The GIFT International Financial Services Centre ("GIFT IFSC") established in Gandhinagar, Gujarat is India's first international financial services centre with the intent of catering to global MNCs and financial institutions in alignment with international standards of business. To ensure that utmost benefits can be provided, the entire zone has been equipped with world class infrastructure akin to global standards. This newsletter navigates the journey of GIFT IFSC, and the International Financial Services Centres Authority ("IFSCA") set up under the International Financial Services Centres Authority Act, 2019.
IFSCA as a unified regulator is also head quartered at GIFT IFSC and is committed to providing a sound and well-structured regulatory environment by providing a single window clearance system. The IFSCA has been able to achieve this through unification of the powers previously held by four separate regulators: Reserve Bank of India ("RBI"), Securities and Exchange Board of India ("SEBI"), Insurance Regulatory and Development Authority of India ("IRDAI"), and Pension Fund Regulatory and Development Authority of India ("PFRDAI").
We are providing transactional updates including a bird's eye view on legal and regulatory updates related to the GIFT IFSC.
Modification under the IFSCA (Anti- Money Laundering, Counter-Terrorist Financing and Know Your Customer) Guidelines, 2022 ("ISFCA Anti-Money Laundering Guidelines")
November 22, 2024 – IFSCA through Circular No. IFSCA-DAC/8/2024-AMLCFT, has introduced pivotal updates to its IFSCA Anti-Money Laundering Guidelines. These revisions are essential for fostering robust compliance frameworks across regulated entities.
Under the updated guidelines, all entities licensed, recognized, registered, or authorized by the IFSCA must establish anti-money laundering and countering the financing of terrorism ("AML-CFT") policies. These policies must be approved by the governing body or an authorized committee of the regulated entities and incorporate the fundamental principles and elements outlined in the IFSCA Anti-Money Laundering Guidelines.
Highlights of the Modifications:
1. Enhanced Global Alignment:
A new sub-clause (d) in clause 11.1 mandates regulated entities to implement countermeasures requested by any international or intergovernmental organization of which India is a member, subject to approval by the Central Government.
2. Strengthened Group-wide Coordination:
A newly added sub-clause (e) in clause 12.2 requires group-level coordination for AML/CFT compliance. Regulated entities within a group, comprising a parent company, branches, and/or subsidiaries shall :
- share customer, account, and transaction information with group-wide compliance, audit, and AML/CFT functions.
- share analyses of unusual transactions or activities to mitigate money laundering and terrorism financing risks.
- receive relevant information from group-level functions for effective risk management.
These modifications underline IFSCA's commitment of aligning with global standards and fostering a resilient AML-CFT ecosystem. Regulated entities must act promptly to integrate these updates into their operational frameworks, ensuring seamless compliance and safeguarding the financial ecosystem.
Source: GIFT IFSCA website [Circular dated November 22, 2024]
IFSCA (Registration of Factors and Registration of Assignment of Receivables) Regulations, 2024 ("Regulation for Factoring and Receivables Assignment")
November 22, 2024 – IFSCA introduces the Regulations for factoring and receivables assignment on November 18, 2024,. These regulations aim to streamline the registration process for Factors and set guidelines for filing transaction details with the Central Registry (CERSAI) via Trade Receivables Discounting System (TReDS), as per Section 19(1)(A) of the Factoring Regulation Act, 2011.
What are Factors?
Factors are entities such as non-banking financial companies (NBFCs) or corporates that acquire trade receivables through assignment. These assignments, made for a consideration, help businesses address short-term liquidity needs through financing or collection of receivables.
Key Features of the Regulation:
1. Registration Requirement:
- Entities seeking to operate as Factors in GIFT-IFSC must obtain a certificate of registration from IFSCA.
- Approved Factors must commence operations within six months of receiving the certificate of registration from IFSCA.
2. Eligibility Criteria
To qualify for registration, a Factor must:
- Hold a certificate of registration under the IFSCA (Finance Company) Regulations, 2021.
- Employ experienced key managerial personnel (KMP) with expertise in factoring.
- Have or commit to developing necessary infrastructure such as office space, communication facilities, and manpower.
- Demonstrate financial soundness.
- Meet the "fit and proper" criteria for both the organization and its key personnel.
- Ensure that neither the Factor nor its key personnel are involved in judicial proceedings for legal violations.
3. Conduct of business and reporting:
A Factor can undertake the factoring business either directly from the assignor or through an ITFS (International Trade Financing Services Platform) in according with the provisions of the Factoring Regulation Act. Further, entities other than Factors meeting such eligibility criteria as may be specified by IFSCA can also undertake factoring business through an ITFS.
4. Registration of assignment of receivables:
The trade receivables financed through a Trade Receivables Discounting Systems (TReDs) should be filed with the Central Registry, by the concerned TReDs on behalf of the Factor, within a period of ten days from the date of such assignment or satisfaction thereof.
