WHAT IS GIFT CITY

Gujarat International Finance Tec–City, properly known as “Gift City” is being developed on the banks of the River Sabarmati in Ahmedabad, the state of Gujarat. Gift City is being established on a land admeasuring 886 acres out of which there is plan to develop 62 million sq. ft. of built-up area consisting of approximately 41.5 million sq.ft. of commercial space, 13.65 million sq. ft. of residential space and remaining areas for social activities. The Gujarat Urban Development Company Limited, an undertaking of Govt. of Gujarat, through Gujarat International Finance Tech – City Company Limited is developing the Gift City. The Gift City has seamless transport connectivity internally as well as excellent connectivity to different part of the world through Ahmadabad International Airport. Gift City would consist of Special Economic Zone (“SEZ”) along with exclusive Domestic Tarif Area (“DTA”). While SEZ would spread in area approximately 261 acres, 625 acres have been earmarked as DTA[1].

EVOLUTION OF GIFT CITY

As per the Special Economic Zone Act 2005[2]  (“SEZ Act”), the Central Government may set up one International Financial Services Centre (“IFSC”) in a Special Economic Zone (“SEZ”).  As such the Gift City is situated in Kandla Special Economic Zone, Gujarat. Gift City is approved  multi services Special Economic Zone (“GIFT SEZ”) under the SEZ Act.

In 2019, Government of India enacted International Financial Services Centres Act, 2019  (“IFSC Act”) with the objective to establish an authority to develop and regulate the financial services market in International Financial Services Centres (“IFSC”) and for other connected matters. IFSC Act established International Financial Services Centres Authority (“IFSCA”) to act as an “Authority”  under IFSC Act[3]. IFSC Act vested all powers which were exercisable by a regulator under Reserve Bank of India Act, Securities and Exchange Board of India Act, Insurance Regulatory and Development Authority of India Act and Pension Fund Regulatory and Development Authority Act  in IFSCA in so far as these relates to the regulation of the financial products in IFSC[4]. Accordingly, various enactments as mentioned in Schedule II of the IFSC Act, such as the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Insurance Regulatory and Development Authority Act, 1999, the Insurance Act, 1938 etc. have been amended  to confer such powers and authority on IFSCA[5].

STATUS OF UNITS IN IFSC

IFSC is the first step towards bringing financial services transaction relatable to India, back to Indian shores and to cater the customers outside Indian jurisdiction, in currency other than Indian Rupees.

To facilitate establishment of IFSC, RBI under Foreign Exchange Management Act, 1999 (“FEMA”) issued FEM (International Financial Services Centre) Regulations, 2015 (“IFSC Regulations”) to regulate Financial Institutions (“FI”), as defined therein, rendering financial services or undertaking financial transactions, as defined therein, in IFSC.

Any FI or branch thereof set up any IFSC and recognised as such by the Govt. of India or regulatory authorities shall be treated as a Person Resident in India[6].  As the FI in IFSC would be a Person Resident outside India, it would have the following effect :-

1. Any investment in any Indian entity shall be treated as Foreign Direct Investment (“FDI”) and shall have to comply with all extant regulations including FEMA Regulations for such FDI investment.
2. Any borrowing made by a Person Resident in India from FI would be treated as an External Commercial Borrowing.
3. Resident individuals can make investments in units in IFSC such as shares of companies Resident outside India under Liberalised Remittance Scheme subject to applicable conditions contained therein.

ESTABLISHMENT OF BANKING UNIT IN IFSC

IFSCA has notified The International Financial Services Centres Authority (Banking) Regulations, 2020 (as amended from time to time) (“Banking Regulations”) for establishment of a banking units and connected operational matters.

As per Banking Regulations, Indian banks (excluding cooperative banks as definition of Indian Bank[7] does not include co-operative banks) and foreign banks can set up their branch in Gift City. The  word “Indian Bank” not only includes a bank established in India but also subsidiary of foreign banks incorporated in India. Thus the foreign banks not having the presence in India may also be setup a branch in Gift City.

Banking unit may be set up as:

• IFSC Banking Unit or IBU e. Banking Unit licensed or permitted by the Authority to operate in an IFSC as a subsidiary company of the Parent Bank ; or
• IFSC Banking Company or IBC, i.e. a Banking Unit licensed or permitted by the Authority to operate in an IFSC as a branch of the Parent Bank.

