services.
  3. Proof of Concepts (PoCs): FEs can receive grant of up to INR 5 million to conduct PoCs in domestic and overseas markets.
  4. Sustainable Finance Solutions: Grant of up to INR 7.50 million is provided for providing solutions concerning sustainable finance, including sustainability-linked finance and ESG investments.
  5. Accelerator Support: Domestic FEs aspiring to get listed on recognized stock exchanges can receive grant of up to INR 1 million for supporting accelerators at the IFSC level.

The disbursement of grants under the Scheme follows a structured process. For start-up FinTech, sandbox, PoC, and green FinTech projects, the grant is distributed in three tranches. The first tranche of 30% is paid at the stage of identifying users, market needs, and features to be built in the MVP under the IFSCA Sandbox. The second tranche of 30% is disbursed upon tying up with at least one partner for the completed MVP. The third tranche is provided upon obtaining limited use authorization (Regulatory Sandbox) for projects under the scheme.

For accelerator grants, the disbursement occurs in two equal tranches. The first tranche is paid within two weeks after the program initiation, with a cohort of at least 10 (ten) relevant FinTechs/ TechFins operating within the IFSC jurisdiction. The second tranche is disbursed at the completed application stage under the framework.

Kindly note that nevertheless, the IFSCA provides a structured mechanism for availing the grants provided under the Scheme, the milestones provided are not absolute, as the IFSCA holds the authority to include or exclude any milestone(s), as deemed necessary. The decision of the IFSCA shall be final and binding.

How to avail the Grant: The application process involves submitting an application to the IFSCA for evaluation. Upon approval, the IFSCA issues a sanction letter with the conditions for grant disbursement. The FinTech entity must enter into an agreement with the IFSCA, comply with pre and post-disbursement conditions, and have its achievements monitored by an internal committee.

Key Compliances: To avail the benefits of the Scheme, FEs must comply with certain regulatory requirements. These include (a) Implementing robust corporate governance practices. (b) Appointing a compliance officer. (c) Providing accurate data to stakeholders. (d) Complying with KYC/AML regulations and adhering to reporting requirements. (e) The FE should be incorporated at the IFSC and seek registration/authorization/license under the Act. (f) The grant received under the Scheme should be utilized within India and not in any other jurisdiction for a period of three years. (g) In the case of an Accelerator Grant FE can apply for 1 (one) grant if the Accelerator is not located within IFSC and 3 (three) grants if IFSC is located within the IFSC.

Failure to comply with the conditions can lead to the return of the grant amount along with interest @ 8% per annum and imposition of lien by IFSCA on the Intellectual Property created by the FE during the sandbox period. Provided that no such encumbrance shall be registered in case of a Listing Support Grant.

Unlocking FDI Potential: The Scheme's focused approach on the FinTech sector unlike broader initiatives like Make in India and Digital India attracts specific foreign investors seeking lucrative opportunities in India's flourishing FinTech ecosystem. By providing grants, regulatory support, market access, and collaboration opportunities, the scheme fosters knowledge sharing, joint ventures, and growth, making India an appealing destination for foreign FinTech investment.

Fes operating within the IFSC, are incentivized to expand internationally due to favourable tax regimes and operational costs. The IFSCA can capitalize on this by (a) Facilitating cross-border business; (b) Promoting international partnerships; and (c) Creating targeted incentives. By actively supporting overseas expansion, the IFSCA can transform GIFT City into a hub for Indian financial services exports, attracting FDI, promoting economic growth, and enhancing India's global competitiveness.

In view of the above, it can be said that, while the Scheme holds promise, certain areas require refinement to unlock its full potential. Early-stage support, clear regulations, and a wider infrastructure are essential for nurturing FinTech startups and promoting their growth. Additionally, focusing on talent development and fostering inclusive participation can further strengthen the FinTech ecosystem.

Moreover, the ambit of the FinTech regulatory sandbox offered by the IFSCA shall be expanded, as GIFT IFSC being outside the regulatory ambit of domestic regulators has the potential to provide a unique advantage of testing activities that fall beyond the purview of individual domestic regulators. This flexibility and unique testing advantage will help attract FDI by enabling experimentation and innovation.

To enhance the scheme's effectiveness, facilitating cross-border ventures, forming international partnerships, and providing targeted FDI incentives can attract more foreign investments and solidify India's position as a global FinTech leader. By continuously evolving and adapting the scheme based on industry feedback and emerging trends, India can harness the power of FinTech to drive financial innovation and economic growth.

The Scheme introduced by the IFSCA is a significant step towards establishing India as a global hub for FinTech companies. By providing grants and incentives to both local and foreign FEs, the scheme encourages the development of innovative financial solutions and fosters a competitive environment in the financial services market. With its focus on technology-driven solutions and international expansion, the scheme holds immense potential for transforming India's financial sector and attracting foreign investments. As the FinTech landscape continues to evolve, refining the scheme and fostering collaboration will be key to ensuring India's continued success in the global FinTech arena.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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