The IFSCA Banking Handbook General Directions- V 5.0 (GEN)

The International Financial Services Centres Authority (IFSCA) Act, 2019, serves as the cornerstone for regulating financial activities within International Financial Services Centres (IFSCs). The IFSCA Banking Handbook General Directions Version 5.0 delineates the legal framework, regulatory provisions, and licensing criteria governing banking units operating in IFSCs. The IFSCA Banking Handbook General Directions Version 5.0 encapsulates the regulatory framework and licensing procedures essential for IBUs operating within IFSCs. By delineating comprehensive guidelines, the Handbook fosters regulatory compliance, operational integrity, and investor confidence within IFSCs.

International Financial Services Centres (IFSC)

The IFSCA Banking Handbook General Directions- V 5.0 (GEN)

1. Legal framework

i. The International Financial Services Centres Authority Act, 2019 (IFSCA Act) provides the foundation for regulatory framework, under the broad definitions of ‘financial institution’, ‘financial services’ and ‘financial product’, for entities and activities including those related to banking business.

ii. Apart from the IFSCA Act, other legislations mentioned in First Schedule of the IFSCA Act, such as the Reserve Bank of India Act, 1934 (RBI Act); the Banking Regulation Act, 1949 (BR Act); the Securities Contracts (Regulations) Act, 1956 (SCRA Act); the Securities and Exchange Board of India Act, 1992 (SEBI Act); the Foreign Exchange Management Act, 1999 (FEMA); the Credit Information Companies (Regulation) Act, 2005 (CIC Act), the Payment and Settlement Systems Act, 2007 (PSS Act), among others, provide the necessary references related to the powers of the Authority in relation to financial products, financial services and financial institutions. The relevant provisions of such Acts and other laws of India shall also be applicable for banking and other businesses in IFSCs. Accordingly, the IBUs must ensure that they are in compliance with all the relevant provisions of the applicable laws of India, unless specifically exempted

iii. In case any applicable statute mandates the requirement of audit of the books of accounts of the IBU (Statutory audit), the audit shall be conducted by an entity eligible to conduct such audit as per the respective statute. In case the statute is silent on the eligible entity, the appropriate entity to undertake the Audit may be decided by the IBU.

2. IFSCA Banking Regulation

i. IFSCA’s functions and powers for making Regulations

i. The IFSCA Act, in terms of Section 28(1) empowers the Authority to, by notification, make Regulations consistent with the IFSCA Act and the ‘Rules’ made thereunder by the Government of India, for carrying out the provisions of the IFSCA Act.

ii. In terms of Section 12(1) of the IFSCA Act, one of the main functions of the Authority is to develop and regulate the financial products, financial services and financial institutions in IFSCs, by such measures as it deems fit, subject to the provisions of the IFSCA Act. The IFSCA Act, under Section 13(1), enables the Authority to exercise all powers exercisable by an appropriate regulator, under other legislations included in First Schedule of the IFSCA Act, in so far as it relates to the regulation of the financial products, financial services or financial institutions, as the case may be.

ii. IFSCA Banking Regulations

i. The IFSCA Banking Regulations made and notified, including the amendments made to them, from time to time – last updated on July 6, 2021, lay down the regulatory framework for IFSC Banking Units (IBUs) and their activities in an IFSC.

ii. An IBU means a financial institution under clause (c) of sub-section (1) of Section 3 of the Act that is licensed by the Authority to undertake permissible activities under the IFSCA Banking Regulations.

iii. The IFSCA Banking Regulations provide that the Authority may specify norms, procedures, processes, manners or provide relaxations, by way of guidelines or circulars, for the purposes of implementation of these regulations and matters incidental thereto, or in order to facilitate and regulate financial services relating to banking activities in an IFSC.

iii. Other IFSCA Regulations applicable for IBUs

In addition to the IFSCA Banking Regulations, some or all the provisions of other Regulations issued by the Authority may be made applicable to the IBUs in respect of certain types of activities.

3. Purpose of the IFSCA Banking Handbook

i. The IFSCA Banking Handbook (‘Handbook’) contains the directions of the Authority to the Banking Units (BUs) operating as branch of a Banking Company (also referred to as ‘parent bank’ in the IFSCA Banking Regulations). Unless generally or specifically exempted, the BUs are required to comply with the directions in this Handbook without fail.

ii. The Authority may, where it feels necessary to do so, issue “Guidance” on the directions for the purpose of amplifying and clarifying the requirements of the directions. BUs are required to take note of the Guidance while complying with the Directions. However, strict compliance of the requirements of the Guidance is not expected as long as the IBU has complied with requirements of the Directions

iii. The Handbook has three components – General directions, Conduct of Business directions and Prudential Directions applicable to BUs.

