International Financial Service Centre (IFSC)
Financial centres that cater to customers outside their own jurisdiction are referred to as international (IFCs) or offshore Financial Centers (OFCs). All these centres are ‘international’ in the sense that they deal with the flow of finance and financial products/services across borders.
The Monetary and Exchange Affairs Department of the International Monetary Fund in its working Paper "Offshore Financial Centers" dated June 23, 2000 defines an 'International Financial Services Center/Offshore Financial Centre' as under:-
" Amongst the many definitions of Offshore Financial Centers (OFCs), perhaps the most practical characterizes OFCs as centers where the bulk of financial sector transactions on both sides of the balance sheets are with individuals or companies that are not residents of OFCs, where the transactions are initiated elsewhere, and where the majority of the institutions involved are controlled by non-residents.
An IFSC is thus a jurisdiction that provides world class financial services to non-residents and residents, to the extent permissible under the current regulations, in a currency other than the domestic currency (Indian rupee) of the location where the IFSC is located.
Gujarat International Finance Tec-City (GIFT City) multi services special economic zone (SEZ) has set up the first International Financial Service Centre in India (IFSC) in accordance with the SEZ Act 2005 (SEZ Act), SEZ Rules 2006 and the regulations made thereunder.
The IFSC in GIFT City (IFSC-GIFT) is being developed as a global financial and information technology services hub designed to be at or above par with globally benchmarked financial centres such as London, Hong Kong, Singapore, and Dubai.
Types of IFSCs
IFSCs are generally classified into four.
1. Global Financial Centers (GFCs ): These are centres that genuinely serve clients from all over the world in the provision of the widest possible array of international financial services (IFS); eg. London, New York, Singapore
2. Regional Financial Centers (RFCs): They serve their regional economies rather than their national economies; examples of such RFCs would be Dubai or Hong Kong
3. Non-global and non-regional, ordinary international IFSCs: These are centres like Paris, Frankfurt, Tokyo and Sydney that provide a wide range of IFS 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.
4. Offshore Financial Centers (OFCs): These are centres that are primarily tax havens for wealth management and global tax management rather than providing the fully array of IFS.
Many emerging IFSCs around the world are aspiring to play a global role in the years to come: e.g. Shanghai and Dubai.
Products and Services at IFSCs
The IFS products and services that IFSCs provide include the following. GFCs provide all of them. Other IFCs provide some combination of them.
- Fund Raising for individuals, corporations and governments (sovereign and sub-sovereign)
- Asset Management and Global Portfolio Diversification
- Personal Wealth Management (PWM) for high-net worth individuals (HNWIs).
- Global Tax Management and Cross- border Tax Liability Optimisation
- Global/Regional Corporate Treasury Management Operations which involves fund raising, liquidity investment and management, asset-liability and duration matching, and risk-management through insurance and traded derivative products for currency, interest-rate, credit and political risk exposure
- Global/Regional Risk Management Operations and Insurance/Re-insurance which involves highly developed exchange traded and tailored derivatives (futures, options, swaps, swaptions, caps and collars) as well as world class derivatives exchanges that trade a variety of global contracts.
- Global/Regional Exchange Trading of Financial Securities, Commodities and Derivatives Contracts in Financial Instruments/ Indices and in Commodities
- Financial Engineering and Architecture for Large Complex Projects
- Global/Regional Mergers and Acquisitions Activity
- Financing for Global/Regional Public- Private Partnerships:
- Global Transfer Pricing: This is an activity which most governments looks doubtfully but often practiced by transnational corporations.
Why an IFSC in India?
An IFSC seeks to bring to India, those types of financial services and transactions that are currently carried on outside India by overseas financial institutions and overseas branches/ subsidiaries of Indian financial institutions.
Setting up an IFSC was the subject matter of the 2007 report of The High Powered Expert Committee (HPEC) on Making Mumbai an International Financial Centre (MIFC report). Various aspects of IFSCs are analyzed in this report.
The policy 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.
Legal provisions for IFSC in India
Section 18 and Section 55 of India's Special Economic Zone Act, 2005 provides for the establishment of an International Financial Services Centre in India within an SEZ in India and enables the Central Government to regulate IFSC activities.GIFT SEZ Limited has been notified by Ministry of Commerce and Industry (MoCI), Government of India on 18 August 2011 for setting up a sector specific SEZ for multi services at Gandhinagar, Gujarat.
