International Financial Services Centre (IFSC)

About International Financial Services Centre (IFSC):

• An International Financial Services Centre (IFSC) caters to customers outside the jurisdiction of the domestic economy.
• These centres are ‘international’ in the sense that they deal with the flow of finance and financial products/services across borders which includes banking, insurance, asset management, and most importantly, a well-structured and fully developed capital market for debt, equities, commodities as well as derivatives.
• The first IFSC in India has been set up at GIFT City, Gandhinagar, Gujarat.

• An expert panel headed by former World Bank economist Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. However, the global financial crisis in 2008 made countries including India cautious about rapidly opening up their financial sectors.
• Since India has many restrictions on the financial sector, such as partial capital account convertibility, high SLR (statutory liquidity ratio) requirements and foreign investment restrictions, an SEZ can serve as a testing ground for financial sector reforms before they are rolled out in the entire nation.
• The main objective behind establishing an IFSC in India is providing a platform for international financial services to operate from and to specialize in exports of high value-added International Financial Services.

Types of IFSCs

• 1. Global Financial Centers (GFCs): These are the centres that sincerely serve clients from all over the world in the provision of the widest possible through the group of organisation e.g., international financial services based in London, New York, Singapore.
• 2. Regional Financial Centers (RFCs): They serve their regional economies rather than their national economies, e.g., Dubai or Hong Kong.
• 3. Non-global and non-regional, ordinary international IFSCs: They provide a broad range of international financial services but cater mainly to the needs of their national economies rather than their regions or the world. In a way, they connect their financial systems to the world. These centres are like Paris, Frankfurt, Tokyo and Sydney.
• 4. Offshore Financial Centers (OFCs): These are centres that primarily tax havens for wealth management and global tax management rather than providing the full array of international financial services.

Salient Features of the Authority

• Composition: The Authority shall consist of a Chairperson, one Member each to be nominated by the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority(PFRDA), two members to be dominated by the Central Government and two other whole-time or full-time or part-time members.
• Functions: The Authority shall regulate all such financial services, financial products and Financial Institutions in an IFSC. It may also recommend to the Central Government such other financial products, financial services and financial institutions which may be permitted in the IFSCs.
• Powers: All powers exercisable by the respective financial sector regulatory (viz. RBI, SEBI, IRDAI, and PFRDA etc.) under the respective Acts shall be solely exercised by the Authority in the IFSCs in so far as the regulation of financial products, financial services and FIs that are permitted in the IFSC are concerned.
• Processes and procedures: The processes and procedures to be followed by the Authority shall be governed in accordance with the provisions of the respective Acts of Parliament of India applicable to such financial products, services or institutions, as the case may be.
• Grants by the Central Govt.: The Central Govt. may, after due appropriation made by Parliament by law in this behalf, make to the Authority grants of such sums of money as the Central Government may think fit for being utilized for the purposes of the Authority.
• Transactions in foreign currency: The transactions of financial services in the IFSCs shall be done in the foreign currency as specified by the Authority in consultation with the Central Govt.

Subject to prior approval of the SEBI:

1. Equity shares of a company incorporated outside India;
2. Depository Receipt(s);
3. Debt securities issued by eligible issuers;
4. Currency and interest rate derivatives;
5. Index-based derivatives; and
6. Such other securities may be specified by SEBI.

As per SEBI (International Financial Services Centres) Guidelines, 2015, only the following persons can deal in securities listed in IFSC:

1. A person not resident in India;
2. A non-resident Indian;
3. A financial institution resident in India who is eligible under FEMA to invest funds offshore, to the extent of permitted outward investment;
4. A person resident in India who is eligible under FEMA, to invest funds offshore, to the extent allowed under the Liberalized Remittance Scheme of Reserve Bank of India, subject to a minimum investment as specified by the Board from time to time.

The Income-tax Act, 1961 contains the following provisions wherein special benefits, exemptions and deductions are allowed to the units located in an IFSC:

Advantages of IFSCs

• They seek to attract overseas investors by bringing financial services that are currently being carried outside India by overseas financial institutions.
• In this age of globalization, IFSCs serve many purposes including fundraising, global tax management and corporate treasury management.
• An IFSC facilitates the rerouting of financial services and transactions that are currently carried out in offshore financial centres by Indian corporate entities and overseas branches/subsidiaries of financial institutions (such as banks, insurance companies, etc.) to India.
• The business and regulatory environment offered by an IFSC in India would be comparable to that of London, New  York, etc. attracting investors.
• It can also provide enhanced access to global financial markets for Indian corporates.
• There are also many tax benefits for entities set up in the IFSC.
• IFSCs help in the creation of fintech hubs. With a large number of Indians outside India working in fintechs, India can be positioned as a fintech hub.

Services an IFSC can provide:

1. Fundraising services for corporations, individuals and governments.
2. Wealth management.
3. Asset management and global portfolio diversification undertaken by pension/mutual funds and insurance firms.
4. Global tax management and cross-border tax liability optimisation, providing a business opportunity for financial intermediaries, law firms and accountants.
5. Risk management operations (insurance and reinsurance).
6. Global and regional corporate treasury management operations.
7. Mergers and acquisitions between trans-national corporations.

Legal Provision for IFSC in India

The Special Economic Zone Act, 2005 provides for the establishment of an IFSC in India. It would be prudent to set up an IFSC within an SEZ since there are several restrictions on the financial sector in India. An SEZ can serve as a testing ground for financial sector reforms before they are rolled out in the entire nation. As per the SEZ Act, the government approved GIFT City as a Multi Services Special Economic Zone (“GIFT SEZ”) in Gandhinagar.

International Financial Services Centres Authority (IFSCA)