The International Financial Services Centres Authority (Capital Market Intermediaries) Regulations, 2025 (“New CMI Regulations”), were notified by the International Financial Services Centres (“IFSCA”) on April 11, 2025, in supersession of the erstwhile International Financial Services Centres Authority (Capital Market Intermediaries) Regulations, 2021 (“Old CMI Regulations”), and the IFSCA Circular No. F. No. 817/IFSCA/Distribution/2022-23 titled “Distribution of Capital Market Products and Services under the IFSCA (Capital Market Intermediaries) Regulations, 2021” (“Old Distribution Circular”), dated December 21, 2022.
The New CMI Regulations were notified by the IFSCA, pursuant to a consultation paper published by it on November 21, 2024[1]. The New CMI Regulations are primarily focused on protecting the ‘interests of investors’ and ‘the integrity of the securities market’[2]. We have focused on key regulatory changes impacting distributors in the IFSC, as they play a key role in market expansion and investor accessibility in asset management businesses across the globe. However, distributors have often been overlooked in the IFSC.
Distributors under the New CMI Regulations
Definition of a Distributor
A “distributor” is defined[3] as a person who engages with clients, for a commission or a fee, to facilitate investment or subscription into “capital market products”[4] or “capital market services”[5]. This would include Registered Distributors (as defined hereinbelow) having a unit in the IFSC and facilitating subscription to units of AIFs operating in the IFSC or facilitating portfolio management/ investment advisory services, etc.
Exemption for Distributors and other Capital Market Intermediaries (“CMIs”) from Registration:
The fund management entities (“FMEs”) registered with the IFSCA and who are willing to undertake activities of a research entity, or of an investment advisor, have been exempted from seeking registration under the New CMI Regulations[6]. Even a distributor providing any investment advice to its clients, incidental to its primary activity, is exempt from seeking registration under the New CMI Regulations as an investment adviser[7].
Further, distributors located outside the IFSC who provide services to entities or AIFs based in the IFSC are exempt from mandatory registration if they are operating without setting up a unit in the IFSC. However, if such an entity, located outside the IFSC, sets up a unit in an IFSC for providing services prescribed in the New CMI Regulations, then they will have to obtain registration as a registered distributor (“Registered Distributor”)[8]. Thereby, the IFSCA has given flexibility to distributors to distribute products such as IFSC-based AIFs and portfolio management services to prospective investors/ clients, without going through the process of registration in the IFSC, if they are operating without setting up a unit in the IFSC (“Unregistered Distributors”).
With the aforesaid clarifications, IFSC intends to expand the scope of services that a registered FME can provide, resulting in increasing operational flexibility. These regulations also open doors for the distributors and other CMIs by easing down on the regulatory requirements for separate registration. This is to encourage established and prospective service providers, such as distributors in India and abroad, to start offering their services to the IFSC based entities and funds.
Clarifications on Net-worth Criteria
New CMI Regulations clarify[9] that minimum net-worth requirement shall now be separate and in addition to the minimum net worth requirements applicable for other activities outside IFSC or within IFSC under any other regulations or framework. For instance, a registered FME, intending to undertake the activities of a distributor, will now be required to maintain a separate net-worth of USD 50,000 according to Schedule I of the New CMI Regulations, in addition to the net-worth prescribed under the IFSCA (Fund Management) Regulations 2025. The deadline for infusion of capital to comply with the revised minimum net-worth requirements specified in the New CMI Regulations is October 01, 2025.
These regulations clarify that an entity that intends to engage in multiple activities under different IFSC regulations shall maintain separate net-worth earmarked for each activity while rationalizing the separate net-worth requirements for all activities under the New CMI Regulations. The aforesaid revisions ensure that only well capitalized and reputable players join the IFSC ecosystem.
Revamped Code of Conduct for Distributors
The Old Distribution Circular prescribed a mandatory code of conduct for all distributors, regardless of their registration status. The New CMI Regulations, however, introduce a code of conduct[10] and advertisement code applicable to all Distributors (which includes Unregistered Distributors) and a separate code of conduct exclusively for Registered Distributors[11], containing obligations and duties over and above the general code of conduct.
