India’s 1st IFSC in GIFT City Gujarat: IFSCA Issues Banking Handbook
About GIFT IFSC
As one of the largest and fastest growing economies, India has been a major consumer of International financial services (IFS). The 2007 report of the committee set up by the Ministry of Finance (popularly known as the Percy Mistry Committee Report) had estimated that even under conservative assumptions, purchases by Indian households and firms of IFS will be nearly $50 billion by 2015, and could exceed $120 billion by 2025. Thus, with the objective of bringing back to India the international financial service business generated from India, and gradually emerge as an international financial services hub at the regional and global level, Government of India operationalized India’s maiden International Financial Services Centre (IFSC) at GIFT Multi Services SEZ in April 2015.
According to the latest Global Financial Centers Index report, London, (March 2021) the IFSC in GIFT City has been placed at the top amongst 15 centers globally, which are likely to become more significant over the next two to three years. GIFT IFSC is a special financial zone which is treated as an offshore territory under Indian foreign exchange regulations. The centre provides world class financial services to non-residents and residents, to the extent permissible under the regulations, in any foreign currency.
Government of India recognised that the development of financial services and products in the IFSCs would require focused and dedicated regulatory interventions. Moreover, the dynamic nature of business in an IFSC would requires a high degree of inter-regulatory coordination within the financial sector. Hence, a need was felt for having a unified financial regulator for IFSCs in India to provide world class regulatory environment to financial market participants.
The International Financial Services Centres Authority Act was passed in December 2019 and the IFSCA commenced its operation as a unified regulator in October 2020. The IFSCA has been vested with the combined powers of four domestic regulators namely RBI, SEBI, IRDAI and PFRDA and has a mandate to develop and regulate financial institutions, financial services, and financial products within the IFSCs in India.
The IFSCA Banking Handbook
The International Financial Services Centres Authority (IFSCA) has taken many measures as part of its endeavour to adopt the international best practices for development, regulation and supervision of the banking business in the Gujarat International Finance Tec-City International Financial Services Centre (GIFT IFSC), after assuming the regulatory powers under the IFSCA Act from October 1, 2020.
The IFSCA Banking regulations notified in November 2020 and directions / guidelines issued thereunder were aimed at enabling and facilitating various banking activities generally carried out by internationally active banks in international financial centres across the globe while ensuring a smooth transition from the RBI guidelines that were applicable prior to the IFSCA Banking Regulations.
In keeping with the recent evolution in global perspectives on international banking, the IFSCA Banking Regulations were amended to enable the IBUs to carry out additional activities such as investment advisory services and portfolio management (wealth management) services, under the respective guidelines / frameworks. With the last amendment in the IFSCA Banking Regulations (notified on July 6, 2021), the IBUs have been allowed to undertake any activity that a financial institution is permitted under the IFSCA Act, 2019 – except those (such as insurance business) expressly prohibited for banking entities. The IFSCA Banking Regulations have also clarified that the minimum capital adequacy and the leverage ratio for the IBU – which is a branch of the parent bank, may be maintained at the parent bank (legal entity) level. Under the amended IFSCA Banking Regulations, the IBUs are required to follow the prudential guidelines issued by the respective Home Regulator as applicable on their parent bank, unless otherwise specified by the Authority.
With a view to further enhancing ‘ease of doing banking business’ in GIFT IFSC, the Authority has now issued the IFSCA Banking Handbook (‘Handbook’) which will act as a compendium of all the detailed directions of the Authority to the IBUs operating in GIFT IFSC, as branch of a Banking Company incorporated in India or outside India. The Handbook prepared on the lines of international best practices followed for banking business in global / regional international financial centres, provides a single comprehensive source of all the instructions / directions governing banking operations in IFSC aligned with the amended regulations.
The IFSCA Banking Handbook consists of the following three components which are further segregated into modules which communicate the Authority’s regulatory expectations with greater clarity and transparency on the various aspects under the IFSCA (Banking) Regulations:
(a) General directions (GEN)- deals with licencing of IBUs, defines the ‘controlled’ and ‘designated’ functions and the requirements from ‘approved / authorised individuals’ who can carry out such functions. It also lays out the broad principles for banking business and provide information about the IFSCA’s supervisory powers, functions and approach.
(b) Conduct of Business directions (COB)- aims at ensuring that IBUs (and other financial institutions operating in the IFSC, wherever made applicable) meet the minimum standards of conduct expected, particularly with regard to the treatment of their clients, their dealings with counterparties and other market participants, contribute to fostering and maintaining the integrity of financial markets in the IFSC
(c) Prudential directions (PRU)-The extant IFSCA Banking Regulations permit an IBU to be set up and operate only as a branch of a Banking Company that is regulated by its Home Regulator. The non-qualitative prudential requirements applicable on the Banking Company under the respective Home Regulations have been made applicable in respect of the IBU, unless the Authority prescribes any directions on any aspect.
As the IBUs need to be provided sufficient time for the transition from the extant framework, the directions of the Handbook would come into effect from January 1,2022.
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.