In part VI of our series on key legal considerations for establishing global capability centres (“GCCs”) in India,[1] we discuss global in-house centres or GICs that precede and are a variant of current GCCs.
Introduction – What are GICs?
Global In-house Centres (“GICs”), termed “captive centres” in the early 1990s, were “offshore centres” for multinational companies (“MNCs”) and large entities to perform specific outsourced business functions/back-end operations. These “offshore centres” were essentially “in-house” offshore centres, considering these were within the MNC group itself. Cost-reduction was the primary goal behind setting up GICs, which included dropping the net operations/business expenditures and, in some cases, even outsourcing the routine back-office work/operations. Initially, MNCs considered developing countries, including India, as ideal destinations for their GICs because of the easy availability of, among other things, cost-efficient human resources; larger pool of skilled, semi-skilled, and un-skilled labour; and comparatively stable business environments. The GICs have since evolved from merely being centres of cost-reduction and quality to emerging as centres of innovation and excellence. This disruptive expansion in their role has led GICs to uniquely position themselves as essential to MNCs’ growth and sustenance strategies by helping them run efficiently and cost-effectively and deliver sustained development and value over time.
Emergence of the IFSCA and IFSCs: planting the seeds for regulation of GICs in India
India’s first and maiden International Financial Services Centre (“IFSC”), was set up in 2015 in Gujarat International Finance Tec-City (“GIFT City”) with a vision to rank among leading global financial centres (“IFC”), providing a business friendly regulatory regime on par with other IFCs.[2] The GIFT City-IFSC has been compared to international financial centres like Singapore, Hong Kong, and Dubai.[3] A project of national importance, the GIFT City-IFSC provides financial entities an opportunity to be part of an ecosystem specifically designed to make India a “destination of choice” for financial institutions.[4] The GIFT City-IFSC is also projected to play a dominant role as India’s gateway to offshore global financial services by providing a platform for the Indian market to undertake their offshore transactions within the territory itself and for offshore participants to access the Indian markets within India, while retaining the non-resident status, i.e., “onshore the offshore”.
The IFSC is carved out as a niche jurisdiction with a deemed non-resident status under the foreign exchange norms. To develop it as an independent financial hub, the Indian government took the visionary step of setting up the International Financial Services Authority (“IFSCA”) on April 27, 2020, under the International Financial Services Centres Authority Act, 2019 (“IFSCA Act”) – a dedicated and unified financial sector regulator with a dual mandate to “regulate” and “develop” the financial markets in IFSCs. Considering the IFSCA functions as the unified regulator for banks, insurance companies, capital markets entities, asset managers, non-banking financial companies, and other financial institutions set up and operating in IFSC, it has been afforded very wide powers. In the IFSC, its powers equal that of domestic financial regulators (and to the exclusion of the domestic regulators), such as the Security and Exchange Board of India, the Reserve Bank of India, the Insurance Regulatory and Development Authority, and the Pension Fund Regulation and Development Authority. Since the formation of the IFSCA, IFSCs have noticed an unprecedented increase in establishments of financial market players and product offerings.
Following the expansion of GICs in India, the IFSCA noted in its meeting on September 9, 2020[5], that GICs that provide services to entities in the financial services group should expressly fall within the ambit of the IFSCA Act. Consequently, the GICs were notified as “financial institutions”[6], and the IFSCA announced the IFSCA (Global In-House Centres) Regulations, 2020 (“GIC Regulations”), on November 12, 2020. Besides the fiscal benefits discussed subsequently, the key benefits that the IFSC jurisdiction offers corporates and MNCs looking to set up a GIC include providing a regulated, predictable global environment, with a light-touch unified regulator and global-level tax benefits.
GICs vs GCCs: Regulatory gap or implied sandbox for GICs?
Global Capability Centres (“GCCs”) and GICs are terms used to refer to the capacity centres of global entities and MNCs. In recent times, these terms have often been used interchangeably. However, under the GIC Regulations, only certain categories of the GCCs/GICs[7] qualify as a GIC.
