Restrictions Eased for Companies in International Financial Service Centers in India

January 20, 2017 Posted by India Briefing Reading Time: 5 minutes

By Pritesh Samuel & Koushan Das

In a move that will boost foreign investment and business in the Indian economy, the Modi government recently unveiled various incentives for private companies that want to set up in international financial service centers (IFSC) in the country. These include granting such firms exemptions from several norms in the Companies Act, 2013. IFSCs serve customers outside the domestic economy and handle cross-border financial products and services. They can be set up in special economic zones (SEZs) to avail benefits and inducements that are applied to such zones.

Key exemptions

On January 4, the Ministry of Corporate Affairs (MCA) allowed 39 modifications/exemptions for private companies in IFSCs from several clauses in the Companies Act of 2013. Highlights of the exemptions are:

Private companies can make placement offers and will not be restricted by previous offers that haven’t been completed or withdrawn.
An extract from the annual return of the company will not have to be included in the board’s report.
Companies will not be required to comply with the secretarial standard as per the Institute of Company Secretaries of India.
Such firms can make investments through more than two investment companies.

The development will particularly help companies that are set up in the Gujarat International Finance Tec-City (GIFT City), which was inaugurated in April 2015 as India’s first and only functioning IFSC. The government had earlier announced various tax exemptions – for example, transaction taxes and stamp duty won’t be imposed and IFSC firms will get a tax holiday.

IFSC regulations

IFSCs have to be licensed under only one of the three central regulatory bodies, which are – India’s Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory Authority of India (IRDA). In addition, some rules that have been relaxed for IFSCs are:

IFSC companies are only limited by shares.
Such companies have to add International Financial Service Centers or IFSC in their names.
Relaxed time for filing documents – the time given for submitting verification for registered addresses to the Registrar of Companies (ROC) for IFSC companies is sixty days rather than 30; the filing of resolution and agreement with ROC can be done in sixty days.
An officer or any other person authorized by the company can authenticate documents and other contracts for IFSC companies. Under the Companies Act, only an officer of the company can do so for other companies.

India is a large purchaser of International Financial Services (IFS) from the rest of the world, and loses significant revenue from the trading of the Indian rupee. In trading in rupee derivatives alone, IFSCs are expected to increase the revenue of the country by capturing approximately US$19 million (Rs 1,334 crore) per day or US$29 billion (Rs 2 lakh crore) per year worth of trading that presently takes place outside of India. The GIFT IFSC has already crossed business transactions worth over US$1.5 billion in a year. The GIFT City area currently has around 3,500 people working and expects this number to reach 30,000 by 2018. Once it is fully operational, around 500,000 direct and indirect jobs are expected to be created.

All transactions in the Gujarat IFSC are required to be carried out in foreign currency; however, administrative and statutory expenses can be done in Indian rupees. Banking, insurance, and capital market sectors can be set up in the IFSC. Domestic and international banks that have branches in India can set up International Banking Units (IBU) in the IFSC and will be exempt from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements. They must have a minimum capital of US$20 million.

Takeaways

The government is keen to make IFSCs succeed and some norms may be overlooked as more IFSCs are planned in the country. The RBI has also suggested a unified regulator for IFSCs, particularly to deal with dispute resolution and other issues. Nevertheless, the easing of restrictions at IFSCs will help companies do business and set up in such IFSCs without major hitches. The reforms are also expected to incentivize global companies to enter. Lastly, the government can use such IFSCs as a sandbox to pass reforms before rolling them out to the rest of the country.

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