Unwrapping The Gift-Ifsc: A Gateway To Global Finance
Within the interconnected landscape of global finance, international financial centres ("IFCs") connect investors, corporations, and financial institutions across the world, thereby propelling global economic integration and development. Globally, international financial services are concentrated in IFCs, with prominent ones being located in Singapore, London, New York, and Dubai. These IFCs have been dynamos of innovation, trade, and transnational investment since decades.
The need for an Indian IFC was sorely felt as the Indian economy liberalised. In 2007, the Percy Mistry Committee Report recommended setting up an IFC in Mumbai – an idea which had to be shelved owing to the exigencies of the 2008 global financial crisis. The idea was revived in the FY 2015-16 Union Budget, wherein the Hon'ble Finance Minister announced the establishment of India's first international financial services centre ("IFSC") in Gujarat's International Finance Tec-City ("GIFT City").
The IFSC which has been set up in the GIFT City under the Special Economic Zones Act, 2005 ("SEZ Act"), presents a strategic proposition for international investors to gain exposure to the Indian market, as well as allow Indian entities to tap into global opportunities. This article intends to cursorily cover the contours of the opportunities embodied in setting up IFSC entities in the GIFT City.
A UNIFIED REGULATOR
In line with the global practice of having a single financial regulator in IFCs, the Government of India had promulgated the International Financial Services Centres Authority Act, 2019 ("IFSCA Act, 2019"), whereby the collective powers of the Reserve Bank of India ("RBI"), the Securities Exchange Board of India, the Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority of India were vested with the International Financial Services Centres Authority ("IFSCA"). Additionally, the IFSCA has recently been authorised to grant necessary licenses or registration to entities in the IFSC, a power which was hitherto vested with the Development Commissioner appointed under the SEZ Act.1
Since its inception as a unified regulator, the IFSCA has issued a holistic set of regulations governing entities in IFSC. These regulations closely align themselves with globally prevailing regulatory trends in other IFCs, facilitating global players in establishing their presence in the GIFT IFSC.
DOMINATING GLOBAL OPPORTUNITIES THROUGH IFSC
As reflecting in its name, the IFSC has been conceptualised as a global centre for financial services. Naturally, IFSCA dedicates most of its regulatory attention in nurturing a vibrant, competitive onshore environment for entities to operate. The IFSCA's regulatory approach is generally light-touch, scale-based, and stresses on simultaneously protecting the interests of investors, intermediaries, and investees (especially for start-ups and advanced/innovative businesses). The IFSCA has laid down specific frameworks for each such business activity, which are summarised below.
Fund Management Entities
The IFSCA permits the establishment of flexible fund-pooling entities known as Fund Management Entities ("FMEs") under the IFSC (Fund Management) Regulations, 2022. Depending upon the risk profile of its intended investors, FMEs have corresponding regulatory restrictions levied upon them. FMEs primarily manage permitted portfolio products, known as schemes, which include retail schemes (including exchange traded funds), non-retail schemes (alternative investment funds), venture capital schemes, portfolio management services, and investment trusts.
- Authorised FMEs: This category of FMEs pool money to invest in start-ups or early-stage ventures through venture capital schemes. Venture capital schemes invest primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and include angel funds. They shall have less than 50 investors. The minimum investment amount from an individual investor must be greater USD 250,000, and the corpus size must be between USD 5 million and USD 200 million.
- Registered FMEs (Non-Retail): In addition to being able to undertake all activities permitted for an Authorised FME, these FMEs pool money to invest in securities, financial products and such other permitted asset classes through restricted schemes. Restricted schemes are offered through private placement exclusively to those accredited investors or investors investing a minimum amount of USD 150,000 and having less than 1,000 investors. Additionally, such FMEs can undertake portfolio management services and act as investment managers for private placement of investment trusts.
- Registered FMEs (Retail): Apart from being able to undertake all activities permitted for Authorised and Registered (Non-Retail) FMEs, these FMEs pool money under one or more schemes for investing in securities, financial products and such other permitted asset classes through retail or restricted schemes. Retail schemes are offered to all investors or a section of investors for subscription with no ceiling as to number of investors in a scheme. Such FMEs may also offer products such as exchange traded funds.
Venture Capital Schemes and Restricted Schemes are schemes which solicit funds only from accredited investors qualify for the 'Green Channel', whereby the scheme is open for subscription by investors immediately upon filing of scheme documents with the IFSCA.