The GIC Regulations categorises as a “GIC” only those GCCs or GICs that qualify as “a unit set up in the International Financial Services Centre for providing support services, directly or indirectly, to entities within its financial services group, including but not limited to banks and non-banking financial companies, financial intermediaries, investment banks, insurance companies, re-insurance companies, actuaries, brokerage firms, funds, stock exchanges, clearing houses, depositories, and custodians, for carrying out a financial service in respect of a financial product”.[8]
The GIC Regulations mark the first time India has been notified regulations to govern the setting up and operation of a GIC. Prior to this, the country had no specific regulatory body or regulation to regulate GICs/GCCs. Various MNCs with entities in the financial service group often found their GICs to be at the cusp of performing activities that could otherwise fall within the regulatory ambit of a financial services regulator (e.g., investment advisory). However, considering no specific regulation governing GICs exists and GICs provide services only to group entities, this light-touch framework for GICs has not only filled a regulatory gap but also provided a sandbox for global MNCs to operate their GICs in a regulated space.[9]
Key regulatory considerations for GICs in IFSCs under the GIC Regulations
Eligibility for registering as a GIC
The three (3) crucial pre-conditions for registering as a GIC are as follows:
- The applicant entity will need to exclusively cater to its “financial services group”[10],
- The entities within its “financial services group” are required to be located in Financial Action Task Force (“FATF”) compliant jurisdictions, and
- The support services provided to its “financial services group” are required for carrying out a “financial service” in respect of a “financial product”.
The GIC Regulations do not define the term“support services”, which provides flexibility in the interpretation of the same. Given that most regulations in IFSC are light touch and drafted with the intent of providing “ease of doing business” to the stakeholders, our understanding of what qualifies as “support services” will depend on the nature of the GIC’s operations, considering different entities in the financial services sector require different kinds of support services.
Registration requirements
An entity applying to register as a GIC would need to include, among other things, the details of the applicant entity, the parent entity, and the businesses the applicant entity proposes to undertake upon registration as a GIC,[11] along with an application fee, which would depend on the total number of employees of the GIC.[12] The annual membership fee could be in the USD 5,000-10,000 range, depending on the number of employees engaged.[13]
Permissible business offerings and modus operandi
As the GIC Regulations were notified keeping in mind the requirements of MNCs at a global level and facilitate ease of operations, a GIC under GIC Regulations, is deemed as a “non-resident” and, accordingly, its operations will be outside the purview of foreign exchange norms of India. Conscious of the global requirements of a GIC, the IFSC regime requires GICs set up under the GIC Regulations to cater to only non-resident entities that form part of its “financial services group”[14] and in specified freely convertible foreign currencies[15] (as best suited to them).
Ongoing compliance requirements with IFSCA and costs
Ongoing compliances for a GIC in an IFSC include, among other things, furnishing its financial statements, list of entities served by the GIC, and a confirmation of compliance with the GIC Regulations on an annual basis.[16] Further, the IFSC regime requires the maintenance of books of accounts, records, and documents in such foreign currency as the GIC declared in its application while registering as a GIC,[17] thereby facilitating the MNC setting up a GIC ease of consolidation of accounts, where required.
Key fiscal incentives of setting up in an IFSC
As an enabler for entities setting up in IFSC, however, some of the key fiscal incentives the government has provided include:
- 100 per cent tax holiday for 10 consecutive years out of 15 years, with the IFSC unit having the flexibility to select any 10 consecutive years out of the first 15 years;
- Minimum Alternate Tax rate at 9 per cent;
- Withholding tax at 4 per cent on interest on overseas borrowings (long-term bonds/rupee-denominated bonds only listed on IFSC);
- No goods and services tax payable on goods and services received by the IFSC unit; and
- Additionally, the IT/ITES Policy of the State of Gujarat also provides fiscal benefits, which stand extended to a GIC set up in the GIFT City-IFSC.[18]
Conclusion
As on date, Bank of America has already set up its GIC under the GIC Regulations in the GIFT City-IFSC. Many other MNCs are also evaluating this niche jurisdiction for their GICs. IFSCA also provides authorisations to fintech and techfin players under the IFSCA’s Framework for FinTech Entities in IFSCs, including in a special regulatory sandbox. This creates an excellent feeder for technology giants to consider setting up in GIFT City-IFSC, thereby also providing a continuous source of accessible diversified “human capital” for the GICs from the ecosystem itself.
