International Financial Services Centres

 

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 The Government of India notified that 27^th April 2020 will be considered as the date of establishment of IFSC Authority. Its headquarter will be situated in Gandhinagar, Gujarat.

 

IFSC Authority is not related to IFSC in banking

 Honestly recall, what comes to your mind when you think about IFSC. I am sure for most of us it is the code that recognizes a bank branch for the purpose of fund transfer. Yes, you are right; there IFSC stands for Indian Financial Systems Code.

In this article I will try to explain about IFSC i.e. International Financial Services Centre.

What is an IFSC

 An IFSC is a jurisdiction that provides financial services to resident and non-resident entities in foreign currency. It is setup under SEZ Act.  It can be setup in an SEZ or the whole IFSC can be an SEZ.

A Special Economic Zone (SEZ) is a specifically defined area where units are set-up for manufacturing of goods and providing services. An SEZ is treated as a foreign territory for the purpose of conducting trade and applying tariffs.

It means that goods/services going out from SEZ even when coming to other parts of India are considered as exports.

So, the goods and services used in the operation of IFSC is considered as being given in a foreign country and hence considered as exports.

Need for IFSC

A financial centre caters to the needs of customers in foreign currency. This leads to flow of financial services across international borders. These centres can be regional, for example Dubai International Financial Centre, located in Dubai caters to need of Middle Eastern and South-East Asian region. They can also be global, for example, London, New York etc.

In a financial centre, banks, insurance companies, clearing- houses and hedge funds (to insure against forex fluctuations) etc. that is, all the financial stakeholders, are located in a designated area. This facilitates quick and easy financial transactions for an overseas (foreign) customer.

A need was felt, to develop a financial centre in India. This need led to the thought to establish IFSCs. GIFT City, Gandhinagar is the first IFSC in India.

Types of units at an IFSC

Following types of units can be set-up in an IFSC:

i)               Banks: As per RBI notification, both Indian and foreign banks can set-up IFSC Banking Unit (IBU). An IBU is like an overseas branch of an Indian bank.  It can accept forex deposits, give credit facilities to companies owned by NRIs and facilitates ECBs (External Commercial Borrowings) etc for raising funds from outside India.

ii)            International Exchange: SEBI has issued guidelines permitting Indian stock exchanges and foreign stock exchanges (as a subsidiary in India) to set up an international exchange to facilitate trade by international investors and NRIs. BSE and NSE have setup International Exchanges at GIFT IFSC.

iii)          Intermediaries: Stock brokers, merchant bankers, portfolio managers etc are permitted by SEBI to setup units as intermediaries at an IFSC.

iv)          Insurance Companies: As per IRDA guidelines, Indian or foreign insurance companies, Indian or foreign reinsurance companies (companies engaged in insuring the insurer against the loss) and insurance brokers.

Thus, IFSC will act as an integrated solution for entities aspiring to invest in India or Indian entities wanting to invest abroad in the form of Indian subsidiaries.

GIFT IFSC

At present there is only one IFSC in India:  GIFT IFSC. It is located in the Gujarat International Finance Tech City (GIFT), popularly known as GIFT City near Gandhinagar.

GIFT City is a financial and IT services hub in Gujarat, it is also a smart city.

Tax Benefits for units under GIFT IFSC

There are many tax exemptions for units under GIFT IFSC:

i)               There is no tax on Capital Gain (both long term or short term)

ii)             No Commodity Transaction Tax (CTT)

iii)           Minimum Alternative Tax (MAT) rate is 9% instead of 18.5%

iv)           A tax holiday of 10 years (100% tax waiver for first 5 years and 50% waiver for next 5 years)

v)             No GST

International Financial Services Centres Authority (IFSC Authority)

The Authority is established under International Financial Services Centres Authority Act 2019, passed by the Parliament on 19^th December 2019.

Need for IFSC Authority: Currently, the banking, insurance and capital market units (such as International Exchanges and intermediaries) setup at the IFSC are regulated by RBI, IRDA, SEBI and PFRDA.  But we know that the nature of business of an IFSC unit is very dynamic and hence requires high coordination between these regulatory bodies. Keeping this in view, relevant amendments have been made in 14 Acts to facilitate creation of an integrated regulatory body in the form of this Authority.

Headquarter of IFSC Authority: As mentioned in the beginning of the article, it was the headquarter of this Authority that was notified on 27^th April 2020 to be situated in Gandhinagar, Gujarat.

Members of IFSC Authority

In order to make the Authority an integrated body, the members are nominated from different regulatory bodies.

The Authority has the following, nominated by the Central Government: -

a)  Chairperson

b)  One nominated member (ex-officio) each from: RBI, SEBI, IRDA and PFRDA

c)   Two members nominated from Ministry of Finance, GoI

d)  Two members nominated on recommendation of Selection Committee.

Functions of IFSC Authority: The primary function of the IFSC Authority is to regulate financial services and the financial institutions functioning in the IFSC (both before and after the creation of this Authority).

It can recommend to the Central Government that which financial institutions, or financial products & services should be permitted in the IFSC.

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