5. Repeal and Savings:
From the date of coming into force of these regulations, the Registration of Assignment of Receivables (Reserve Bank) Regulations, 2022, and Registration of Factors (Reserve Bank) Regulations, 2022 issued by the Reserve Bank of India shall not apply in GIFT IFSC. Further, on and from the date of coming into force of these regulations, the circular titled "Guidelines on Factoring and Forfaiting of Receivables" dated August 17, 2021 issued by IFSCA shall stand repealed.
Why These Regulations Matter?
The said regulations reinforce IFSCA's commitment to fostering a robust and compliant financial ecosystem in GIFT-IFSC. By setting clear standards for Factors, these regulations enhance transparency, risk management and financial stability, enabling businesses to better leverage receivables for liquidity.
These regulations strengthen the regulatory framework for factoring, enhancing transparency, financial stability, and operational efficiency within GIFT-IFSC, and offer a streamlined approach to business financing through trade receivables.
Source: GIFT IFSCA website [Regulation dated November 22, 2024]
Principles to mitigate the risk of greenwashing in Environmental Social and Governance ("ESG") labelled debt securities in the GIFT IFSC
November 21, 2024- Recognizing the global concern surrounding greenwashing—the deceptive practice of overstating or falsifying sustainability claims, IFSCA has introduced principles to ensure transparency, accountability, and integrity in the issuance of ESG-labelled debt securities (e.g., Green Bonds, Social Bonds, Sustainability Bonds) within GIFT IFSC. These principles aim to uphold investor's confidence and create a level playing field for genuine issuers.
Key Principles for ESG-Labelled Debt Securities:
1. Being True to Label
(a) Issuers must avoid misleading labels or terminology such as "Green," "Social," or "Sustainability" unless aligned with recognized frameworks, such as:
- ICMA Principles/Guidelines
- Climate Bonds Standard
- ASEAN Standards
- European Union Standards
- Frameworks recognized by Indian regulators.
(b) Offer documents and marketing materials must explicitly state the specific environmental or social objectives of the securities.
2. Screen the Green
- Transparency is required in project evaluation and selection criteria.
- The offer document should detail methodologies, tools, and procedures used to screen and select projects, avoiding vague or generic descriptions.
3. Walk the Talk
- Issuers must establish robust internal controls to ensure funds are allocated exclusively to stated projects.
- Any misallocation of funds must be promptly disclosed, and in severe cases, issuers should consult investors for early exit opportunities.
4. Overall Impact
- Issuers must address any limitations or trade-offs associated with the environmental benefits of financed projects.
- For example, if a project claims significant carbon reduction, the issuer must transparently disclose how the reductions are calculated to avoid misleading perceptions.
5. Be Alert
- Continuous monitoring and disclosure of project impacts are essential.
- Issuers must provide:
- A list of funded projects with descriptions.
- Allocated amounts and expected impacts.
- Qualitative and, where feasible, quantitative performance measures for ESG impacts.
These principles reinforce IFSCA's commitment to curbing greenwashing and ensuring genuine sustainability in ESG-labelled securities. By adhering to these principles, issuers can maintain credibility, protect investors, and support the growth of a transparent and sustainable financial ecosystem.
Source: GIFT IFSCA website [Circular dated November 21, 2024]
Change in the details of the Central [Designated] Nodal Officer for implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967
November 18, 2024 ¬– IFSCA vide circular no. 887/IFSCA/UAPA/2023-24/04 notified to all the regulated entities in GIFT-IFSC that for the purpose of implementation of Section 51A of the Unlawful Activities (Prevention) Act, 1967, Joint Secretary (CTCR), Ministry of Home Affairs [Telephone number 011-23093124, email address: jscter-mha@gov.in], is designated as the Central Nodal Officer in place of the Additional Secretary (CTCR).
Source: GIFT IFSCA website [Circular dated November 18, 2024]
Exempting certain entities/activities from the applicability of ISFCA Anti-Money Laundering Guidelines
November 18, 2024 ¬– IFSCA vide circular no. IFSCA- FCS/1/2023-Banking notified to all the regulated entities in GIFT-IFSC about certain entities/activities that are exempted from the applicability of the IFSCA Anti-Money Laundering Guidelines. It is to be noted that IFSCA had received representations from market participants to examine the applicability of the IFSCA Anti-Money Laundering Guidelines. Consequently, post examining the same and taking into consideration other relevant factors, the IFSCA exempted following entities/activities from the applicability of the IFSCA Anti-Money Laundering Guidelines:
- "Global-in-House Centre" registered under IFSCA (Global In-House Centres) Regulations, 2020;
- "International Branch Campus" or an "Offshore Educational Centre" of a foreign university or a foreign educational institution registered under IFSCA (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022;
- "Financial Crime Compliance Service Provider" registered under IFSCA (Book-keeping, Accounting, Taxation and Financial Crime Compliance Services) Regulations, 2024; and
- A Financial Institution providing services only to the entities in its 'Financial Group' which are located in a country not identified in the public statement of FATF as 'High-risk jurisdictions subject to call for action'. Any financial institution undertaking transactions through third-party business / service providers in the course of their operations, shall undertake business risk assessment and comply with incidental provisions of the Guidelines.
