This article is written by Shreya Kalyani, pursuing a Diploma in Companies Act, Corporate Governance and SEBI Regulations from LawSikho.com. Here she discusses “IFSC Companies and Benefits Available to Them”.
IFSC companies are incorporated in the country itself but operate for the jurisdiction which is outside the original jurisdiction of the company. IFSC companies are approved by the Central Government under section 18(1) of the SEZ Act, 2005. It is an unlisted company and operates in Special Economic zones, provided there can be only one IFSC in a Special Economic Zone. It basically, serves to people outside the domestic economic jurisdiction of the country to expand the zone of world class services to residents as well as non- residents. It acts as a facilitation centre, for boosting of export services.
They provide services which include raising of funds for individuals, government and corporations; Global tax management and cross border tax liability optimization; Risk management operations such as insurance; Merger and Acquisition among transnational companies etc.
Earlier, around 2007 it was suggested on making Mumbai as an IFSC Centre. However, the global financial crisis in 2008 forced India to dismiss the plan. Then in 2015 GIFT City had been introduced through the Union Budget of 2015 aiming to make it as global financial hub.
Now the question comes to mind is what kind of entities can set up offices in IFSC? All the entities which are regulated by RBI or SEBI or IRDA are eligible to set up offices in that area, such as Banks, Insurance companies, Brokerage Firms, Investment Advisors, Transfer Agency services etc.
How do companies at IFSC work?
IFSC operates as a foreign territory governed by Indian Laws. It allows companies incorporated outside India to raise money in foreign currencies by listing their shares on stock exchange of IFSC, where an individual or institutional investors from India abroad including NRIs would be allowed to trade. Mutual Funds and alternative investment funds set up in an IFSC can also invest in securities listed here. GIFT City has two zones: domestic and special zones. All rupee denominated transactions can be undertaken from the GIFT domestic area. Special economic zone is an area located within the country’s national borders, in which the business and trade laws are different from the rest of the country. It is established mainly for increasing trade balance, increasing investment and job creation. Any intermediary operating within IFSC shall provide financial services to a person non-resident in India, non-resident Indian, a person or financial institution who is eligible under FEMA to invest funds offshore. Even mutual funds and Alternative investment funds in IFSC can invest in securities listed in IFSC.
Why has the IFSCs been introduced?
The aim behind setting up of IFSC is to create a world class smart city that provides global financial services. Currently, these services are being rendered by Indian Corporate Entities or financial institutions from other overseas branches and financial centres. IFSCs provide services across borders. India’s first IFSC is GIFT City in Gujrat as part of a Special Economic Zone. GIFT city project is implemented by GIFT City Co. Ltd., a 50:50 joint venture between Infrastructure Leasing and Financial Services Ltd. and Gujrat Urban Development Company Ltd. The smart city GIFT in Gujrat, which is the first IFSC of India has attracted many real estate developers which have also signed MoUs to set up hospitals, hotels, residential and commercial complexes.
How is it regulated? Does company law regulate it in any way?
Companies Act, 2013 is applicable on all private and public companies of IFSC. The issuer of securities within IFSC are required to prepare a statement of accounts in accordance with Companies Act, 2013. However, government has relaxed certain provisions of the Act and compliance with other Regulations to facilitate the participation of entities in IFSC. Since it is related to financial services, at present three regulatory bodies i.e. Reserve Bank of India, Securities Exchange Board of India and Insurance Regulatory Authority of India.
Budget 2019 has proposed many amendments for IFSC that will facilitate the regulatory framework and improve the ease of doing business. International Financial Services Centre Authority Bill, 2019 The dynamic nature of business in the IFSCs makes it important to have a high degree of inter-regulatory coordination. This Bill aims to bring a unified authority for regulating all financial services in the IFSCs.
Benefits available to them to boost their coming:
There are certain benefits available to private and public companies set up in IFSC such as:
- Securities Transaction Tax is a tax which is levied at the time of purchase and sale of shares, units or equity oriented funds and all other securities listed on stock exchange in India. However, there is an exemption from security transaction tax liveable on securities transactions entered into by non- residents through IFSC.