A Parent Bank who has already set up an IBU in an IFSC, may be permitted to convert the same to an IBC, with the prior approval of the Authority.

Procedure for establishment of a banking unit[8]:

1. A Parent bank desirous of establishing a banking units shall submit an application to the Authority in the form and manner as specified by the Authority.

2. The applicant shall satisfy the following requirements for grant of licence by the Authority:

• Parent Bank shall provide a minimum capital of USD 20 million or such other amount as may bespecified by the Authority, or equivalent in any foreign currency to its Banking Unit, for the purposes ofstarting operations, that shall be maintained on unimpaired basis, at all times;
• Parent Bank shall obtain a No Objection Letter from its home regulator regarding setting up of them Banking Unit in the International Financial Services Centre;
• Parent Bank shall submit an undertaking that it shall provide liquidity to its BU whenever needed for the operations of the BU.

3. As IFSC is a Gift City SEZ Area, permission of establishment of Banking Unit will also be required from Commissioner, Kandla SEZ.

4. Banking Units may undertake any or all of the activities mentioned under clause (e) of sub-section (1) of Section 3 of the Act or Section 6 of the Banking Regulation Act, 1949, except those expressly prohibited by the Authority, subject to compliance with such terms and conditions or guidelines as may be specified by the Authority, including matters relating to design, execution and risk management[1]. Thus a Banking Unit set up in Gift City, can undertake the following activities:

• Commercial Banking: – External Commercial Borrowing, trade finance, factoring services, guarantee and indemnity business, equipment leasing and hire purchase etc.
• Capital Market Business: – Becoming a trading member of a stock exchanges for specified products, issue of perpetual debt instruments, undertake money market operations, investment in Indian securities under FPI route etc.
• Private Banking: – Offering of structured deposits, distributor of mutual fund units, insurance, and other financial products.
• Financial Services: – Such as underwriting, custodial securities, trustee and financially services, retailing of government securities, etc.

5. A Banking Unit shall be permitted to function as a banker to an issue in an IFSC, without any additional registration requirement, subject to compliance with the regulatory provisions that may be specified by the Authority from time to time[10].

6. Referral services is also a permitted activity under Banking Regulations. “Referral services” means an activity in which a BU, pursuant to an arrangement with a financial product or financial service provider, refers its clients or the clients of its Parent Bank as potential customers (or “leads”), to such financial product or financial service provider for providing them the financial product(s) or financial service(s).

7. A banking unit will be required to comply with prudential regulatory requirements as may be prescribed by the Authority, from time to time[11].

8. Parent bank may establish a Global Administrative Office in IFSC for(i) managing, administering, or coordinating operations of the Parent Bank or any of the Group entities either in IFSC or outside IFSC;(ii) providing support services to Parent Bank or any of the Group entities for execution of the permitted activities either in IFSC or outside IFSC[12]. “Group entities” here shall mean any holding company, subsidiaries, branches or any other entity, in whatever legal form, through which the Parent bank undertakes its operations or permitted activities.

9. Parent bank may establish a Representative Office[13] or “RO” in for (i) marketing of financial products; (ii) collection of data; (iii) carrying out of outreach operations.

ESTABLISHMENT OF FINANCE COMPANY/ FINANCE UNIT IN IFSC

IFSCA has issued International Financial Services Centres Authority (Finance Company) Regulations, 2021 (“Finance Company Regulations”) for establishment of a Finance Company  or Finance Unit in IFSC.

As per Finance Company Regulations:

1. A Finance Company[14] can be set up either as a subsidiary or a joint venture, or as a newly incorporated company under the Companies Act, 2013 provided it does not accept public deposit from resident and non-resident, and it is not registered with the Authority as a Banking Unit.
2. An incorporated entity in its home jurisdiction can set up a Finance Unit[15] in IFSC.
3. An entity can commence business as a Finance Company or Finance Unit in IFSC only after obtaining a certificate of registration from the Authority[16]. If Finance Company or Finance Unit is regulated by a financial sector regulator in its home jurisdiction then a No-Objection Certificate from the home regulator for setting up a Finance Unit in the IFSCs, wherever applicable, is also required to be taken.
4. A Finance Company or Finance Unit will have and maintain minimum owned fund, depending on the category of activity(ies) or a combination of activities and shall be required to comply with prudential regulatory requirements as may be prescribed by the Authority, from time to time[17].
5. Permitted Core activities and Non-Core Permitted Activities for a Finance Company or Finance Units shall be as under[18]:

