Introduction
The International Financial Services Centre ("IFSC") zone in the Gujarat International Finance Tec-City ("GIFT City") is being developed as a multi-service special economic zone catering to global financial and IT services hubs and hosting both domestic and international financial and IT/ITES sectors. Recently, a consultation paper1 published by the authority of IFSC ("IFSCA") highlighted that the streamlining of the regulatory framework for fund management in IFSC (as discussed in the following section) has boosted and successfully attracted numerous global and Indian investment and financial entities, contributing to a substantial corpus of approximately USD 38 billion. Thereby implying abundant funding opportunities for the Indian ecosystem and the onshoring of the foreign funds into the GIFT City (IFSC).
This article focusses on the current regulatory framework for funds in the IFSC zone and outlines the transaction documents required for an offshore fund migrating to IFSC. It does not indicate or provide any tax advice.
Legal framework
I. Current regime
Prior to the establishment of the IFSCA, there were several regulators such as SEBI, RBI, IRDAI and PFRDA exercising their jurisdiction over entities in IFSC. However, post the implementation of the IFSCA Act, 2019 ("Act"), the Act empowered the IFSCA to regulate financial products, financial services or financial institutions within its jurisdiction.2
The legal framework for fund management in IFSC has been streamlined under the Act and the International Financial Services Centres (Fund Management) Regulations, 2022 ("FME Regulations"). These regulations consolidate fund management under a unified set of guidelines, governing fund managers and establishing operational standards for funds.
The Act and the foreign exchange laws stipulate that financial institutions (or their branches) established in the IFSC shall transact and conduct its business in foreign currency,3 and such entities shall be treated as persons resident outside of India,4 which means that the transaction documents (as discussed in the next section) will reflect and deem a transaction between an offshore fund and an entity set up in IFSC as a transaction between two persons resident outside of India.
II. Fund formation for migration and onshoring
Unlike SEBI (Alternative Investment Fund ("AIF")) Regulations, 2012, the FME Regulations directly regulate and govern the fund management entity ("FME") rather than the fund itself. The FME Regulations mandate that an FME in the IFSC must be incorporated either as a company, a limited liability partnership ("LLP") or as a branch thereof. It also categorizes FMEs into the following types:
- Authorised FME: FMEs that pool funds to invest in start-ups or early-stage ventures under the Venture Capital Schemes ("VCS");5
- Registered FME (Non-retail): FMEs that pool funds to invest in permitted asset classes, provide portfolio management services, and perform all activities allowed for Authorised FMEs. An FME, looking to launch a category I/II/III AIF scheme, may consider a Registered FME (Non-retail) registration;6 and
- Registered FME (Retail): Such FMEs act as investment managers for public offers of REITs and InvITs, launch ETFs, and perform all activities permitted for Authorised FMEs and Registered FMEs (Non-retail).7
Under the FME Regulations, the VCS and the aforesaid restricted schemes will be constituted in IFSC as a company or an LLP or as a trust under the applicable laws of India, and the same shall be denoted in the transaction documents.8
Sealing the deal
Apart from the approvals of the concerned authorities, a construction of a deal to migrate the assets and the liabilities of an offshore fund to an IFSC fund may include the following transaction documents for:
- Trust deed: Executed among the settlors, trustee, and beneficiaries to establish the fund in the IFSC, and registered under the provisions of Registration Act, 1908. The application form requires the knowledge of whether the trustee is registered with the IFSCA or any other regulatory authority in any capacity along with such details of its registration;
- Fund transfer or migration agreement: Between the offshore fund and the IFSC fund, for the transfer, migration and assignment of assets, liabilities and other items as applicable;
- Contribution agreement: Among the trustee, FME, and the contributor i.e., the offshore fund, for issuing units of the IFSC fund to the offshore fund (which would include the investors of such offshore fund); and
- Private placement memorandum: It is undertaken to invite the investors of such offshore fund or the offshore fund itself and will be valid for six months from the date of filing with the IFSCA.9 Further, an FME may launch multiple schemes subject to filing of placement memorandum/ draft offer document along with the requisite fees with the IFSCA.10
Stamping will not be required in case a transaction captured in the aforementioned documents is between persons resident outside of India, unless the agreement is executed and stored in India. Further, a stakeholder may also use certain fiscal exemptions in regard to taxes, cess, duties, fees or any other levies under the Gujarat Special Economic Zone Act, 2004 ("Gujarat SEZ Act").11 However, it is important to note that while the Gujarat SEZ Act is a state legislation, matters related to bills of exchange, cheques, promissory notes and other like instruments also fall under the Union List.12
Conclusion
Overall, the development of GIFT City is expected to significantly boost employment within the GIFT IFSC and the broader financial sector in India. It is also set to transform India's economy by connecting it with the global financial markets. This connection could increase the India's share of international transactions, enhance its global economic influence, and generate substantial revenue, thereby contributing to the growth of the nation's GDP.
Footnotes
1. Consultation paper dated August 05, 2024, on review of IFSCA (Fund Management) Regulations, 2022.
2. Section 13, International Financial Services Centres Authority Act, 2019.
3. Section 20, International Financial Services Centres Authority Act, 2019.
4. Regulation 3, Foreign Exchange Management (International Financial Services Centre) Regulations, 2015.
5. Regulation 3(4)(a), International Financial Services Centres (Fund Management) Regulations, 2022.
6. Regulation 3(4)(b), International Financial Services Centres (Fund Management) Regulations, 2022.
7. Regulation 3(4)(c), International Financial Services Centres (Fund Management) Regulations, 2022.
8. Regulations 21(3) and 33(3), International Financial Services Centres (Fund Management) Regulations, 2022.
9. Regulation 31(2), International Financial Services Centres (Fund Management) Regulations, 2022.
10. FAQ on International Financial Services Centres (Fund Management) Regulations, 2022.
11. Section 21, Gujarat Special Economic Zone Act, 2004.
12. Item 46, Union List, Seventh Schedule, Constitution of India.
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.