Overview
The Indian government has envisioned IFSCs as a special economic zone and financial hub within India for the delivery of a variety of financial services to participants who are resident and non-resident in foreign currencies (i.e., not Indian rupee). The foreign exchange control regulations of India regard IFSCs as offshore jurisdictions even if they are geographically located within India, making all entities registered there legally considered to be foreign entities. The first and only IFSC that is currently operating in India is the Gujarat International Finance Tec-City (GIFT City), which was founded in 2015.
Since the 2005 Special Economic Zones Act was passed, the idea of IFSCs has existed (SEZ Act). Indeed, the SEZ Act gives the Indian government the authority to approve the establishment of IFSCs and to specify conditions for the establishment and operation of such centres, subject to industry-specific regulations and guidelines issued by financial sector regulators like the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority (IRDA). As a result, these financial sector regulators produced sector-specific norms that were applicable to units in the IFSC when GIFT City was operationalized in 2015.
The International Financial Services Centres Authority Act was passed by the Indian government in late 2019 after it became clear that the dynamic nature of business in the IFSCs required a high level of inter-regulatory coordination (IFSC Act). The International Financial Services Centers Authority (IFSCA) was created by the IFSC Act to serve as a single regulator for all companies registered in IFSCs. The IFSCA was subsequently established in April 2020 with the main objectives of providing a world-class regulatory environment and boosting the convenience of doing business in IFSCs in all respects.
The IFSCA has continuously announced new regulations that completely regulate numerous financial sector operations like banking, capital markets, insurance, and the stakeholders thereof as a symbol of this new regulator's coming of age. Below is a brief summary of some significant IFSCA laws issued for specific industries that may be pertinent to the quickly expanding fintech market:
The IFSCA (Capital Market Intermediaries) Regulations, 2021 (CMI Regulations)
The CMI Regulations govern intermediaries, including broker dealers, investment advisers, portfolio managers, investment bankers, depository participants, etc., who are engaged in capital markets activity within the IFSC. These regulations include a thorough registration procedure, requirements for net worth, fit and adequate standards, general and particular obligations and responsibilities of capital market intermediaries, a code of conduct, provisions for international trade, etc. As a result, there is now the option for both domestic and foreign firms to register as capital market intermediaries at the IFSC, either by opening a branch there or by forming a body corporate, partnership firm, or sole proprietorship there.
It should be noted that although the CMI Regulations have restricted the operations of capital market intermediaries in the IFSC to just the two IFSCA-recognized stock exchanges (i.e., India INX and NSE IFSC), special provisions have been made through subsequent circulars that permit broker-dealers incorporated in IFSCs to access international stock exchanges subject to compliance with certain prescribed conditions.
The IFSCA (Issuance and Listing of Securities) Regulations, 2021 (Listing Regulations)
The Listing Regulations, among other things, regulate initial and follow-on public offerings by Indian and foreign issuers for the issuance of both equity and debt securities on the recognised stock exchanges by the IFSC. This includes listing obligations and disclosure requirements, as well as special provisions for listing by special-purpose acquisition vehicles (SPACs), start-ups, and small and medium enterprises.
The IFSCA (Finance Company) Regulations, 2021 (Finance Company Regulations)
In addition to registration requirements, prudential compliance, Know Your Customer and Anti-Money Laundering requirements, corporate governance and disclosure requirements, the Finance Company Regulations provide a detailed set of regulations for finance companies and finance units to be established in IFSCs. The finance company regulations also provide a list of permitted specialised, core, and non-core activities that finance firms and finance units may engage in. The permitted core activities include, among other things, lending, making investments, leasing equipment, and financial lease deals for leasing aircraft and ships. The permitted specialised activities include, among other things, credit enhancement, factoring, and other activities that are permitted by the IFSCA. Among other things, carrying out the duties of a merchant banker, financial counsellor, portfolio manager, and mutual fund distributor are among the permissible non-core activities.
IFSCA (Registration of Insurance Business) Regulations, 2021 (Insurance Business Regulations)
The Insurance Business Regulations have been notified with the goal of establishing the procedure for insurer and re-insurer registration and activities in an IFSC. It should be noted that Indian insurers are allowed to offer life insurance, general insurance, health insurance, or business reinsurance to entities based in an IFSC and individuals working in an IFSC, as well as to businesses and individuals present in any offshore location, including global subsidiaries of Indian conglomerates. This permission is granted upon registration. However, international insurers are restricted to only accepting IFSC-based clients.
IFSCA (Insurance Intermediaries) Regulations, 2021 (II Regulations)
In accordance with the II Regulations, two groups of insurance intermediaries are regulated: insurance distributors, which include corporate agents, direct brokers, and reinsurance brokers, as well as surveyors, loss assessors, and third-party administrators; and insurance claim service providers. As a result, Indian direct insurance brokers, composite brokers, and re-insurance brokers are permitted to conduct business both domestically and abroad.
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