Sunday, March 29, 2015

SEBI Guidelines for International Finance Centres

[The following post is contributed by Yogesh Chande, who is an Associate Partner with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal.]

The report (2007) of the High Powered Expert Committee (HPEC) on ‘Mumbai: An International Financial Centre’ had in its report suggested the setting up of International Financial Centre in Mumbai.

The Minister of Finance in his budget speech (2015-2016) stated that, “While India produces some of the finest financial minds, including in international finance, they have few avenues in India to fully exhibit and exploit their strength to the country’s advantage. GIFT in Gujarat was envisaged as International Finance Centre that would actually become as good an International Finance Centre as Singapore or Dubai, which, incidentally, are largely manned by Indians. The proposal has languished for years. I am glad to announce that the first phase of GIFT will soon become a reality.” 

Pursuant to announcement in the Union Budget 2015-2016 on Gujarat International Finance Tec-City (GIFT), SEBI’s board on 22 March 2015 approved the SEBI (International Financial Services Centres) Guidelines, 2015 (“IFSC Guidelines”). SEBI on 27 March 2015 issued the IFSC Guidelines for facilitating and regulating financial services relating to securities market in an IFSC set up under section 18(1) of Special Economic Zones Act, 2005.

In terms of the IFSC Guidelines, the following entities have been permitted to operate in an IFSC:

Infrastructure Companies in Securities Market

1. Stock exchanges;
2. Clearing corporations;
3. Depositories.


4. Includes a stock broker, a merchant banker, an underwriter, a portfolio manager, a foreign portfolio manager, an investment adviser and those persons who are associated with the securities market.


5. Alternative Investment Funds;
6. Mutual Funds.

In terms of the IFSC Guidelines, following are the modes in which capital and debt could be raised / issued:

i) A domestic company including a body or corporation established under a Central or State legislation can raise capital in currency other than Indian Rupee in compliance with the provisions of Foreign Currency Depository Receipts Scheme, 2014;

ii) Companies of foreign jurisdictions can raise capital in currency other than Indian Rupee in compliance with provisions of the Companies Act, 2013 and SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 as if the securities are being issued under chapter X and XA thereof, dealing with issuance of Indian Depository Receipts (“IDR”) and rights issue of IDR.

iii) A company incorporated in India or outside India is eligible to issue debt securities subject to certain prescribed conditions.

Criteria for setting up of Infrastructure Companies in Securities Market in an IFSC


a) Stock Exchange: Can be formed by an Indian recognised stock exchange or a stock exchange of a foreign jurisdiction.

b) Clearing Corporation: Can be formed by an Indian recognised stock exchange or a clearing corporation or any recognised stock exchange or a clearing corporation of a foreign jurisdiction.

c) Depository: Can be formed by an Indian registered depository or any regulated depository of a foreign jurisdiction.


At least 51% of the paid up equity share capital needs to be held by those seeking to form a stock exchange or a clearing corporation or a depository. Change in equity shareholding merely requires intimation to SEBI within fifteen days of acquisition of equity shares.

Minimum networth:

In case of a stock exchange and a depository, the initial minimum networth needs to be INR 250 million and INR 500 million in case of a clearing corporation. The initial minimum networth needs be to increased to INR 1000 million over a period of three years from date of approval in case of a stock exchange and a depository, and to INR 3000 million over a period of three years from date of approval in case of a clearing corporation.

Relaxation of certain provisions:

The IFSC Guidelines have provided for certain relaxations to stock exchanges, clearing corporations and depositories to be set up in an IFSC from the provisions of Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 and SEBI (Depositories and Participants) Regulations, 1996; dealing with transfer of a certain percentage of profits of these entities every year to the relevant “fund” prescribed under the applicable regulations. Infrastructure companies in securities market operating in an IFSC are required to adopt the broader principles of governance prescribed by International Organization of Securities Commissions (IOSCO) & principles for Financial Market Infrastructures (FMI), and such other governance norms as may be specified by SEBI, from time to time.

Trading on stock exchanges:

The stock exchanges operating in an IFSC can provide platform for trading in securities and products in such securities in any currency other than Indian rupee such as: (i) equity shares of a company incorporated outside India; (ii) depository receipt(s); (iii) debt securities issued by eligible issuers; (iv) currency and interest rate derivatives; (v) index based derivatives.

Operations of intermediaries in an IFSC

Intermediaries seeking to operate in an IFSC which are intending to provide financial services relating to securities market need to be formed as a “company” form of organisation. The IFSC Guidelines currently do not envisage any other form of organisation like a “limited liability partnership”. Intermediaries operating within the IFSC can provide financial services to prescribed categories of clients only, such as a person not resident in India or a non-resident India. A person resident in India cannot be a client of such an intermediary. Similar requirement is also applicable to those who intend to avail investment advisory or portfolio management services from intermediaries operating as such in an IFSC. The IFSC Guidelines permit a portfolio manager operating in IFSC to invest in securities which are listed in IFSC, and also in unlisted securities issued by companies incorporated in IFSC, or those issued by companies belonging to foreign jurisdiction. Intermediaries are obliged to appoint a senior management person as “designated officer” to ensure compliance with the regulatory requirements.

Issue of capital and issue of debt securities

Unlike in case of entities mentioned in the first two paragraphs under the section relating to modes of raising capital, in case of issue of debt securities, Chapter V of the IFSC Guidelines does not expressly state that, such debt securities should be in a currency other than Indian Rupee. Companies mentioned in the first two paragraphs above have an option to list their securities on stock exchanges set up in an IFSC, unlike in case of an issuer issuing debt securities which needs to be mandatorily listed. In case of issue of debt securities, the requirements relating to appointment of trustees, creation of debenture redemption reserve, entering into an agreement with a depository/custodian, reporting of financial statements and trading on stock exchanges including clearing & settlement of debt securities through a clearing corporation set up in an IFSC is mandatory.

Funds operating in IFSC

A person resident in India is not eligible to make an investment in an alternative investment fund (“AIF”) or a mutual fund (“MF”). It appears that, this condition on investment in an AIF or a MF is in relation to investing in the units of a scheme of an AIF or a MF, and does not prohibit investment by a person resident in India in the AIF as a sponsor, or in the asset management company (“AMC”) of the MF as a shareholder. An AIF and a MF are permitted to accept money from eligible investors only in foreign currency. As regards the capitalisation norm of a MF, the IFSC Guidelines prescribes that the AMC of a MF needs to have a minimum networth of USD 2 million, which should be increased within three years of commencement of business to USD 10 million.


An IFSC caters to a person resident outside the jurisdiction in which it is set up. An IFSC plays a significant role in development and penetration of capital markets and contains a large number of internationally significant financial institutions. It is expected that, IFSC Regulations will enable India to garner billion of dollars worth financial services business that is otherwise lost to foreign countries. To ensure that the IFSC Guidelines are effective and achieve the intended objective, it will be critical that, apart from SEBI, the concerned agencies in the government machinery and the Reserve Bank of India work relentlessly in periodically reviewing the regulatory structure pertaining to functioning of IFSC, evolve a smooth mechanism for dispute resolution, develop an effective bankruptcy procedure and above all provide a predictable and a stable tax regime.

- Yogesh Chande

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