An International Financial Services Centre (IFSC) is set up at Gandhinagar, Gujarat as a part of a Special Economic Zone (SEZ). 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.

2.  Pursuant to the Regulations issued under FEMA, the respective regulators would frame regulatory framework for provisions of financial services. IRDA of India would be permitting insurers including foreign insurer or reinsurers to set up branch in IFSC. Similarly RBI would permit the setting up of IFSC Banking Units (IBUs) by banks. Government would be permitting IRDA of India to allow such life and non-life insurance services, health insurance services and reinsurance services, as may be specified. The Securities and Exchange Board of India (SEBI) would allow setting up of exchanges and allow other activities for fund raising, merchant banking, brokerage, fund management, private equity, etc. Activities like currency derivatives, NIFTY futures, Depository Receipts, etc. would take place on the exchanges like any other IFSC.  

3.  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.  

Non-resident treatment for IFSC units enables foreign currency operations with regulatory exemptions and ring fencing safeguards. RBI enabled IFSC rules treat financial institutions in the Gandhinagar IFSC as non-resident entities transacting in foreign currency, permit RBI regulated IBUs and regulator specified insurer and capital market activities, require parent bank capital support, exempt certain liabilities from CRR/SLR while denying deposit insurance and central bank liquidity, and mandate ring fenced foreign currency balance sheet operations with limited rupee use and restricted participation in domestic payment and onshore markets.