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This article is written by Anusha Misra, from NALSAR University of Law. This article dwells on the International Finance Centre Authority Act, 2019.

Introduction

The International Financial Services Centres Authority Bill was brought before the Lok Sabha by  Nirmala Sitharaman, the Minister of Finance on 25th November, 2019. The Bill provides for the establishment of an authority to develop and regulate the financial services market in the international financial services centres set up in Special Economic Zones in India. The Bill was approved by the President by his assent on 19th December, 2019.

Purpose and objective of the Act 

The International Financial Services Centre Act aims to regulate the functioning of financial institutions in India by managing the financial service market. It seeks to bring about uniformity and standardization by establishing a single authority (International Financial Services Centres Authority) to overlook the financial service market.

What is an international financial services centre

Before looking at what the international financial services centre’s authority is and its functions it becomes important to look into what an international financial service centre is.

A financial centre that proffers to customers outside the domestic economy’s jurisdiction is known as an international financial service centre. As an international financial service centre, that deals with the flow of financial products, financial services, and finance across borders it is also known as an offshore financial centre. 

An international finance service centre is hence a jurisdiction that provides financial services of world-class calibre to residents and non-residents. It does so based on the regulations imposed by a currency that is not a domestic currency. New York is an example of an international financial services centre. 

A panel headed by former World Bank economist Percy Mistry submitted a report based on which Mumbai was to be an International Financial Service Centre in 2007. However, owing to the global financial crisis of 2008, many countries including India were reluctant towards opening their financial sectors rapidly. International Financial Service Centres in India are to be set up after the approval from the central government as a Special Economic Zone. In India, the International Financial Service Centre has been defined in SEZ Act, 2005. According to the act:

The Central Government may approve the setting up of an international financial service centre in a Special Economic Zone and may prescribe the requirements for setting up and operating such a centre. The Central Government shall approve only one international financial services centre in a Special Economic Zone.

Advantages of international financial services centres 

The advantages of an international financial service centre are as follows:

  1. They attract investors from overseas by bringing financial services outside the jurisdiction of its domestic economy by financial institutions located overseas.
  2. International financial service centres are useful for global tax management, fundraising, and corporate treasury regulation. 
  3. An international financial services centre establishes the rerouting of financial services and transactions outside the domestic economy’s purview to the domestic economy. 
  4. It can also provide access to global financial markets for corporations located within the domestic economy.
  5. Entities that are set up within an international financial services centre can avail many tax benefits. 
  6. International financial services centres also help in the creation of fintech hubs. 

Services an international financial services centre provides

An international financial services centre provides the following services:

  1. Fundraising services for entities like governments, corporations, and even individuals.
  2. Management of wealth. 
  3. Management of assets and global portfolio diversification. 
  4. Global tax management and cross-border tax liability optimization.
  5. Providing a business opportunity for financial intermediaries, law firms, and accountants.
  6. Risk management operations.
  7. Global and regional corporate treasury management operations.
  8. Mergers and acquisitions between trans-national corporations.
  9. It serves as a facilitation hub to improve export services.

What does an international financial services centre require?

An international financial services centre requires the following:

  1. Rational legal framework for regulations.
  2. A sustainable local economy.
  3. A political network that is stable.
  4. Well-developed infrastructure. 
  5. Location of strategic importance.
  6. Good quality of life.

How does an international financial services centre company differ from a normal business structure?

  1. International financial services centre companies can only be set up if shares are restricted.
  2. Each company shall have an ‘international financial services centre’ in its name.
  3. The international financial services centre’s object clause must state that ‘they will carry out the objects as necessary and specified in SEZ activities and compliance with SEZ Laws.’
  4. The international financial services centre’s registered office must be located in a Special Economic Zone.

What kind of organizations should set up International Financial Services Centre offices

All entities controlled by RBI or SEBI or IRDA are eligible to create offices in the region, such as banks, insurance companies, brokerage firms, investment advisors, transfer agency services, etc.

Regulation of international financial services centres

The Companies Act, 2013, extends to both IFSC private and public corporations. IFSC securities issuers are expected to file a statement of accounts under the Companies Act, 2013. Policy, however, has relaxed some provisions of the Act and other regulations to encourage the involvement of organizations in IFSC as it applies to financial services, three regulatory bodies, i.e, India’s Reserve Bank, India’s Stock Exchange Commission, and India’s Insurance Regulator.

Budget 2019 has introduced several IFSC changes that will promote the regulatory system and boost business-friendliness. International Financial Services Center Authority Act, 2019 IFSCs’ fluid existence makes it necessary to have a high degree of inter-regulatory coordination. This Bill seeks to introduce a single authority to control all IFSC financial services.