• Permitted Core activities such as lending in the form of loans, commitments and guarantees, credit enhancement, securitisation, financial lease, and sale and purchase of portfolios; Factoring and forfaiting of receivables; Undertaking investments, including subscribing, acquiring, holding, or transferring securities; Buy or Sell derivatives; Global/Regional Corporate Treasury Centres; etc.
• Non-core Activities such as Merchant Banking; Registrar and Share Transfer Agent; Trusteeship Services; Investment Advisory Services; Portfolio Management Services; etc.

ESTABLISHMENT OF CAPITAL MARKET INTERMEDIARIES IN IFSC

IFSCA has issued International Financial Services Centres Authority (Capital Market Intermediaries) Regulations, 2021 (“Capital Market Regulations”)  paving way for the Broker dealers, Clearing members; Depository participants; Investment bankers; Portfolio managers; Investment advisers, Custodians etc. (“Capital Market Intermediary”) to establish their offices in IFSC.

A Capital Market Intermediary shall obtain a certificate of registration from the Authority prior to commencement of operations in an IFSC[19] and  shall abide by the Code of Conduct as specified in Schedule III of Capital Market Regulations[20]. Specific obligations and responsibilities of Capital Market Intermediaries have been prescribed in Chapter IV of the Regulations.

A registered capital market intermediary incorporated in IFSC (and not entities incorporated outside IFSC and operating in an IFSC in the form of branch) may undertake cross boarder activities subject to certain conditions as may be stipulated[21].

INSURANCE SERVICES IN IFSC

IFSCA has issued IFSCA (Registration of Insurance Business) Regulations, 2021 (“Insurance Regulations”) which applies apply to :-

1. Indian insurer or re-insurer
2. Foreign insurer or re-insurer
3. Branch office of a foreign insurer
4. A public company or a wholly owned subsidiary of an insurer or re-insurer
5. A body corporate incorporated under the laws of any country outside India not being in the nature of a private company.

No person can establish an International Financial Service Centre Insurance Office (“IIO”) and commence the business of insurance or re-insurance in an IFSC without obtaining registration from the Authority in accordance with these Regulations[22].

An Indian insurer or re-insurer, desirous of setting up a placeof business in an unincorporated form in an IFSC, shall be duly registered with IRDAI for undertaking the business of insurance or re-insurance in India and  has been granted a No Objection Certificate by the IRDAI toset up place of business in an IFSC. Similarly a foreign insurer or foreign re-insurer, desirous of setting up branch in an unincorporated form in an IFSC should be registered or licensed for transacting insurance or re-insurance business, or both, in its home country or country of its incorporation or domicile and has been granted No Objection Certificate by the regulatory or supervisory authority of its home country or country of its incorporation or domicile, to set up an office in an IFSC.

The Board of the Applicant shall undertake to comply with the assigned capital, solvency, net owned funds and other requirements as may be specified by the Authority from time to time[23].

Permitted Activities for IIO [24]:

An IIO registered with the Authority may carry any of the following class of businesses
as may be permitted by the Authority subject to such conditions as may be specified:-

(a) Life Insurance Business;

(b) General Insurance Business;

(c) Health Insurance Business; or

(d) Re-insurance Business.

In case of re-insurance business, the IIO may accept re-insurance business from the cedents based in the IFSC, in relation to risk emanating from other SEZs and re-Insurance business from outside India or may accept re-insurance business from the insurers operating in DTA in accordance with the order of preference for cession specified in the IRDAI (Re-insurance) Regulations, 2018[25].

IIO shall be required to comply with basic regulatory and governance requirements, such as net owned funds, paid up capital, solvency requirements, reporting etc.,  as mentioned in Chapter V of the Insurance Regulations.