- There are other taxes and custom duties from which the companies of IFSC are exempted such as: Custom Duty, Excise Duty, Central Sales Tax, Service Tax, Commodity Transaction Tax, Long Term Capital Gain Tax, Dividend Distribution Tax, VAT and Stamp Duty.
- The government has also exempted from the charge of Global Depository Receipts that are made by non-residents on recognised stock exchanges of IFSC.
- Under Companies Act, every company having net worth of Rs.500 crore, or turnover of Rs.1000 crore, or net profit of Rs.5 crore rupees shall contribute something as their corporate social responsibility. However, companies under IFSC are exempted from Corporate Social Responsibility norms for 5 years.
- Exemption from the requirement of taking approval from NCLT for following a different financial year than April- March. Not even in a case where a company under IFSC is a subsidiary of a foreign company.
- SEBI has relaxed shareholding and net worth requirements for intermediaries setting up their subsidiaries in IFSC.
- As per Budget 2016, MAT rate is 9% where for other companies it is 18.5%
- Time given to IFSC for filing of resolutions and agreements with ROC is of 60 days while for other companies it is 30 days under the Companies Act, 2013. Therefore there is relaxation in filing their documents.
- Under the Act, for all the companies only an officer of the company can authenticate documents and other contracts. However, for IFSC companies any person other than officer, provided he is authorised by the company, can authenticate documents and contracts.
- IFSC companies are allowed to make private placement offers without being restricted by earlier incomplete or withdrawn offers,
- IFSC companies do not need to comply with the secretarial standards prescribed by ICSI. For instance, they may or may not include their annual return in the Board’s report.
- IFSC companies need only Internal audit, provided their Article of Association permits so. Such companies are also allowed to make investments through more than 2 investment companies.
- They are exempted from the payment of Dividend Distribution Tax on dividends declared.
- Under the Income Tax Act, tax holidays have been extended for IFSC units to 100% of business profits for 10 consecutive years out of period of 15 years.
- After the Budget of 2019, it is also proposed to exempt the interest income earned by non-residents in respect of money borrowed by any IFSC units after September 1, 2019.
- Mutual funds located in IFSC are exempt from the tax that is chargeable under section 115R of Income Tax Act, on any distribution of income derived from transactions made on stock exchange in IFSC.
Benefits available under the SEBI Regulations for issue of securities:
- Eligibility and shareholding limit for stock exchanges, clearing corporations and depositories, which are desirous of providing services in IFSC, has been relaxed to the requirement of having at least 51% of their paid up equity share capital with them and rest may be held by other stock exchanges.
- Net worth requirements for stock exchanges, clearing corporations and depositories, which are desirous of providing services in IFSC, have been relaxed. It is 25 crores for stock exchange and depository while for a clearing corporation it is 50 crores.
- The provisions of Securities Contracts (Stock Exchange and Clearing Corporations) Regulation, 2012; Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 are not applicable to the stock exchange operating in IFSC.5
- Depository receipts, debt securities and equity shares can be issued by both domestic and foreign companies. In addition to the Indian residents, there are Non- resident Indian, foreign individual and institutional investors who are eligible to participate in IFSC.
How is it different from a normal company?
- IFSC companies can be set up only when it is limited by shares.
- Every company shall have ‘IFSC’ as suffix in its name.
- Object clause of IFSC shall and must mention that “they will carry out the objects as required and mentioned in SEZ activities and in compliance with SEZ Rules”.
- A registered office of an IFSC company must be located in a Special Economic Zone.
IFSC companies are playing the crucial role of bringing offshore financial transactions to the Indian Territory. Primary aim was to bring back the financial services and transactions that were being carried out in offshore financial centres by the Indian corporate entities. Currently, the financial sector institutions such as banks, insurance companies, stock exchanges, mutual funds, alternative investment funds and other SEBI registered institutions are permitted to be set up at IFSC. With the help of such fiscal incentives; support by SEBI, IRDA, benefits and exemptions provided by different regulations, IFSC are being provided with the needed impetus to become a success in India. RBI has opened up opportunities for all Indian and Foreign banks having operations in India to set up units in IFSC. IFSC provides Indian Companies easier access to global financial markets and also opens the door for employment in the financial sector.
- SEBI (International Financial Services Centre) Guidelines, 2015.
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