The last decade has seen unprecedented growth in India’s financial services sector. It employs over 3 million people, constitutes about 5% of the GDP and has an estimated market capitalization of over US$ 200 billion. As India experiences continued economic growth, the financial sector could generate about 10-11 million jobs and a GDP contribution of US$ 350 to US$ 400 billion by 20201 . With a sustained growth and rapid development in technology and infrastructure, an increasing share of financial services would get centralized. McKinsey & Company’s market assessment report estimates potential of about 6 million centralized jobs across multiple service roles.
Several developed countries have successfully established high-tech financial hubs, which over time have catered as international financial services centers. These centers provide suitable regulatory regimes and create a business environment to promote talent and increase capital flow. As they develop they create significant economic value for their respective domestic economies, e.g. financial services in London and New York account for 10% of the GDP and about 5% of jobs. Emerging financial services centers like Singapore and Hong Kong have achieved similar levels of concentration of economic activity over short periods of time.
With the above background the author has made an attempt to analyze the present status of IFSC Regulations and how India is positioned itself to capture the Global opportunities.
What is IFSC?
An international financial services centreprimarily caters to customers outside the jurisdiction of domestic economy, dealing with flows of finance, financial products and services across borders
Section 2(q) of Special Economic Zones Act, 2005 has defined “International Financial Services Centre” means an International Financial Services Centre which has been approved by the Central Government under sub-section (1) of section 18
The provisions of Section 18 of the SEZ Act, 2005 is been reproduced for ready reference
Setting up of International Financial Services Centre
- (1) The Central Government may approve the setting up of an International Financial Services Centre in a Special Economic Zone and prescribe the requirements for setting up and operation of such Centre :
Provided that the Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.
The Central Government may, subject to such guidelines as may be framed by the Reserve Bank, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and such other concerned authorities, as it deems fit, prescribe the requirements for setting up and the terms and conditions of the operation of units in an International Financial Services Centre.
Present Regulatory Architecture
It can be observed from the above diagram that the IFSC related activities are governed by several Regulators based on the nature of activities being undertaken.
Reserve Bank of India (RBI) regulates the IFSC Banking Units (IBU) as a Banking Regulator and also regulates the Foreign Exchange control Regulations.
Insurance Regulatory and Development Authority of India (IRDAI) regulates the activities of Insurance companies in IFSC
Securities and Exchange Board of India (SEBI) regulates the operations of intermediaries dealing in Securities and Commodities and their derivatives
Pension Fund Regulatory and Development Authority (PFRDA) regulates the operations of entities dealing in such funds and having operations in IFSC
Subsequent to the below regulatory developments India has set up first IFSC in Gujarat International Finance Tec-City Company Limited (GIFT City), Gandhi Nagar, Gujarat, India. For more details of GIFT city, the reader may refer to the website http://giftgujarat.in
What are the services an IFSC can provide?
?Fund-raising services for individuals, corporations and governments
?Assetmanagement and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds
?Wealthmanagement
?Globaltax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.
?Globaland regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching
?Riskmanagement operations such as insurance and reinsurance ?Mergerand acquisition activities among trans-national corporations
What does an IFSC require?
IFSCs such as Dubai International Financial Centre and Shanghai International Financial Centre, which are located within SEZs, have six key building blocks:
?Rationallegal regulatory framework
?Sustainable local economy
?Stablepolitical environment
?Developed infrastructure
?Strategiclocation
?Goodquality of life
Keeping the above issue in sight, the Indian Government has made many changes and is making efforts to create sustainable and conducive environment to attract the global players to India.
Brief of Regulatory Developments in India
01-03-2015 Press Release issued by PIB for setting up first IFSC in Gandhi Nagar, Gujarat
02-03-2015 RBI has issued FEMA (IFSC) Regulations, 2015
27-03-2015 SEBI has issued SEBI (IFSC) Guidelines, 2015
27-03-2015 Ministry of Finance (Department of Financial Services) has issued notification for giving many relaxations to the Insurance Companies from various provisions of Insurance Act, 1938
27-03-2015 Ministry of Finance (Department of Financial Services) has issued notification IRDAI (Regulation of Insurance Business in Special Economic Zone) Rules, 2015 for permitting insurance companies to set up operations in IFSC
01-04-2015 RBI has framed schemeto all Scheduled Commercial banks (including foreign banks)for setting up IFSC Banking Units (IBU)
06-04-2015 IRDAI has issued guidelines titled IRDAI (IFSC) Guidelines, 2015
08-04-2015 Ministry of Commerce and Industry has issued notification permitting setting up of IFSC under SEZ Act, 2005 and rules made thereunder and also notified suitable application form for setting up such IFSC units
17-03-2016 SEBI has amended the guidelines to include the Commodity Derivatives for IFSC operations
28-11-2016 SEBI has issued guidelines to Stock Exchanges and Clearing Corporation to set up their operations in IFSC
10-04-2017 RBI has issued Directions to the IBUs to carry on the clearing operations in IFSC without forming separate entity and also permitted to open SNRRA for local expenses
13-04-2017 SEBI has further amended the guidelines to include the Derivatives on Equity Shares for IFSC operations
27-04-2017 SEBI has further amended the guidelines to permit IBUs to carry on TCM and PCM activities for Stock exchanges/ Clearing Corporation in IFSC as well as domestic activities
FEMA Regulations:
RBI,inter alia, has framed around 27 Regulations under FEMA, concerning various activities between Residents in India and Non Residents.