Finance Companies
Finance companies are materia to non-banking financial companies ("NBFCs"). They render services mirroring banks while being prohibited from accepting deposits. The IFSCA (Finance Companies) Regulations 2021 ("Finance Company Regulations") provides the principle governing framework for finance companies. One of the key incentives for a finance company in IFSC is that they are not required to comply with the principal business test (i.e., 50:50 criteria) to be classified as NBFCs, whereby a finance company may also register itself solely for carrying out permissible "non-core activities". Moreover, as per the Foreign Exchange Management (Overseas Investment) Rules, 2022 ("OI Rules"), a person resident in India, even if not engaged in financial services activities, can set up a finance company in IFSC provided the same is not engaged in banking or insurance.
Under the Finance Company Regulations, the activities of finance companies are classified into core financial activity and non-core financial activity. Depending upon the type of activities the finance company undertakes, its net owned fund requirement changes. As per IFSCA's latest available annual report, there has been a substantial increase in the number of finance companies in IFSCA, which is indicative of steady increasing international interest in setting up of a finance company in IFSC.
Fintech and Startups
The IFSCA has issued a dedicated framework for fintech entities, which covers: (i) financial technology solutions resulting in new business models, applications, process or products in areas/activities linked to financial services; and (ii) advanced/innovative technological solutions which aid and assist activities in relation to financial products, services, and institutions. Notably, the framework covers not only fintech players, but 'techfin' players too. Thus, start-ups which may be engaged in anti-money laundering / know-your-customer solutions, regulatory tech, biometrics, chatbots, green finance etc. are also accorded benefits under the said framework.
Significantly, start-ups can access the IFSC's environment through: (i) direct entry for entities having deployable advanced / innovative technology solution(s) which aid and assist activities in relation to financial products, services, and institutions; and (ii) entry via IFSCA sandboxes.
The IFSCA has distinct sandboxes to suit the needs of fintech entities at different stages of their developmental lifecycles and risk assessments:
- Fintech Regulatory Sandbox (FRS) with limited-use authorisation to engage with market participants for Indian companies functioning within the domain regulated by a domestic financial sector regulator, and foreign entities or their branches from FATF compliant countries;
- Fintech Innovation Sandbox (FIS) with isolated environment and no live market participant interactions, having eligibility conditions identical to the Fintech Regulatory Sandbox;
- Interoperable Regulatory Sandbox (IoRS) for Indian fintech companies seeking access to foreign markets and vice versa, where such product would, if released, be governed by multiple domestic financial sector regulators and, post-exit from this sandbox, would require permissions from relevant regulators prior to launch in the market.
Significantly, the IFSCA also has a system of monetary grants to fintech entities under an incentive scheme, and hosts sponsorship events such as hackathons and cohorts to channel private investment in IFSC domiciled startups.
Family Offices
The IFSCA has provided recognition and an enabling regulatory environment to host family offices in the form of 'Family Investment Funds' ("FIFs"). FIFs provide a broad canvas for eligible contributory trustees apart from including members of a 'single family'.
Since the RBI's Liberalised Remittance Scheme does not permit trusts from transferring funds overseas, FIFs present a convenient and tax-efficient method for family offices to gain exposure to overseas investments. Investments made into pooling vehicles established in IFSC are treated as overseas portfolio investment, permitting families to remit funds to FIFs either individually or through their listed or unlisted group entities. FIFs, in turn, can undertake global investments without being encumbered by restrictions on overseas investments posed under the Foreign Exchange Management Act, 1999 ("FEMA"). Unlike other classes of funds in the IFSC, compliances for FIFs are relatively lower – they require no separate FME to be appointed, FIFs may establish additional investment vehicles within the IFSC, and may accept contributions from its employees, directors, FME, or other service providers. Likewise, foreign residents (including non-resident Indians) may set up or participate in FIFs without the applicability of sectoral thresholds under FEMA, and repatriation of funds from IFSC does not require regulatory approval.
