IFSC stands for “INTERNATIONAL FINANCIAL SERVICES CENTRES”. An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. Some examples of Global Financial Centres are London, New York and Singapore. However, Shanghai and Dubai, are emerging IFSCs around the world and are aspiring to play a global role in the years to come. An expert panel headed by former World Bank economist Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. However, the global financial crisis that unfolded in 2008 made countries including India cautious about rapidly opening up their financial sectors.
FIRST IFSC ESTABLISHED IN INDIA & ITS ADVANTAGES:
Gujarat International Finance Tec-City (also called GIFT City), inaugurated in April 2015 is India’s first IFSC. Following shall be the advantages of GIFT City:
⇒ Major Infrastructures as never before in India.
⇒ High Technologies.
⇒ International Popularity. (Will increase Foreign Investment)
⇒ GIFT could provide as many as 5,00,000 direct and indirect jobs and absorb 5.76 million square metres of real estate, creating a mini-boom in and around GIFT city.
⇒ Business friendly Regulations and policies. (SEZ)
|Exemption to IFSC Private company U/s. of 462 of Companies Act, 2013||G.S.R. 9(E)||04/01/2017|
|Exemption to IFSC Public company U/s. of 462 of Companies Act, 2013||G.S.R. 08(E)||04/01/2017|
IFSC VIS-À-VIS SEBI
Securities and Exchange Board of India (SEBI) has approved the IFSC guidelines 2015 allowing Indian as well as foreign stock exchanges, clearing corporations and depositories to set up subsidiaries to undertake their business in IFSC. Under the IFSC guidelines that will regulate financial services relating to securities market in an International Financial Services Centre, SEBI relaxed the shareholding and net worth requirement norms for intermediaries setting up their subsidiaries.
Gujarat International Finance Tec-City (GIFT) would be the country’s first IFSC and the BSE and NSE have already signed MoUs for setting up international exchanges. The move is expected to capture an estimated Rs 1,334 crore per day or Rs 2 lakh crore per year worth of trading in rupee derivatives that currently goes to locations outside India.
The guidelines also permit issuance of depository receipts and debt securities in IFSC by domestic as well as foreign companies and also provide for listing and trading of equity shares issued by companies incorporated outside India. Non Resident Indian, foreign investors, institutional investors, and Resident Indian eligible under FEMA may participate in IFSC. Even mutual funds and Alternative Investment Funds set up in IFSC can invest in securities listed in IFSC, securities issued by companies incorporated in IFSC and securities issued by foreign issuers.
SEBI also strengthened the continuous disclosure norms. While all listed companies will now be required to disclose information related to all events to the stock exchanges within 24 hours, the board outcome will have to be disclosed within 30 minutes of the closure of board meeting.
SEBI also approved regulations for issuance and listing of debt securities by Municipality. The regulations state that the issuer shall only issue revenue bonds and the issuer’s contribution for each project shall not be less than 20 per cent of the project cost. While credit rating has been made mandatory, the minimum tenure has been fixed at 3 years.
IFSC VIS-À-VIS FEMA
To operationalise the IFSC, a Notification under the Foreign Exchange Management Act, 1999 (FEMA) shall be issued by Reserve Bank of India (RBI) in March 2015, making regulations relating to financial institutions set up in the IFSC. The key features of these regulations will be that any financial institution (or its branch) set up in the IFSC-
a) shall be treated as a non-resident Indian located outside India,
b) shall conduct business in such foreign currency and with such entities, whether resident or non-resident, as the Regulatory Authority may determine, and
c) subject to certain provisions, nothing contained in any other regulations shall apply to a unit located in IFSC.
RBI has also formulated a Draft Scheme for the setting up of IFSC Banking Units (IBUs) by banks, whose broad contours may be summarised as follows:
i. Setting up of IBUs:Eligible banks intending to set up IBUs (which would be regulated and supervised by RBI) would be required to apply to the Department of Banking Regulation (DBR) of RBI under Section 23 of the Banking Regulation Act, 1949. To begin with, only Indian banks (public and private, authorised to deal in forex) and foreign banks having a presence in India would be eligible to set up IBUs. Banks already having offshore presence would be preferred and each bank would be permitted to set up only one IBU in one IFSC.
ii. IBUs vis-à-vis foreign branches of banks: For most purposes, the 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.
iii. Role of the Parent Bank’s Board: The bank’s Board would set comprehensive overnight limits for each currency for IBUs, may set out appropriate credit risk management policy and exposure limits, and monitor overall risk management and ALM framework of the IBU.
iv. Capital Requirements: The parent bank would be required to provide a minimum of USD 20 million upfront as capital, and the IBU shall have to maintain minimum capital on an on-going basis as may be prescribed.
