This article has been written by Shaunak Choudhury pursuing the Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from LawSikho. This article has been edited by Ruchika Mohapatra (Associate, Lawsikho) and Dipshi Swara (Senior Associate, Lawsikho). 

Introduction

International Financial Services Centres are established through the Special Economic Zones Act of 2005 (Section 18), simply defined as IFSCs that have been approved by the central government. So far there is only one fully established IFSC that exists on Indian soil – Gujarat International Finance Tec-City also known as GIFT City, that has been looking like a success. Units inside IFSCs are treated as persons resident outside India working with foreign currency.

Before the existence of the IFSC Authority through the Act of the same name in 2019, the units within an IFSC would be regulated by the corresponding Indian regulators; Insurance Regulatory Development Authority of India, Reserve Bank of India, Securities Exchange Board of India, and Pension Fund Regulatory and Development Authority. After a notification from the Ministry of Finance (Department of Economic Affairs) dated 26^th September 2020 was issued, the full powers of the IFSCA commenced from 30^th October 2020, giving regulatory powers to the authority.

The three major financial sub-sectors that can be established in IFSCs are insurance, banking, and capital markets entities. These three sub-sectors thus encompass in them; Indian banks authorised to deal in foreign currency, foreign banks, Indian insurer, Indian reinsurer, Indian broker, Foreign insurer, foreign Reinsurer, Stock Exchanges / Commodity Exchanges, Clearing Corporation, Depository, Stock Broker, Alternate Investment Fund, Mutual Fund, Investment Adviser, and Portfolio Manager. 

Powers of the IFSCA and other regulatory bodies

Before we can get to the primary aspect of this article there is an issue that needs to be addressed. Although the IFSCA Act, 2019 changes the landscape of regulation for GIFT City and future IFSCs, there are some legal vagaries that have not been fully sorted. The problem pertains to the powers of the IFSCA and other regulatory bodies. 

Where the Special Economic Zones, 2005 Act in Section 18(2) gives powers to the “Reserve Bank, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and such other concerned authorities”, the IFSCA Act, 2019 takes away those powers through its second schedule (Section 33) which amends various laws to give exclusive powers to the IFSCA to regulate financial institutions, financial products, and financial services within the IFSC zone. For example, the amendment to the SEBI Act restricts the powers of SEBI: “a) shall not extend to an International Financial Services Centre set up under sub-section (1) of section 18 of the Special Economic Zones Act, 2005 (28 of 2005); b) shall be exercisable by the International Financial Services Centres Authority established under sub-section (1) of section 4 of the International Financial Services Centres Authority Act, 2019”. Thusly there is a contradiction between Section 33 of the IFSCA Act, 2019 and Section 18(2) of the Special Economic Zones Act, 2005. Although Section 13 of the IFSCA Act mentions certain exceptions on the powers of the IFSCA and areas that other regulators would continue to control, there isn’t clarity on exactly what the IFSCA can or cannot do, and what other regulators can and cannot do. This will be apparent when discussing the establishment of entities in Gift City because we shall see involvement of SEBI.

The regulations of establishing these companies or limited liability partnerships are very extensive and for a more detailed understanding of the regulatory regime in GIFT City and future IFSCs, it would be prudent to look into specific financial services entities, those being investment advisory companies or firm and portfolio managers. 

Investment advisors

Investment advisors as defined by the SEBI (Investment Advisors) Regulations 2013 (Clause 2(m)) “means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called”. Investment advice “means advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning: Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations”.

Role of intermediaries in IFSC & related regulations  

Chapter III of The Securities Exchange Board of the India (International Financial Services Centres) Guidelines 2015 clarifies the position of intermediaries in IFSCs. The definition of an intermediary as given clause 2(g) specifically includes a stockbroker, merchant banker, banker to an issue, trustee of trust deed, registrars to an issue, share transfer agent, underwriter, investment adviser, portfolio manager, depository participant, custodian of securities, foreign portfolio investor, and a credit rating agency. Thus making investment advisors, “intermediaries’ ‘ in the eyes of SEBI.

The guideline restricts the nature of clients that intermediaries in IFSCs may cater to; person not a resident of India, a non-resident Indian, a financial institution resident in India who is eligible under FEMA to invest funds offshore, and a person resident in India eligible under FEMA to invest funds offshore. 

