Setting up of the International Finance Services Centre (“IFSC”) in Gujarat, positioned as a regulatory island within the boundaries of India with access to India’s economy, providing a progressive legal framework benchmarked with best practices adopted by global financial centres like London, Singapore, New York, Hong Kong, was pathbreaking.
Business from the IFSC can be conducted in any freely convertible currency other than the Indian rupee; and in terms of the FEMA (IFSC) Regulations, 2015, any financial institution or its branch set up in IFSC shall be treated as a ‘person resident outside India’.
It is designed to attract overseas investors by onshoring the financial services and financial products that are currently being exported to overseas 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 tax on long-term capital gains and a regulator i.e. International Financial Services Centre Authority (“IFSCA”) which assumes the responsibility of a unified regulator across different areas within the IFSC otherwise overseen by sectoral regulators such as RBI, SEBI, IRDAI and the PFRDA in mainland India.
Investors have shown increased interest in the opportunities in the IFSC post the operationalising of the IFSCA in the late 2020s. IFSCA has 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, derivative products.
Whilst the IFSCA provides an enabling framework for the regulatory framework within India, it also needs to change to permit Indian companies/ institutions for the desired momentum which is absent inter alia to participate in the benefits of IFSC. For instance, branches of Indian banks (IBUs) cannot offer or invest in structured financial and derivative products that are not permitted by RBI.
If the branch was based in one of the other international financial centres such products could have been offered to its customers. Similarly, for undertaking certain activities like dealing in commodities, banks in India are required to undertake the same through subsidiaries but need regulatory approval.
As a result of which, though there has been interest in new products like the bullion exchange, aviation leasing etc, participation has been limited. Branches of foreign banks that are not subject to these restrictions and are at an advantage compared to the Indian banks. Indian financial institutions/ banks ought to have a level playing field in the IFSC.
Further, there are restrictions on investments under the Liberalised Remittance Scheme (“LRS”). RBI has permitted resident individuals to make remittances under LRS to Indian IFSCs.
However, residents have been permitted to remit monies only for the purposes of investing in securities in IFSC and if the investment is not made within 15 days the funds will have to be remitted 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 (outside IFSCA). This limits the scope of products and services that banks can offer under the LRS Scheme.
There is also immense scope to develop the capital markets in IFSC and “onshore” some of the offshore capital market products in IFSC. The regulatory regime should consider allowing Indian Companies to list in the IFSC or permit the issuance of instruments/receipts which represent equity in IFSC.
Predominant concerns for institutional investors include delays in dispute resolution and the absence of cross-border insolvency law in the case of stressed entities and assets. The IFSC needs a special dispute resolution branch that is stand alone. Addressing some of these issues will add the necessary impetus to the growth of the ecosystem.
As the Indian Government paves the way to operationalise the ‘IFSC Dream’ by providing tax incentives, a favourable regulatory regime as well as introducing innovative financial products, pro-active participation and increased co-operation between the leading regulators of India such as SEBI, RBI, IRDAI with the IFSCA will increase investor confidence and ensure that different stakeholders can participate in the IFSC opportunity to make it a global financial centre of scale and substance.
(Chacko is Partner at Cyril Amarchand Mangaldas; Dalal is an Associate at Cyril Amarchand Mangaldas)
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