4. Application of IFSCA Banking Handbook

i. The IFSCA Banking Handbook shall apply to all IBUs.

ii. The IBUs shall be required to follow, in addition to the IFSCA Banking Handbook, the regulations / directions / circulars / guidelines / frameworks issued by the Authority in respect of certain specific permitted activities such as Portfolio Management Services, Investment Advisory services, Custodian services, Factoring and Forfaiting, Aircraft Leasing, International Trade Financing Services (ITFS) Platforms and any other such regulations / directions / circulars / guidelines / frameworks issued by the Authority.

5. Structure and Components of IFSCA Banking Handbook

i. The IFSCA Banking Handbook consists of the following three components –

(a) General directions (GEN)

(b) Conduct of Business directions (COB)

(c) Prudential directions (PRU)

ii. The modules in GEN deal with licencing of IBUs, defining ‘controlled’ and ‘designated’ functions and the requirements from ‘approved/authorised individuals’ who can carry out such functions. The GEN directions also lay out the broad principles for banking business and provide information about the Authority’s supervisory powers, functions and approach.

iii. The modules in COB are aimed 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. COB also includes directions to ensure that the behaviour of IBUs (and other financial institutions operating in the IFSC wherever made applicable) contributes to fostering and maintaining the integrity of financial markets in the IFSC and will assist the Authority to meet the regulatory objectives, including and particularly those related to:

(a) protecting the interests of investors and users of financial services;

(b) ensuring that the IFSC’s financial markets are fair, efficient, transparent and orderly; and

(c) fostering and maintaining confidence in the IFSC’s financial system and regulatory regime.

iv. Under the extant IFSCA Banking Regulations, an IBU can be set up and operate only as a branch of a parent bank that is regulated by its Home Regulator. The IFSCA Banking Regulations also provide that the minimum initial / regulatory capital for the IBU may be maintained at the parent bank as per the Home Regulators. On similar lines, the IBU shall follow all other non-qualitative prudential requirements applicable on it as a branch of the parent bank under the respective Home Regulations, unless the Authority prescribes any directions for the IBUs on any aspect. The PRU modules cover the prudential requirements in respect of governance, governing board responsibilities, policies, systems and controls to be made applicable on IBUs.

GENERAL DIRECTIONS (GEN)

MODULE NO.1 LICENSING OF BANKING UNITS (LIBU)

1. Requirement for license

i. Section 3(1) of the IFSCA (Banking) Regulations, 2020 (as amended) (hereinafter referred to as “the regulations”) require Indian Banks and Foreign Banks (hereinafter referred to as the Banking company) to obtain license from the Authority to set up an IBU in an International Financial Services Centre.

ii. Section 3(8) of the Regulations permits the Banking Company to establish only one IBU in each IFSC and in the form of a branch of the Banking Company.

iii. Section 3(9) of the Regulations permit a Banking company incorporated in India or outside India to set up Representative Offices (ROs) in IFSC. Module 12 of the Conduct of Business Directions of the IFSCA Banking Handbook lays down the mechanism for setting up a RO in IFSC

iv. These directions specify the procedure for applying for such licence, conditions to be fulfilled for grant of licence and procedure for acceptance/rejection of application by the Authority.

2. Application for license

i. The Banking company desirous of opening an IBU shall apply to the Authority for a Licence by:

(a) completing the form prescribed in Annex 1 and filing the Application Form with the Authority accompanied by such documents as are specified in the Form;

(b) providing the information required in Annex 2 such further information as the Authority may require; and

(c) paying the fee prescribed in by the Authority¹

3. Minimum conditions for consideration of license application

i. In addition to the requirements in 2, the Banking company applying for licence to set up an IBU in IFSC (other than in Rule 3 (I)) shall satisfy the following conditions to be considered for issue of license:

(a) The Banking company shall undertake to maintain necessary regulatory capital for the operations of the IBU subject to a minimum capital of USD 20 million (Base Capital requirement) to be maintained from the date of commencement of operations of the IBU.