v. Liabilities and Advances: The IBU’s liabilities will be exempt both CRR and SLR. But liabilities only with original maturity period greater than one year are permissible, although short-term liabilities may be raised from banks subject to RBI prescribed limits. 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, subject to FEMA, 1999. Advances by IBUs shall not be a part of the Net Bank Credit of parent banks.
vi. Permissibility of activities: Opening of current or savings accounts and issuance of bearer instruments is not allowed. Payment transactions can only be undertaken via bank transfers. IBUs can undertake transactions with non-resident entities other than retail customers/HNIs, and can deal with WOS/JVs of Indian companies abroad. They may undertake Factoring/Forfaiting of export receivables, but are prohibited from cash transactions.
vii. Ring Fencing: All transactions of IBUs shall 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. Separate Nostro accounts will have to be maintained by IBUs with correspondent banks. IBUs will not be permitted to participate in domestic call, notice, term, forex, money and other onshore markets and domestic payment systems.
IFSC VIS-À-VIS IRDA
IRDA would also be permitting insurers including foreign insurer or reinsurers to set up branch in IFSC. Government would be permitting IRDA to allow such life and non-life insurance services, health insurance services and reinsurance services, as may be specified.
SERVICES PROVIDED BY IFSC:
⇒ Fund-raising services for individuals, corporations and governments
⇒ Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds
⇒ Wealth management
⇒ Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.
⇒ Global and regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching
⇒ Risk management operations such as insurance and reinsurance
⇒ Merger and acquisition activities among trans-national corporations
CAN AN IFSC BE SET UP IN A SPECIAL ECONOMIC ZONE (SEZ)?
⇒The SEZ Act 2005 allows setting up an IFSC in an SEZ or as an SEZ after approval from the central government.
WHAT DOES AN IFSC REQUIRE?
IFSCs such as Dubai International Financial Centre and Shanghai International Financial Centre, which are located within SEZs, have six key building blocks:
—Rational legal regulatory framework
—Sustainable local economy
—Stable political environment
—Good quality of life
RELAXATIONS GIVEN BY GOVERNMENT (MINISTRY OF CORPORATE AFFAIRS) TO IFSC COMPANIES:
Government allows 39 modifications or exemptions for private firms licensed to set up businesses in international financial services centres from clauses in Companies Act. Some of which are as:
⇒ A specified IFSC private company will only be limited by shares.
⇒ All such companies have to suffix International Financial Services Centres or IFSC in their names.
⇒ Companies also have relaxation for filing their documents under the exemptions—the time given for submitting verification for registered addresses to the registrar of companies (ROC) for IFSC companies will be sixty days instead of thirty, filing copies of every resolution and agreement with the ROC can be done in sixty days.
⇒ For IFSC companies, an officer or any other person authorized by the company can authenticate documents and other contracts (under the Companies Act, for all other companies, only an officer of the company can do so).
⇒ IFSC companies can make private placement offers and will not be restricted by earlier offers which haven’t been completed or withdrawn.
⇒ An extract of the annual return of the company will not have to be included in the board’s report. IFSC companies will not have to comply with the secretarial standards prescribed by the Institute of Company Secretaries of India.
⇒IFSC companies only need internal audit if their articles of association provide for the same.
⇒ IFSC firms can make investments through more than two investment companies
However, a brief analysis is summarized below for quick reference:
|Provisions of Companies Act, 2013||Exceptions for IFSC Private Company||Exceptions for IFSC Public Company|
|1.||Clause 41 of Section 2 (Financial Year)||Financial year of such Company which is subsidiary of a foreign company, may same as financial year of its holding and approval of the Tribunal will not be required.||Financial year of such Company which is subsidiary of a foreign company, may be same as financial year of its holding and approval of the Tribunal will not be required.|
|2.||Clause (a) of sub-section (1) of Section (4)||To have suffix “International Financial Services Company” or IFSC as part of name.||It shall have a suffix “International Financial Services Company” or “IFSC” as part of its name.|
|3.||Clause (c) of sub-section (1) of Section (4)||It shall state its object to do financial services activities, as permitted under Special Economic Zones Act, 2005 read with Special Economic Zones Act, 2006.||It shall state its object to do financial services activities, as permitted under Special Economic Zones Act, 2005 read with Special Economic Zones Act, 2006.|
|4.||Sub-section 1 of Section 12||Can have registered office only in IFSC located in the approved multi- services SEZ set up under Special Economic Zones Act, 2005 read with Special Economic Zones Act, 2006.||Can have registered office only in IFSC located in the approved multi- services SEZ set up under Special Economic Zones Act, 2005 read with Special Economic Zones Act, 2006.|