International Financial Services Centres Authority

The International Financial Services Centre Authority (IFSCA) was established on April 27, 2020, by invoking the international financial services centres Authority Act, 2019. The headquarters of the international financial services centre is located in Gandhinagar, Gujarat, this led to a lot of controversies as Mumbai was deemed to be the headquarters for the International Financial Services Authority. The main objective of the international financial services centre is to establish a sturdy global connection and focus on the needs of the Indian economy while functioning as an international financial institution. 

Members and term of members 

Section 5 of the International Financial Services Centre Act lays down the composition of the authority. 

The authority is headed by the chairperson. The authority comprises one member each nominated by the Reserve Bank of India, the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority, and the Pension Fund Regulatory and Development Authority. In addition to that, 2 members from the Ministry of Finance will be appointed by the central government and 2 members will be appointed by the Central Government on the recommendation of a Selection Committee. 

Section 6 of the Act lays down the terms of the members of the authority. The Chairperson’s tenure is for 3 years and is eligible for reappointment. However, if a person is 65 years and older they will be barred from being reappointed as chairperson. If the person is 62 years and older they will be barred from being appointed as a whole-time member. 

Functions 

Section 12 of the Act lays down the functions of the international financial services centre.

The functions of the authority are as follows:

  1. The Authority shall develop and regulate the financial products, financial services, and financial institutions in the international financial services centres.
  2. In addition to that, the authority shall:

-Regulate the financial products, financial services, and financial institutions in an international financial services centre which have been permitted, before the commencement of this Act, by any regulator for any international financial services centre;

-Regulate such other financial products, financial services, or financial institutions in the international financial services centres as may be notified by the Central Government from time to time;

-Recommend to the Central Government such other financial products, financial services, and financial institutions which may be permitted in an international financial services centre  by the Central Government and;

-Perform the functions as specified. 

3. In addition to regulation of financial services and products, the International Financial Service Centre Authority can also refer the central government to other financial products.

Powers 

Section 13 of the Act lays down the powers of the international financial services centre. The powers conferred on the international financial services center are as follows:

  1. The powers exercised by regulatory bodies such as the Reserve Bank of India are exercised by the international financial services center about the regulation of financial services, institutions, and products. 
  2. Fines, Penalties, fees, and settlement amounts are to be collected by the Authority in foreign currency equivalent to the penalty imposed.
  3. The authority also has the power to specify how the Authority will carry out its functions to fulfill the objective of the Act.

International Financial Services Center Authority Fund

Section 15 of the Act seeks to establish a fund known as the International Financial Services Centers Authority Fund. 

The following shall be ascribed to the Fund:

  1. Fees, grants, and charges received under this Act by the Authority.
  2. All sums received from various sources as decided by the Central Government.

The fund shall be used for the following:

  • Allowances, salaries, and remuneration of the members, officers of the authority and any other expenses incurred by the authority while discharging its functions under this Act.

Performance Review Committee

Section 17 of the Act mandates the establishment of a Performance Review Committee that comprises at least 2 members. 

The functions of the Performance Review Committee are as follows:

  1. To review the functioning of the authority.
  2. To analyze whether the international financial services centre has abided by the laws while carrying out its functions.
  3. To ensure that the policies put forth by the international financial services centre ensure transparency. 
  4. To Review the risk management abilities of the authority.

The Performance Review Committee shall submit a report of its findings at least once in a financial year. The Performance Review Committee shall function in such a manner that any person may submit to the committee that:

  1. The authority has not abided by the law while carrying out its functions.
  2. Misappropriation by any member of the authority has taken place.
  3. Abuse of powers by the authority of the members of the authority has taken place.
  4. Non-compliance by any member or employee of the authority has taken place. 

The international financial services centre shall put forth regulations governing the information provided to the Performance Review Committee and the sanctioning of resources to empower the Performance Review Committee to discharge its functions. 

Foreign exchange transaction

Section 20 of the International Finance Service Centre Act lays down the foreign exchange transaction. The foreign exchange transaction will be in foreign currency as stipulated in the agreement with the central government.

Conclusion 

The government has not laid down any guidelines concerning the regulation of financial products, financial services, and financial institutions in international financial services centres and its abilities to transact in foreign currencies and make rules. Albeit India is late in setting up an international financial services center Authority, the benefits of doing so are manifold. 

Concerning increasing the revenue of the country, will lead to an inevitable growth of the Indian financial sector. It will help to attract global financial service businesses and bring back revenue streams to India by establishing a stable regulatory framework. Entities such as foreign corporations will be able to invest in the debt and equity of Indian companies. By Act’s objective, under-setting up an international financial services centre Authority, India can now globally compete to provide services and prevent the payment from going out of India. Lastly, establishing an international financial services centre in India will also lead to vast employment opportunities. 

With the aid of these tax incentives, SEBI, IRDA, benefits, and exemptions provided by various regulations, IFSC is given the necessary impetus to succeed in India. RBI has opened up opportunities for IFSC units for all Indian and foreign banks operating in India. IFSC provides easier access for Indian companies to global financial markets and also opens the door to financial sector jobs.

References 


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