India’s 1st IFSC in GIFT City: Sebi issues guidelines for off-market transfer of securities by FPIs to IFSC
What is an IFSC?
An International Financial Service Centre (IFSC) is a jurisdiction that provides world-class financial services to non-residents and residents, to the extent permissible under the regulations, in a currency other than the domestic currency of the location where the IFSC is located.
India’s First IFSC
The Government of India established International Financial Services Centres Authority in April 2020 under the International Financial Services Centres Authority Act passed by the Indian Parliament. For the first time, the regulatory powers of four financial services regulators in India, namely, Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory Development Authority of India (PFRDAI), have been vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the International Financial Services Centre in India. Approved by the Government of India as an International Financial Services Centre (IFSC) at GIFT City, the IFSC reinforces India’s strategic position as a global hub for financial services. Apart from providing a global financial platform, it provides easy access to the Indian economy, which is amongst the largest and fastest-growing economies in the world and connects ~30 million strong Indian diaspora globally to India through the IFSC.
What is Foreign Portfolio Investment?
Foreign Portfolio Investment (FPI) consists of securities and other financial assets held by investors in another country. It does not provide the investor with direct ownership of a company's assets and is relatively liquid depending on the volatility of the market. Portfolio investment involves the making and holding of a hands-off—or passive—investment of securities, done with the expectation of earning a return. In foreign portfolio investment, these securities can include stocks, American depositary receipts (ADRs), or global depositary receipts of companies headquartered outside the investor's nation. Holding also includes bonds or other debt issued by these companies or foreign governments, mutual funds, or Exchange Traded Funds (ETFs) that invest in assets abroad or overseas. The persons/ institutions investing money through this route are called Foreign Portfolio Investors.
What are Off-Market Transactions?
An off-market transaction is settled between two parties on mutually agreed terms and the clearing corporation or the stock exchange is not involved. These include legacy transfers, gifts, transfer of shares between two Demat accounts, shifting of securities between a client and a sub-broker, and transactions in unlisted securities. One party is the transferor, while the other is the transferee.
The SEBI Circular
The Securities and Exchange Board of India (SEBI), the regulator of the capital markets in India, earlier in June issued guidelines for off-market transfer of securities by FPIs to IFSC.
For relocation, an FPI or its wholly-owned special purpose vehicle may approach its Designated Depository Participants (DDP) for approval of a 'one-time off-market' transfer of its securities to the 'resultant fund'. SEBI noted that tax incentives are provided for relocating foreign funds to IFSC under the Finance Act, 2021, in order to make the IFSC in GIFT City, Gujarat, a global financial hub. DDPs after appropriate due diligence may accord their approval for a one-time off-market transfer of securities for such relocation.
Relocation request will imply that the FPI has deemed to have applied for the surrender of its registration. The 'off-market' transfer shall be allowed without prejudice to any provisions of tax laws and FEMA.