(b) The Banking company shall submit an undertaking to the Authority to the effect:

(i) that it shall ensure that the IBU shall have access to liquid assets and financial resources which are adequate in relation to the nature, size and complexity of the business of the IBU to ensure that there is no significant risk that liabilities cannot be met as and when they fall due.

(ii) that it complies and shall continue to comply with its home regulator’s prudential requirements;

(iii) that it will share with the Authority reports pertaining to capital adequacy, liquidity risk and leverage ratio that it submits to its home regulator, within such time as may be specified by the Authority.

(iv) that, in case of breach of prudential requirements relating to Capital to Risk Weighted Asset Ratio (CRAR), Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR) and Leverage Ratio (s) set by its home regulator, it shall notify the Authority forthwith with relevant documents.

c. The Banking company shall submit a No Objection Letter from its Home Regulator regarding setting up of an IBU in the International Financial Services Centre;

d. The term “home regulator” for the purpose of these directions means a regulatory authority (by whatever name called) that has direct regulatory authority over, and carries out oversight of, the Banking company in the jurisdiction where the Banking company has been incorporated and the term “home supervisor” should be understood along the same lines.

4. Transitional provisions:

i. IBUs operating in IFSC on the date of commencement of the provisions of the Handbook shall be deemed to have been licensed by the Authority under the provisions of this module.

ii. IBUs in (i) shall be required to provide the undertaking as required in para 3(i) (a) & (b) to the Authority before April 1,2022.

5. Conditions for granting license

i. In considering the application of the Banking company for setting up an IBU, the Authority shall also consider the following financial/ non-financial parameters:

a. Business record and past performance of the Banking company.

b. Preliminary assessment of the Banking company’s internal control system for meeting operational efficiency and effectiveness, managerial and financial reporting, etc.

c. Preliminary assessment of Banking company’s Risk management policy including its scope.

d. Sources of resource raising by the Banking company.

e. Soundness and feasibility of the nature and scale of the business proposed to be conducted out of the proposed IBU

f. The Banking company’s track record in complying with Anti-Money laundering/Combating the financing of terrorism (AML/CFT) guidelines in its home jurisdiction.

g. Ability of the Banking company to appoint persons with the competence and experience to manage the proposed IBU responsibly.

h. The extent of Banking company’s resources to identify, monitor, measure and take action to remove or reduce risks as to its safety and soundness.

i. Extent and sophistication of technology use in operations and reporting to the regulator and the use of (Regtech)

ii. While considering the application, the Authority shall presume that the processes, practices and policies of the Banking company shall apply, mutatis mutandis, to the operations of the IBU in IFSC if the license is granted. It shall be the responsibility of the Banking company to inform the Authority at the time of applying for license, in writing and with necessary details, if in the opinion of the Banking company, such presumption would not be valid for one or more areas of the proposed operation of the IBU in IFSC.

6. Additional conditions for a Banking company not having presence in India applying to set up an IBU in IFSC

i. In addition to condition 3 and 4, the applicant shall satisfy the Authority that the home supervisor carries out effective global consolidated supervision of the Banking company.

ii The Authority may require the applicant to satisfy such other condition/provide such other information as deemed necessary by it.

7. Issuance / Denial of license

i. After considering an application for setting up an IBU, if the Authority is satisfied that the said application, prima facie, satisfies the conditions for granting license, the Authority shall communicate an “in principle approval” for the same to the applicant and may require the applicant to satisfy one or more conditions, within the time specified (if any), to be eligible to be issued a license for setting up an IBU.

ii. On the applicant satisfying the conditions mentioned in the “in principle approval” or any other condition that the Authority may require it to fulfill, within the time specified or any extended period of time granted by the Authority, the Authority shall grant licence to the Banking company subject to such conditions as provided under these regulations or such other additional conditions as it may deem fit.

iii. The Authority may, if it so desires, seek the opinion of the Government of India or any other body/committee set up by the Government of India before deciding on an application by for a Banking company not having presence in India.

iv. Grant of a license to open an IBU shall be at the sole discretion of the Authority and the grant of “In-principle approval” by the Authority shall not automatically entitle the applicant to be granted a license to open an IBU.

v. If the Authority reaches the opinion that licence cannot be granted, it may give thirty days’ time to the Banking company, setting out the grounds based on which it cannot grant licence, to enable the applicant to make written submissions, if any.

Notes:

¹ Fee structure for IFSC Banking Units ( F.no.276/IFSCA/Banking Supervision/2021-22/1 date May 11,2021)