Foreign Exchange Management (International Financial Service Centre) Regulations, 2015 (“FEMA Regulations”) deals with the permissible transactions in IFSC as per Foreign Exchange Management Act, 1999
As per Regulation 3 of FEMA Regulations, any financial institution or branch of a financial institution set up in the IFSC and permitted/recognized as such by the Government of India or a Regulatory Authority shall be treated as a person resident outside India and accordingly any transaction taken place between such IFSC entity and Residents in India needs to comply with other regulations framed under FEMA, 1999
As per Regulation 4 of FEMA Regulations, a financial institution or branch of a financial institution shall conduct such business in such foreign currency and with such persons, whether resident or otherwise, as the concerned Regulatory Authority may determine
As per Regulation 5 of FEMA Regulations read with Section 1(3) of FEMA, 1999 all other regulations framed under FEMA are not applicable to the IFSC in case the activities are carried with in the IFSC and subject to these FEMA Regulations.
Commercial banks are allowed to open IBUs within IFSC, which are deemed as overseas branches. Such IBUs can trade in foreign currencies in overseas markets and also with Indian banks, raise funds in foreign currency as deposits and borrowings from non-resident sources and provide loans and liability products for clients.
SEBI Regulations
As per SEBI (IFSC) Guidelines, 2015 any intermediary located in IFSC viz., a stock broker, a merchant banker, a banker to an issue, a trustee of trust deed, a registrars to an issue, a share transfer agent, an underwriter, an investment adviser, a portfolio manager, a depositary participant, a custodian of securities, a foreign portfolio investor, a credit rating agency, or any other intermediary or any person associated with the securities market, as may be specified by the Board from time to time, can deal in securities, commodities and their derivatives in a Foreign Jurisdiction [as defined in clause 2(f)]
All the entities willing to set up operations in IFSC shall be first registered with SEBI as an intermediary as per respective regulations framed by SEBI and shall comply with all the applicable regulations including IFSC regulations.
In case of Stock Exchanges, Clearing Corporations and Depositories, willing to carry on IFSC activities shall form separate Subsidiary Companies (holding at least 51% of paid-up Equity ‘share capital) and the balance shares can be held by any other stock exchange, clearing corporation or Depository, (whether Indian or foreign jurisdiction),as the case may be.
The stock exchange shall have minimum networth of Rs. 25 Crores initially and shall enhance it to Rs. 100 Crores over a period of 3 years from the date of approval. Similarly Clearing Corporation shall have initial networth of Rs. 50 Crores and to be enhanced to Rs. 300 Crores, over a period of 3 years. Also the Depository shall have initial networth of Rs. 25 Crores and shall enhance it to Rs. 100 Crores over a period of 3 years.
Many provisions of SEBI related to depositories, stock exchanges, clearing corporations operating in IFSC are not applicable as per exemptions given under Rule 6 of SEBI Guidelines
Pursuant to the IFSC Guidelines, depositories, stock exchanges, clearing corporations operating in IFSC shall adopt the broader principles of governance prescribed by International Organization of Securities Commissions (IOSCO) and principles for Financial Market Infrastructures (FMI) and such other governance norms as may be specified by the SEBI, from time to time
As per clause7, the stock exchanges operating in IFSC are permitted to deal in following types of securities and products in such securities in any currency other than Indian rupee, with a specified trading lot size on their trading platform subject to prior approval of the SEBI:
- Equity shares of a company incorporated outside India;
- Depository receipt(s);
- Debt securities issued by eligible issuers;
- Currency and interest rate derivatives;
- Index based derivatives;
- Such other securities as may be specified by the Board.
SEBI has prescribed Commodity Derivatives as “other securities” under the aforesaid clause. Also SEBI has prescribed Derivatives on equity shares of a company incorporated in India, by Foreign Portfolio Investors as “other securities” under the aforesaid clause
Further, it also provides that SEBI registered Foreign Portfolio Investors (FPIs), operating in IFSC, and eligible entities, which are incorporated and operating in IFSC, shall be eligible to trade in such derivatives on equity shares.
Market Wide Position Limit (MWPL) for such derivatives on equity shares shall be as prescribed by SEBI from time to time.
Earlier this year, the SEBI simplified the IFSC onboarding process for FPIs and eligible foreign investors as under:
?Noadditional documentation and/or prior approval required for SEBI registered FPIs ?Atradingmember may rely on the due diligence already carried out by :
-a SEBI registered intermediary for FPIs
- a bank operating in IFSC for eligible foreign investors
As per latest amendment dated 27-04-2017, SEBI has permitted IBUs to carry on the operations both in Domestic market and Foreign Jurisdiction as Single entity, thereby paving way for more IBUs to enter into the IFSC operations. Also the IBUs are permitted to open Special Non-Resident Rupee Account in India to meet the administrative expenses in INR
Conclusion:
While many reforms in the area of IFSC have been brought by India, there are certain things still to be done. Some of these issues have been addressed in speech titled “Macro and Micro Drivers of Business Potential of IFSCs in India”, by Dr. Urjit R. Patel, Governor of RBI – January 11, 20172 – at Gandhinagar, Gujarat, regarding other steps to be taken, inter alia, micro ecosystem in IFSC, a modern complementary legal infrastructure that is sufficiently supportive of the swift resolution of conflicts and disputes arising from the settlement/enforcement of complex international financial contracts. The contract should be of international standard and enforceable in the court of law and preferably similar to ISDA documentation
In addition he has opined to have a unified financial regulatory framework providing for a single regulator for IFSC could contribute to better regulation and supervision of the financial entities in the IFSC. While individual regulators can supervise the entities initially when the size of the business is small, a unified regulator would be necessary to pay undivided attention to the IFSC. Work on the design of such a framework should begin soon so as to be able to implement this in time.
Once India implements many of the above reforms and pave the way for effective economic and regulatory reforms, India is poised to play key role in the global economic activity and also provide lot of support for the Economic Development in India and employment generation to the tune of 1 Million 3 Jobs in India.