IFSC has been designated for all practical purposes as a 'deemed foreign territory' which would have the same ecosystem as other offshore locations, but which is physically on Indian soil.
Any financial institution (or its branch) set up in the IFSC is
a) treated as a non-resident Indian located outside India,
b) expected to conduct business in such foreign currency and with such entities, whether resident or non-resident, as the Regulatory Authority may determine, and
c) Nothing contained in any other regulations shall apply to a unit located in IFSC, subject to certain provisions.
For instance, a bank in IFSC is not subject to CRR or SLR stipulations of RBI. For most purposes, the IFSC Banking Units (IBU) will be treated on par with a foreign branch of an Indian bank, like the application of prudential norms, the 90 days’ Income Recognition Asset Classification and Provisioning norms, adoption of liquidity and interest rate risk management policies. Deposits will not be covered by deposit insurance and RBI shall not provide liquidity or Lender of Last Resort support. Funds may be raised only from entities not resident in India, though the deployment may also be with entities resident in India (except individuals including retail customers and HNI’s), subject to FEMA, 1999. Advances by IBUs shall not be a part of the Net Bank Credit of parent banks. All transactions of these banks are to be in currency other than INR, and IBUs would operate and maintain balance sheet only in foreign currency, except a Special Rupee Account to defray administrative and statutory expenses. IBUs will not be permitted to participate in domestic call, notice, term, forex, money and other onshore markets and domestic payment systems.
Only one International Financial Services Centre is approved in a Special Economic Zone.
Regulations/Guidelines for IFSC in India
The Finance Minister of India, Shri Arun Jaitley, while delivering the budget speech for the assessment year 2015–16 announced that the first phase of GIFT will soon become a reality and that appropriate regulations/guidelines governing IFSC would be issued by March 2015.
Following the Budget 2015, the financial regulators viz. the Securities and Exchange Board of India (SEBI), the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority of India (IRDAI) and the Department of Financial Services issued the following regulations and guidelines to operationalize IFSC-GIFT in India under the provisions of the SEZ Act.
Reserve bank of India
(i) Foreign Exchange Management (International Financial Services Centre) Regulations, 2015' – These are RBI regulations relating to financial institutions setting up in International Financial Services Centres (IFSC).
(ii) Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks – This scheme charts out the regulatory and supervisory framework governing IFSC Banking Units set up in IFSCs by Indian banks.
Securities and Exchange Board of India
(iii) The Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 - These guidelines by SEBI aim to facilitate and regulate the financial services related to securities market in an International Financial Services Centre (IFSC), under Section 18(1) of Special Economic Zones Act, 2015.
Department of Financial Services
(iv) Insurance Regulatory and Development Authority of India (Regulation of Insurance Business in Special Economic Zone) Rules 2015 – These rules set out the regulatory framework for insurance activity in Special Economic Zone.
Insurance Regulatory and Development Authority of India
(v) Insurance Regulatory and Development Authority of India (International Financial Services Centre) Guidelines, 2015 – These are guidelines issued to regulate insurance business in IFSC’s according to which all Indian insurers are eligible to set up IFSC Insurance Office and an insurer registered with a foreign regulatory or supervisory authority will be permitted to set up such office based on certain criteria.
An IFSC Task Force set up in the Department of Economic Affairs in 2016 under the Chairmanship of MoS (Finance & Corporate Affairs) currently oversees all policy and regulatory matters related to developments of IFSC’s in India.
Tax Regime for IFSC in India
The Budget 2016-17 announced a competitive tax regime for IFSC with tax exemptions for a period of 10 years.
(i) A reduction in Minimum Alternate Tax (MAT) to 9% from 18.5%
(iii) Short Term Capital Gain Tax taxable at the rate of 15%
Participants of IFSC in India
A wide range of participants including the Banks, Insurance companies, Stock Exchanges, Clearing Corporations & Depositories, Brokers, Investment Advisers, Portfolio Managers, Alternate Investment Funds and Mutual Funds have been permitted to participate in GIFT-IFSC.
Hon'ble Prime Minister of India inaugurated BSE’s India International Exchange (IFSC) Ltd. (India INX) and India International Clearing Corporation (IFSC) Limited (India ICC) on January 09, 2017. Subsequently, India International Exchange (INX) commenced trading from January 16, 2017. NSE’s International Exchange & Clearing Corporation has also commenced operations in June 2017.