SEBI has subsequently amended the guidelines as per the market norms through discussions and consultations it’s had with stakeholders. It has issued several amendments and clarifications on the guidelines, but this article focuses on the ones relevant to the sub-group of intermediaries in IFSCs. The first of these relevant amendments was issued on 27^th July 2017 and it changed the requirements for setting up an office inside an IFSC. Previously the guidelines suggested that anyone that was interested to set up an intermediary business in the IFSC would have to form a new company to do so (clause 8). The July 2017 amendment then changed that guideline to do two things. First was to allow SEBI registered intermediaries along with their international associates to provide such services without having to form a new company for the IFSC (clause 8(1)); and second, was to differentiate between trading members and clearing members, and other intermediaries (clause 8(2)). 

A subsequent circular dated 17^th October 2017 amended clause 8(2). Where the previous iteration said that trading and clearing members “shall” form a company for functioning in IFSCs, the new provision says that they “may” and includes both Indian and Foreign trading and clearing members. A 27^th February 2020 circular amended clause 8(1) to add certain exceptions for the prior permission from SEBI. If the financial service is being rendered to institutional investors, prior permission is not required. If the intermediary is not registered with SEBI but is providing service only to institutional investors, prior approval will not be required in case the intermediary is recognized by a foreign jurisdiction. 

 A circular dated 21^st August 2020 added clause 8(3) to allow intermediaries, either Indian or of foreign jurisdiction to provide financial services as long as they comply with the regulatory framework for those financial services. 

Things to keep in mind while  setting up investment advisory entity in IFSC

In order to properly establish investment advisory entities in IFSCs, SEBI issued a circular titled “Operating Guidelines for Investment  Advisors in International Financial Services Centre ” dated 9^th January 2020. The operating guideline itself is not too comprehensive as it heavily depends upon (clause 1) the regulations set up by the SEBI (Investment Advisors) Regulations 2013 which is the primary regulation for investment advisors for India. Thus, a certificate of registration is to be applied through submitting Form A (Investment Advisers Regulations) along with a fee of USD 750 for application and USD 7500 for registration (the same for renewal every 5 years). Qualifications and experience that the applicant needs to have are similar to the Investment Advisers Regulation, i.e., any one of the professional qualifications listed along with 5 years of experience in the securities markets. Certification from NISM or a recognised organisation is mandatory for giving advice about Indian securities markets; whereas for advising on foreign securities markets, certification from any corresponding foreign organisation which is recognised by the Financial Market Regulator (such as the SEC in the United States) is acceptable. 

The net worth requirement was set as USD 1.5 million for the Investment advisory but the same was brought down by the circular dated 28^th February 2020 to USD 700,000. In the circular dated 28^th September 2020, SEBI clarified that it is not necessary to form a new company or LLP for the investment advisor functioning within the bounds of an IFSC if one already exists. 

Thus, if one is to look into the laws pertaining to investment advisors in IFSCs the following would the order of examination would be – 

1. The Securities Exchange Board of the India (International Financial Services Centres) Guidelines 2015.
2. Circular Dated 27^th July 2017 (SEBI/HO/CIR/P/2017/85) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
3. Circular Dated 17^th October 2017 (SEBI/HO/MRD/DSA/CIR/P/2017/117) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
4. Circular Dated 27^th February 2020 (SEBI/HO/MRD1/DSAP/CIR/P/2020/30) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
5. Circular Dated 21^st August 2020 (SEBI/HO/MRD1/DSAP/CIR/P/2020/155) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
6. SEBI (Investment Advisors) Regulations 2013.
7. Circular dated 23^rd September 2020 (SEBI/HO/IMD/DF1/CIR/P/2020/182) Guidelines for Investments Advisors.
8. Circular dated 9^th January 2020 (SEBI/HO/IMD/DF1/CIR/P/2020/04) Operating Guidelines for Investment Advisors in International Financial Services Centre.
9. Circular dated 28^th February 2020 (SEBI/HO/IMD/DF1/CIR/P/2020/31) Operating Guidelines for Investment Advisers in International Financial Services Centre (IFSC) – Clarifications
10. Circular dated 28^th September 2020 (SEBI/HO/IMD/DF1/CIR/P/2020/185) Operating Guidelines for Investment Advisers in International Financial Services Centre (IFSC) – Amendments

Portfolio managers 

Portfolio managers as per the SEBI IFSC 2015 Guidelines are considered as intermediaries (Clause 2(g)), and have also been recognised as such in the SEBI Act 1991 (Section 11(2)(b)).