|5.||Sub-section 2 and 4 of Section 12||It is 60 days instead of 30 days of its incorporation period for intimating to Registrar for situation of registered office address and any change in situation of registered office address.||It is 60 days instead of 30 days of its incorporation period for intimating to Registrar for situation of registered office address and any change in situation of registered office address.|
|6.||Sub-section (3) & (7) of Section 42||This sub-section of section 42 relating to private placement shall not apply.||This sub-section of section 42 relating to private placement shall not apply.|
|7.||Sub-section (6) of Section 42||The time frame for allotment of securities is 90 days from the date of receipt of application money for such securities instead of 60 days.||The time frame for allotment of securities is 90 days from the date of receipt of application money for such securities instead of 60 days.|
|8.||Section 43 (kinds of share capital)
|This section is already not applicable to private Companies, where the memorandum or articles of association of such company provides otherwise.||This section shall not apply, where the memorandum or articles of association of such company provides for it.|
|9.||Section 47 (voting rights)||This section is already not applicable to private Companies, where the memorandum or articles of association of such company provides otherwise.||This section shall not apply relating to voting rights, where the memorandum or articles of association of such company provides for it.|
|10.||Clause (c) of sub-section (1) of Section 54||This clause of sub- section 1 of Section 54 relating to issue of sweat equity shares shall not apply.||This clause of sub- section 1 of Section 54 relating to issue of sweat equity shares shall not apply.|
|11.||Clause (a) of sub-section (1) of Section 62||Exemption is already available to private companies.||The offer period for right issue can be lesser than those specified in the section, if 90% of the members have given their consent in writing or electronic mode.|
|12.||Clause (b) of sub-section (1) of Section 62||Exemption is already available to private companies.||An ordinary resolution to be passed by the company instead of a special resolution for the offer to be made to employees under ESOPs.|
|13.||Clause (a) to (e) of sub-section (2) of section 73||Exemption is already available to private companies.||It shall not apply which accepts from its members, monies not exceeding 0 % of aggregate of paid-up capital and free reserves and such company shall file the details of monies so accepted to Registrar in such manner as may be specified.|
|14.||Sub-section (1) of section 0||The Board may subject to consent of all the shareholders, convene the extra-ordinary general meeting at any place within or outside India.||The Board may subject to consent of all the shareholders, convene the extra-ordinary general meeting at any place within or outside India.|
|15.||Section 1 to 7 and Section 9||This sections shall apply unless otherwise specified in the articles of the company.||This sections shall apply unless otherwise specified in the articles of the company.|
|16.||Sub-section (1) of section 117||A copy of agreement or resolution (eForm MGT-14) to be filed within 60 days instead of 30 days.||A copy of agreement or resolution (eForm MGT-14) to be filed within 60 days instead of 30 days.|
|17.||Clause (g) sub-section (3) of section 117||Exemption is already available to private companies.||This clause, relating to filing of board resolutions with registrar shall not apply.|
|18.||Sub-section () of section 118||Secretarial standards 1 and 2 shall not be applicable.||Secretarial standards 1 and 2 shall not be applicable.|
|19.||Section 135 (Corporate Social Responsibility)||This section not apply for a period of 5 years from the commencement of business of such company.||This section not apply for a period of 5 years from the commencement of business of such company.|
|20.||Section 138 (Internal Audit)||This section shall apply if the articles provide for the same.||This section shall apply if the articles provide for the same.|
|21.||2nd proviso to sub-section (1) of Section 149||Not applicable to private companies.||This proviso relating to compulsory appointment of atleast one woman director shall not apply.|
|22.||Sub-section (4) to (11), Clause (i) of sub-section (12) and sub-section (13) of Section 149||Not applicable to private companies.||This sub-sections relating to independent directors shall not apply.|
|23.||Sub-section (6) & (7) of section 152||This sub-sections relating to retirement and re-appointment of directors shall not apply.||This sub-sections relating to retirement and re-appointment of directors shall not apply.|
|24.||Sub-section (1) of Section 173||It shall hold the first meeting of board of directors within 60 days of its incorporation and thereafter atleast one meeting of board of directors in each half of a calendar year.||It shall hold the first meeting of board of directors within 60 days of its incorporation and thereafter atleast one meeting of board of directors in each half of a calendar year.|
|25.||Section 177 and 178||Not applicable to private companies.||These sections relating to audit committee; and nomination and remuneration and stakeholder relationship and shall not apply.|
|26.||Section 180||Not applicable to private companies.||This section relating to restriction on powers of the board shall apply unless the articles of the company provides otherwise.|
|27.||Section 197||Not applicable to private companies.||This section relating to limit on overall managerial remuneration and managerial remuneration in case of absence or inadequacy of profits shall not apply.|