ESTABLISHMENT OF GLOBAL IN HOUSE CENTRE IN IFSC

Global In-House Centre i.e. a unit set up in the IFSC for providing support services, directly or indirectly, to entities within its financial services group, including but not limited to banks and non-banking financial companies, financial intermediaries, investment banks, insurance companies, re-insurance companies, actuaries, brokerage firms, funds, stock exchanges, clearing houses, depositories, and custodians, for carrying out a financial service in respect of a financial product can be established as per the International Financial Services Centres Authority (Global In-House Centres) Regulations, 2020 (“Global House Regulations”), issued by IFSCA for registration of  Global In-House Centre  and other connected matters.

GIHC shall exclusively cater to its financial services group[26], i.e. any entity which is regulated by a financial services regulator or any other competent body regulating financial services activities in its home jurisdiction and include its holding, subsidiary or associate companies, branch, or subsidiary of a holding company to which it is also a subsidiary[27].

A Global In-House Centre, shall provide services to non-resident entities only and can deal in freely convertible foreign currency only[28].

INCENTIVES AND EXEMPTIONS TO UNITS IN IFSC[29]

A. DIRECT TAX INCENTIVES

Under Income Tax Act 1961, following direct tax incentives have been given to units established in IFSC:

• 100% tax exemption for 10 consecutive years out of 15 years
• IFSC Unit has the flexibility to select any 10 years out of 15 years block
• MAT / AMT @ 9% of book profits applies to Company / others setup as a unit in IFSC – MAT not applicable to companies in IFSC opting for new tax regime
• Dividend paid to shareholders of company in IFSC
• From 01 April 2020, dividend income distributed by Company in IFSC to be taxed in the hands of the shareholder.

B. INDIRECT TAX INCENTIVES

Indirect tax benefits available to units in IFSC are as follows:

-No GST on services

• received by unit in IFSC
• provided to IFSC / SEZ units, Offshore clients

-GST applicable on services provided to Domestic Tariff Area

C. EXEMPTIONS AND RELAXATIONS FROM MINISTRY OF CORPORATE AFFAIRS

The Ministry of Corporate Affairs issued two notifications on 04.01.2017 granting certain exemptions and relaxations from certain provisions of the Companies Act, 2013 to companies located in IFSC.  For example a Public Company, established in Gift City shall have following exceptions, modifications, or adaptations of various provisions of the Companies Act 2013:

• Company, which is a subsidiary of a Foreign Company, the financial year of the subsidiary may be the same as a financial year of its holding company, and approval of tribunal shall not be required.
• A specified IFSC Public Company shall be formed only as a company limited by shares. Thus formation of a company limited by guarantee is not permitted.
• A specified IFSC Public Company shall have its registered office at the International Financial Service Centre located in the approved Multi Services Special Economic Zone set up under the Special Economic Zones Act 2005 where it is licensed to operate, at all times. Further, it can change its registered office from one place to another within International Financial Service Centre only with the authority of resolution passed by the Board of Directors. However, the registered office cannot be shifted outside the International Financial Service Centre.
• Section 43 relating to “Kinds of Share Capitals” and Section 47 relating to “Voting Rights” shall not apply where Memorandum or Article of Association of such company provides for it.
• The requirement of having at least One Woman Director, under section 149 (1) is not applicable.
• Section 177 relating to Constitution of Audit Committee. and section 178 relating to Constitution of Nomination and Remuneration Committee and Stakeholders Relationship Committee shall not apply.
• Various resolutions which were otherwise required to be passed only in the meeting of the Board of Directors under sections 179 (3), may be passed at the meeting of the board or through resolutions passed by circulation.
• Section 186 (1) relating to Loan and Investment by a Company shall not apply.
• Section 186 (2),(3) & (5) shall not apply if a company passes a resolution either at a meeting of the board or by circulation.
• Section 196 relating Appointment Managing Director or Manager and Section 197 relating to overall Maximum Managerial Remuneration, shall not apply.

PUBLIC ISSUE BY UNITS IN IFSC

To facilitate initial public offer of specified securities by an unlisted entity, a follow-on public offer, rights issue, preferential issues  of specified securities by a Listed Entity etc., IFSCA has issued  International Financial Services Centres Authority (Listing) Regulations, 2024 (“Listing Regulations”).