Shipping and Aircraft Leasing
The IFSCA has notified 'ship lease', whether on an operating basis or on a hybrid of financial and operating basis, as a financial product. Thereafter, the IFSCA released the framework for ship lease, which has brought ship-leasing within the fold of the Finance Company Regulations. This enables shipping entities to also carry out asset management support services, such as engineering, modification, and providing technical support to vessels, in addition to leasing. Finance companies engaged in ship leasing have also been permitted to sale and lease back, purchase, novate, transfer, assign, or undertake other similar transactions in respect of ship leases. As an additional incentive, vessels owned by IFSC based entities receive preferential treatment in chartering tenders over foreign counterparts.2
As is the case with ship leasing, the IFSCA notified 'aircraft lease' as a 'financial product' and issued the framework for aircraft lease, which is similar in its scheme and substance to the framework for ship lease. These efforts have translated rapidly to results, with aircraft leasing in GIFT IFSC growing by over 129% between December 2023 and March 2024.3
ATTRACTIVE INCENTIVE STRUCTURE
For entities choosing to be domiciled under its ambit, the IFSCA has rendered abundant incentives, including regulatory relaxations. One such key incentive is the residential status of a 'person resident outside India' under FEMA. This renders FEMA virtually inapplicable on IFSC entities, thereby allowing unimpeded transactions in foreign currency. This relaxation actualises a key component of the 'onshoring the offshore' policy imperative.
On the other hand, for persons resident in India, this relaxation provides an option to set up an IFSC entity for funding their global prospects. To this effect, Schedule V of the OI Rules contains incentives seeking to promote persons residing in India to consider IFSC as a viable jurisdiction to set up their offshore businesses.
The said OI Rules provide relaxed conditions for Indian entities and resident individuals to invest in IFSC entities, both via direct and portfolio routes. One such relaxation for an Indian entity engaged in financial services activities is that, in case the necessary no-objection certificate ("NOC") from domestic regulators is not provided within 45 days, a deemed approval operates.
Further, the Ministry of Corporate Affairs has issued certain relaxations/exemptions for IFSC entities such as, inter alia, an exemption from the requirement of complying with the provisions of corporate social responsibility for a period of five years, convening of two board meetings instead of four board meetings, non-applicability of the restriction of making an investment through not more than two layers of investment companies, etc.
In terms of taxation benefits, IFSC entities are positioned to take benefit on multiple counts. An IFSC entity is eligible for a deduction of 100% of its income for any ten consecutive years out of fifteen years in relation to income generated from its licensed business. Minimum alternate tax credit can be carried over for 15 years, while alternate minimum tax ("AMT") credit may be carried over for 5 years, though IFSC units which receive income solely in convertible foreign currency are required to pay a rate of only 9% of its adjusted total income as AMT instead of 18.5% otherwise. Any income by way of interest payable to a non-resident by an IFSC unit for monies borrowed by it on or after September 1, 2019, are also exempt from tax. Further, any interest income received by a non-resident or a person who is not ordinarily resident in India, on a deposit made in a banking unit in the IFSC, is exempted from income tax. Likewise, the sale of certain specified securities listed on a stock exchange in IFSC by a non-resident is not regarded as a transfer if the corresponding consideration is paid or payable in foreign currency. With regards to Goods and Services Tax, there is a 'nil' rate of tax on services by an intermediary of a financial services unit located in IFSC for customers located abroad.
CONCLUSION
The IFSC represents a significant break from the regulatory incrementalism, and seeks to reward innovativeness. The IFSCA's execution borrows liberally from successful experiments which have taken place globally, making IFSC an appealing proposition. The IFSC itself can be conceptualised as a live sandbox of sorts, which offers an interlude between India and foreign jurisdictions. India's economic ambitions require meaningful financial interaction with the rest of the world, particularly when it comes to providing capital to future-facing industries ranging from logistics to deep-tech start-ups. India's developmental trajectory is contingent upon greater integration with the global financial sector, and at the same time, IFSC permits regulation which is tailored to suit Indian priorities. IFSCA has managed to strike a win-win balance between investor protection, business considerations of financial intermediaries, and scope for entities seeking funds. By the end of FY 2024, banking assets in the IFSC had reached USD 60 billion, and cumulative derivatives trading at USD 796 billion4 – figures which display investor confidence in the India growth story, as also the IFSC's ability to successfully capitalise the same and effectively contribute to the Indian economy. Unambiguously, the IFSC amalgamates international business interests with India's developmental imperatives, which is a valuable modus operandi to achieve India's ambitions of a USD 5 trillion economy in the foreseeable future.
Footnotes
1 Notification S.O. 940(E), February 28, 2024, Department of Economic Affairs, Ministry of Finance, the
Government of India
2 File No. 16-18011/9/2023-SD-DGS (C.No. 22004), October 5, 2023, Directorate General of Shipping, Mumbai
3 International Financial Services Centres Authority (ifsca.gov.in)
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