With such complimentary and holistic business environment and opportunities, strategic location, and a light-touch FATF-compliant regulatory regime, the GIFT City-IFSC provides a slew of opportunities and advantages for corporates and MNCs to explore a GIC structure in this unique jurisdiction.
Blog Series on Global Capability Centres
For further information, please contact:
Bharath Reddy, Partner, Cyril Amarchand Mangaldas
bharath.reddy@cyrilshroff.com
[1] You can read part I of the series here – Global Capacity Centres (GCCs) take centre stage in fuelling global growth | India Corporate Law (cyrilamarchandblogs.com) part II here – Strategic structuring and modelling Global Capability Centres (GCCs) in India: How to set up | India Corporate Law (cyrilamarchandblogs.com) part III here – Strategically building a workforce for Global Capability Centres (GCCs) in India | India Corporate Law (cyrilamarchandblogs.com) part IV here Taxation landscape of Global Capability Centres (GCCs) in India | India Tax Law (cyrilamarchandblogs.com) and part V here Optimal locations for Global Capability Centres (GCCs) in India: Where to set it up? | India Corporate Law (cyrilamarchandblogs.com)
[2] It is pertinent to note that GIFT City is also a special economic zones (“SEZs”) under the Special Economic Zones Act, 2005.
[3] GIFT City: How PM Modi’s pet project is fast becoming India’s capital gateway (businesstoday.in); and India Developing a New “GIFT CITY”, like Singapore to Attract FDI (eurasiantimes.com).
[4] GIFT City, Official Website – giftgujarat.in/about.
[5] Meeting of the IFSCA on the theme of ‘Recognition of Finance-related Global In-House Centres as a Financial Service in the IFSCA Act’, dated September 9, 2020.
[6] Vide Ministry of Finance notification dated October 16, 2020, available at: Central Government notifies Aircraft Lease and Global in-House Centres in IFSCA Act, 2019
[7] Section 3(1)(c) of the IFSCA Act defines ‘financial institutions’ as “a unit set up in an International Financial Services Centre and which is engaged in rendering financial services in respect of any financial product”.
[8] Regulation 2(1)(e), GIC Regulations.
[9] For more information on how GICs desirous of setting-up in the GIFT City can leverage the GIC Regulations you can read our blog here – GICs in IFSC, GIFT City: A Combination to Unlock Value | India Corporate Law (cyrilamarchandblogs.com)
[10] Regulation 3(1)(c) defines ‘financial services group’ as “any entity which is regulated by a financial services regulator or any other competent body regulating financial services activities in its home jurisdiction and include its holding, subsidiary or associate companies, branch, or subsidiary of a holding company to which it is also a subsidiary”.
[11] Annexure – 1, Circular on Global In-House Centres (GIC) in the International Financial Services Centre (IFSC) issued by IFSCA, dated November 18, 2020 (“GIC Circular”).
[12] Annexure – 1, GIC Circular.
[13] Pursuant to Clause 4, Annexure – 1, GIC Circular.
[14] Regulation 6(1), GIC Regulations.
[15] As on date, IFSCA has permitted the following specified freely convertible foreign currencies: (i) US Dollar (USD); (ii) Euro (EUR); (iii) Japanese Yen (JPY); (iv) UK Pound Sterling (GBP); (v) Canadian Dollar (CAD); (vi) Australian Dollar (AUD); (vii) Swiss Franc (CHF); (viii) Hong Kong Dollar (HKD); (ix) Singapore Dollar (SGD); (x) UAE Dirham (AED); and (xi) Russian Rouble (RUB).
[16] Annexure – 2, GIC Circular read with Regulation 8, GIC Regulations.
[17] Regulation 9, GIC Regulations.
[18] The IT/ ITes Policy specifically covers back office operations and is available at: IT POLICY-Final – Single Page – Print File.cdr (gujarat.gov.in)