Further in August 28, 2024, in exercise of the powers conferred by section 30 of the Securities Contracts (Regulation) Act, 1956, the Central Government amended the Securities Contracts (Regulation) Rules, 1957 to bring the IFSC and IFSCA within the purview of the Securities Contracts (Regulation) Rules, 1957  and inserted the following explanation in rule 19A, after the explanation to sub-rule (6), namely:

“Explanation. – For the purposes of this rule, the provisions of sub-rules (1) to (5) shall apply to, or in relation to, a company listed on a recognised stock exchange in an International Financial Service Centre, subject to the modification that references to “twenty-five per cent.” in those sub-rules shall be construed as references to “ten per cent.” and the first proviso to sub-rule (5) shall not apply to such company.”

Thus the minimum float requirements stand reduced from 25% to 10% of the share capital for listing in international stock exchanges at GIFT City.

As per Listing Regulations, an issuer shall be eligible to list its securities or any other permitted  financial product on a recognised stock exchange subject to the following conditions[30]:

• the issuer is incorporated or set up either in an IFSC or in India, or in a Foreign Jurisdiction inaccordance with the relevant laws of its home jurisdiction;
• the issuer operates in conformity with its constitution; and
• the issuer is eligible to issue such securities or other financial products, that are proposed to be listedon the recognised stock exchange, in conformity with the relevant laws of its home jurisdiction.

A public Indian company proposing to list its equity shares on a recognised stock exchange shall be required to meet the eligibility criteria provided under Schedule XI of the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 and the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024.

The securities shall be denominated in a specified foreign currency for listing and trading[31].

A supranational or a multilateral or a statutory institution;  a municipality or any similar body; and an entity which offers or proposes to offer sovereign debt securities, shall also be entitled to list their debt securities.

The securities and other permitted financial products listed or proposed to be listed on a recognised stock exchange shall be freely transferable and held in dematerialised form. The debt securities and such other financial products may also be held with an international central securities depository.

GIFT CITY- DTA

The entities who have established their offices in Gift SEZ Area cannot strive of their own and may need the support and services of other experts e.g. experts from Information and Technology etc. Thus to encourage such entities to establish their offices in Domestic Tariff Area, the Government of Gujarat has come out with its Information and Technology Policy, 2022-27 which provides for various incentives to IT and ITES units such as[32] :-

• All eligible IT/ITeS units shall be entitled to Capex support of varied amount depending upon their category to be determined as per the policy.
• Reimbursement of contribution made by employer under Employees Provident Fund.
• Interest subsidy on loans.
• Reimbursement of electricity charges paid to Government of Gujarat for a period of five years etc.

Footnotes:

[1] Source: https://api.giftgujarat.in/public/tool-guiedes-for-setting/DoingBusinessatIFSC.pdf

[2] Section 2(q) read with Section 18 of the Special Economic Zone Act 2005

[3] Section 4 of IFSC Act 2019

[4] Section 13 of IFSC Act 2019

[5] Section 33 of IFSC Act 2019

[6] Regulation 3 of IFSC Regulations

[7] Regulation 2(f) of Banking Regulations

[8] Regulation 3 of Banking Regulations

[9] Regulation 13 of Banking Regulations

[10] Regulation 3(3) of IFSC (Capital Market Intermediaries) Regulations 2021

[11] Chapter III of Banking Regulations

[12] Section 3(9) of Banking Regulations

[13] Section 3(9) of Banking Regulations

[14] Regulation 2(e) of Finance Company Regulations

[15] Regulation 2(f) of Finance Company Regulations

[16] Regulation 3 of Finance Company Regulations

[17] Chapter II of Finance Company Regulations

[18] Regulation 5 of Finance Company Regulations

[19] Regulation 3 of Capital Market Regulations

[20] Regulation 13 of Capital Market Regulations

[21] Regulation 63 of Capital Market Regulations

[22] Regulation 4 of Insurance Regulations

[23] Regulation 5 of Insurance Regulations

[24] Regulation 10 of Insurance Regulations

[25] Regulation 15 of Insurance Regulations

[26] Regulation 3 of Global House Regulations

[27] Regulation 2(f) of Global House Regulations

[28] Regulation 6 of Global House Regulations

[29] Source: https://accreditation.giftgujarat.in/tax-benifits

[30] Regulation 6 of Listing Regulations

[31] Regulation 7 of Listing Regulations

[32] Policy can be accessed at: https://giftsez.com/documents/IT-POLICY-FInal-2022.pdf

 

This article has been authored by Navneet Gupta, Partner at SNG