The aforementioned entities shall undertake business risk assessment and document the same. Further, if any anti money laundering/ counter-terrorist risk are envisaged in the business risk assessment, such entities shall continue to comply with the provisions of the Prevention of Money Laundering Act 2002 and rules made thereunder, and IFSCA (AML/CTF/KYC) Guidelines, 2022.
Source: GIFT IFSCA website [Circular dated November 18, 2024]
GIFT City announces the launch of Fintech Institute and Innovation Hub
November 14, 2024 ¬– GIFT City announced the launch of the GIFT International Fintech Institute ("GIFT IFI") and the GIFT International Fintech Innovation Hub ("GIFT IFIH"). GIFT IFIH is a dedicated fintech incubator and accelerator which is supported by the Asian Development Bank ("ADB"). GIFT IFI is an institution which will be led by a distinguished consortium comprising of Ahmedabad University in collaboration with IIT Gandhinagar and the University of California, San Diego.
The training programs of GIFT IFI, scheduled to begin in January 2025, are tailored to provide professionals with industry-relevant skills critical for success in the modern financial sector.
Source: GIFT CITY website [News dated November 14, 2024]
Amendment in IFSCA (Market Infrastructure Institutions) Regulations, 2021 ("Market Infrastructure Institutions Regulations")
November 01, 2024 – IFSCA vide notification dated November 01, 2024 notified amendment in the Market Infrastructure Regulations called as IFSCA (Market Infrastructure Institutions) (Amendment) Regulations, 2024 ("MII Amendment Regulations").
The key highlights of the MII Amendment Regulations include:
- Amendment in the definition of Key Managerial Personnel: The definition of key managerial personnel is amended to include person covered under the definition of "key managerial personnel" under the Companies Act, 2013 and a person to whom a key management personnel report.
- Incorporation of the definition of non- independent director: Non-independent director is defined as a director elected or nominated by the shareholders who is neither a broker dealer, nor clearing member, nor depository participant, or their associate or agent.
- Deletion of the definitions: The definition of shareholder director and trading member were removed from the MII Amendment Regulations.
- Code of conduct for recognized market infrastructure institution: A recognized Market Infrastructure Institutions ("MII") is required to abide by the code of conduct as specified under Part A of Schedule-I of MII Amendment Regulations. As per the said code of conduct, each MII shall adhere to the provisions of the IFSCA Act, 1999, Securities Contracts (Regulations) Act, 1956, Securities and Exchange Board of India, 1992, Depositories Act 1996, including any rules, regulations, circulars, guidelines and any other directions issued thereunder and shall inform the IFSCA of any violations committed by any of its members, participants or issuer. Among other provisions outlined in the code of conduct, it emphasizes the importance of MII taking effective measures to implement a robust risk management framework and uphold good governance practices.
- Code of conduct for governing board, directors, committee members and key managerial personnel: The governing board of the MII is required to abide by the code of conduct as specified under Part B of Schedule-I of MII Amendment Regulations. As per the said code of conduct, governing board of the MII shall evaluate profitability margins of the MII and shall focus on strategy, policy level issues and important matters. They shall endeavor to provide adequate training programs to help employees better understand expectations of behavior, mechanisms to measure and track indicators related to culture at regular intervals, accountability mechanisms and performance management mechanisms which take into account adherence to culture, conduct and behavior related dimensions.
- Net worth of MII: As per regulation 15 of Market Infrastructure Institutions Regulations, MII is required to submit an audited net worth certificate from the statutory auditor on a yearly basis to IFSCA. As per MII Amendment Regulations, for the purposes of this regulation, net worth of a recognized stock exchange or recognized depository means the aggregate value of paid up equity shares capital plus free reserves (excluding statutory funds, benefit funds and reserves created out of revaluation) reduced by the investments in business (whether related or unrelated, aggregate value of accumulated losses and deferred expenditure not written off, including miscellaneous expenses not written off.
- Appointment of Chief Risk Officer, Chief Information Security Officer and Chief Legal officer: As per regulation 63A of Market Institutions Regulations, MII shall appoint a chief risk officer to identify, monitor and initiate necessary steps to mitigate the risk associated with the functioning of a MII. As per Regulation 63B of Market Institutions Regulations, in addition to a chief technology officer, a MII shall appoint a chief information security officer who shall be responsible for overseeing the cyber security posture of the MII and shall report directly to the managing director/chief executive officer.
Further, as per regulation 63B of Market Institutions Regulations, MII which is not a subsidiary or a joint venture of a MII, shall be required to appoint a chief legal officer. A chief legal officer shall be responsible for taking the necessary steps to mitigate legal risk associated with the functioning of a MII.
Source: GIFT IFSCA website [Regulation dated November 01, 2024]
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