As per the 16^th January 2020 SEBI (Portfolio Managers) Regulations 2020, a ““portfolio manager” means a body corporate, which pursuant to a contract with a client, advises or directs or undertakes on behalf of the client (whether as a discretionary portfolio manager or otherwise) the management or administration of a portfolio of securities or goods or funds of the client, as the case may be: Provided that the Portfolio Manager may deal in goods received in delivery against physical settlement of commodity derivatives”

The 2015 Guideline in fact has certain specific provisions for portfolio managers in Clause 9(4). It allows portfolio managers to invest only in certain kinds of securities; those listed in the IFSC, those issued by companies incorporated in the IFSC, and those issued by companies belonging to foreign jurisdiction. A circular from SEBI dated 23^rd May 2017 in fact amends the initial Clause 9(4) in order to add a crucial category that perhaps should have been added in the first place – companies incorporated in India (outside IFSC). This amendment is applicable on portfolio managers along with the amendments to the 2015 Guidelines mentioned previously in the section pertaining to investment advisors. 

Key operating guidelines for Portfolio managers

There are Operating Guidelines created for Portfolio Managers functioning in IFSCs. And similar to the operating guidelines for investment advisors in IFSCs, these operating guidelines must put the onus on the SEBI (Portfolio Managers) Regulations 2020 for the establishment of portfolio managers (clause 1(a)). 

The Operating Guidelines suggest that registration would have to be done as per Chapter II of the SEBI Portfolio Managers Regulations 2020 along with an application fee of USD 1500 and registration fee of USD 15000 with USD 7500 for a renewal every three years. The renewal amount was increased to USD 10000 by the IFSCA through a circular dated 15^th April 2021. 

The minimum net worth for setting up a portfolio management firm or company in an IFSC has been set at USD 750,000. If the PM is a branch of a parent entity then the requirement would have to be met by the parent company, and if the PM is a subsidiary it would have to be met by the PM subsidiary itself, if not then the parent entity’s net worth will be looked into. A PM entity in an IFSC shall only take clients as per Clause 9(3) of the 2015 Guidelines, over and above that the minimum value of funds or securities needs to be USD 70,000 from the clients. The funds of the clients shall be kept in separate accounts in IFSC Banking Units as prescribed by the RBI. 

Thus, if someone wished to look into establishing and operating a portfolio management entity in Gift City or any other future IFSC created in India, they would have to go through the following regulations;

1. The Securities Exchange Board of the India (International Financial Services Centres) Guidelines 2015.
2. Circular Dated 23^rd May 2017 (SEBI/HO/MRD/ DSA/CIR/P/2017/45) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments. 
3. Circular Dated 27^th July 2017 (SEBI/HO/CIR/P/2017/85) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
4. Circular Dated 17^th October 2017 (SEBI/HO/MRD/DSA/CIR/P/2017/117) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
5. Circular Dated 27^th February 2020 (SEBI/HO/MRD1/DSAP/CIR/P/2020/30) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
6. Circular Dated 21^st August 2020 (SEBI/HO/MRD1/DSAP/CIR/P/2020/155) Securities and Exchange Board of India (International Financial Services Centres) Guidelines, 2015 – Amendments.
7. SEBI (Portfolio Managers) Regulations 2020 (along with amendments dated 16^th March 2021 and 26^th August 2021).
8. Circular dated 9^th September 2020 (SEBI/HO/IMD/DF1/CIR/P/2020/169) Operating Guidelines for Portfolio Managers in International Financial Services Centre (IFSC).
9. Circular dated 15^th April 2021 (F. No. 294/IFSC/Fee Structure for IAs and PMS/2021-22) Fee structure for Investment Advisers and Portfolio Managers in IFSC.

Conclusion

The guidelines for both IAs and PMs in IFSCs are rather exhaustive and are arranged in a convoluted manner. Even though the IFSCA is in charge of these units, registration, investigation, and penalties are the responsibility of SEBI. The amendments to the regulator acts in the IFSCA Act are rather broad and do not accurately represent the current status of control in Gift City. With a total of five regulators and two on each unit depending on their business, it is bound to create issues not only for the business but also between the regulators. Clarity on this matter would greatly benefit Gift City. Either the IFSCA takes charge of all the responsibilities over the businesses in Gift City, or its role is relegated to a cosmetic one. 

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