India’s first International Financial Services Centre (IFSC) at GIFT City in Gujarat is on course to become an important global destination for all players in the banking and financial services industry. There has been a record surge in the number of applications received by the IFSCA and the recent Zerodha’s True Beacon, the first Alternative Investment Fund (AIF) has set the ground for many others to come. One of the key reasons for the large number of companies lining up at IFSC is the formation of a unified regulator- International Financial Services Center Authority (IFSCA), which has smoothened the application process. The regulator has played an instrumental role in making the business environment conducive for foreign players and has been issuing regulations for each business vertical.
One of the recent regulations issued by IFSCA provides a framework for finance companies in IFSC. The regulations are focused at providing a robust yet light-touch regulatory environment at par with other financial services centres across the globe. The regulations shall provide the required impetus to Bon Banking Financial Institutions to complement the role of banking in provide finance and other innovative products at IFSC.
Important Features of Regulations
An entity can commence business as a Finance Company (FC) or a Finance Unit (FU) after obtaining registration certificate from IFSCA. A Finance Company can be set up either as a subsidiary or a joint venture, or as a newly incorporated company under the Companies Act, 2013, or in any other form as may be specified by the Authority from time to time: Provided that if an investing entity in a Finance Company is carrying out a regulated financial activity in its home jurisdiction, it shall obtain a No-Objection Certificate from its home country's regulator for setting up a Finance Company in the IFSCs, wherever applicable. A Finance Unit can be set up if the investing entity or the ultimate parent of the investing entity, as the case may be, is carrying out a regulated financial activity in its home jurisdiction and has obtained the No-Objection Certificate from the home country regulator for setting up a Finance Unit in the IFSCs.
An entity seeking registration under the regulations needs to inter alia fulfil the following conditions:
- In case the applicant is seeking registration as a FC, it shall have and maintain minimum owned fund, depending on the activity proposed to be undertaken by it, OR in case the applicant is seeking registration as a FU, its parent shall provide and maintain minimum owned fund, on unimpaired basis at all times, depending on the activity proposed to be undertaken by the FU, as specified in Schedule of the Regulations, or such other higher amount as may be specified by the IFSCA.
- The FC/FU or its promoters, seeking registration, shall be from a Financial Action Task Force (FATF) compliant jurisdiction and comply with international standards set by the FATF to combat money laundering and terrorist financing.
Prudent Regulatory Requirements
A FC/ FU shall maintain a minimum CR at 8% of its regulatory capital to its risk-weighted assets or at such percentage as may be specified by the IFSCA.
Liquidity Coverage Ratio (LCR)
A FC/ FU shall maintain LCR on stand-alone basis, at all times, as may be determined by the IFSCA. Provided that in the case of a FU, the LCR may be allowed to be maintained by the parent entity with specific approval of the IFSCA.
Exposure Ceiling (EC)
The sum of all the exposures of a FC/ FU to a single counterparty or group of connected counterparties shall not exceed 25% of its available eligible capital base without the approval of the IFSCA.
The permissible activities for FC/FU are divided in three broad categories: (i) Specialised activities, (ii) Core activities, and (iii) Non-core activities, which have been listed under Chapter IV of the regulations.
Permitted Specialized Activities
- Credit enhancement
- Factoring and forfaiting of receivables
- Any other as may be permitted by the IFSCA
Permitted Core Activities
- Lend in the form of loans, commitments and guarantees, securitisation, and sale and purchase of portfolios
- Undertake investments, including subscribing, acquiring, holding, or transferring securities or such other instruments, as may be permitted by the Authority
- Undertake equipment leasing,
- Carry out financial lease transactions for aircraft lease and ship lease
- Buy or Sell derivatives
- Global/Regional Corporate Treasury Centres
- Any other core activity as may be permitted by the Authority.
Permitted Non-core Activities
Subject to specific registration requirements, wherever applicable, permitted non-core activities for a Finance Company or a Finance Unit, as the case may be, shall include following activities:
- Merchant Banking
- Authorised Person
- Registrar and Share Transfer Agent
- Trusteeship Services
- Investment Advisory Services
- Portfolio Management Services
- Distribution of mutual fund units
- Distribution of insurance products
- Function as trading and clearing members or professional clearing member of exchanges and clearing corporations set up in IFSC
- Transactions permitted under the Framework for Aircraft Operating Lease, as specified by the Authority.
- Transactions permitted under the Framework for Ship Operating Lease, as may be specified by the Authority.
- Asset Management support services permitted under the Framework for Enabling Ancillary Services as specified by the Authority,
- Any other non-core activity, as may be permitted with prior approval of the Authority.
Currency of Operations
- A FC/ FU shall carry out its operation in a freely convertible foreign currency and with such persons, whether resident or otherwise, as may be permitted by the IFSCA. Provided that a FC/ FU may be permitted to conduct such business, transactions denominated in Indian National Rupee (INR) as may be specified by the IFSCA, subject to settlement of those business transactions in freely convertible foreign currency.
- A FC/ FU shall be permitted to have an INR account out of the freely convertible foreign currency to defray their administrative and statutory expenses and for such other purposes as may be specified by the IFSCA.
- Every FC/ FU shall maintain its balance sheet only in $. A FU shall ensure that accounts pertaining to its transactions are kept distinct from that of its parent.
Detailed regulations can be read at https://ifsca.gov.in/Viewer/Index/161
Update: On December 3, 2021, Hon'ble Prime Minister Narendra Modi will inaugurate the Infinity Forum on fintech, which among other things will discuss and come up with actionable insights into how technology can be leveraged by the fintech industry for inclusive growth.