The general code of conduct casts several obligations on all CMIs, including a duty to observe high standards of integrity and fairness, exercise due diligence, and fulfil its obligations in a prompt, ethical and professional manner. These obligations are general in nature and may not be burdensome for most Unregistered Distributors. However, specific code of conduct for distributors provides a list of duties and obligations that must be undertaken by a Registered Distributors.
Some of the key obligations of a Registered Distributor under the New CMI Regulations include:[12]
- Distributing capital market products and services issued by entities in India, IFSC or foreign jurisdiction to clients and investors in the IFSC, foreign jurisdiction and India. However, it is to be noted that aRegistered Distributor may distribute capital market products and services of foreign entities only if these foreign entities (which are issuing the products/ providing services) are from permissible international exchange jurisdictions under the PMLA, i.e. USA, Japan, South Korea, UK, France, Germany and Canada, as may be revised from time to time;[13]
- Ensuring that products or services that it is distributing have been authorised, vetted or approved for offering to all types of investors, by the relevant regulatory or supervisory authority of such regulated financial entity[14];
- Ensuring compliance with all applicable laws as prevalent in the jurisdictions of issuers, service providers and clients while undertaking various permissible activities. For instance, while distributing AIFs registered in India or the IFSC, it has to ensure that it does not break the norms relating to private placement of units;
- Undertaking due diligence of capital market products and services being distributed to non-sophisticated investors, and (b) assessing suitability of products/ services for such investors;
- Disclosing all material information regarding capital market products and services being distributed to its clients, including related party transactions and self-positions. If requested by a client, the Registered Distributor shall disclose the amount of direct and indirect remuneration and the basis of such remuneration it receives as a result of rendering distributing services to that client and whether there is any relation between the Registered Distributor and the entity offering the capital market product or service;
- Abstaining from attracting clients through offer of rebate, kickback, gifts, etc; and
- Maintaining the necessary infrastructure, ensuring clear segregation of its proprietary investments from those carried on as part of distribution activities, maintaining records and adhering to reporting requirements.
While the obligations of Registered Distributors are clearly carved out, it can be deduced from the intentional use of words ‘distributor’ and ‘Registered Distributor’ that these New CMI Regulations do not cast the same obligations on Unregistered Distributors.
However, it is to be noted that some obligations, such as appointment of principal officer (“PO”) and compliance officer (“CO”) (of adequate qualification[15]), and books of accounts, fit and proper status, dispute resolution mechanism, cyber resilience framework, etc., remain equally applicable to both Registered and Unregistered Distributors. Therefore, making it clear that Unregistered Distributors might be unregistered, but they are regulated under the New CMI Regulations.
With reference to the above, one practical challenge that emerges is that CMIs operating in the IFSC, including the unregistered ones,[16] are required to have a PO/CO based in the IFSC[17]. For Unregistered Distributors, having a PO/CO based in the IFSC, without having a unit, will be challenging. While we may find a way around to address this drafting gap, it still a situation of impasse for most service providers eyeing to start a business in the IFSC.
Conclusion
The New CMI Regulations represent a paradigm shift, transitioning GIFT City from a rules-driven model to a risk-aligned, outcome-oriented and efficiency-first regime. By enhancing entry standards, and emphasising robust governance, these regulations align GIFT City with global best practices. The revision in regulations relating to distributors indicates intentional regulatory-hold over Registered Distributors, while easing upon Unregistered Distributors who simply want to distribute/ refer the IFSC based products without setting up a unit in the IFSC. While there may be a few drafting gaps and minor ambiguities in the practical application of these regulations, IFSC has proven itself over the past few years as a pro-active, responsive and market-friendly regulator, committed to resolving any gaps and ambiguities under their regime and encouraging an amicable financial-regulatory environment. We may expect a new wave of distributors distributing more and more IFSC based funds, creating a new market segment for existing distributors in India and an opportunity for both funds and prospective investors.
[1] International Financial Services Centres Authority (Capital Market Intermediaries) Regulations, 2025
[2] Regulation 2 of the New CMI Regulations
[3] Regulation 3(1)(q) of the New CMI Regulations
[4] “Capital market products” shall mean “securities” as defined under sub-section (h) under section 2 of Securities Contracts (Regulation) Act, 1956, and includes similar instruments by whatever name called, issued or created by any issuer in IFSC, India or Foreign Jurisdictions, and such other instruments as may be specified by the IFSCA
[5] “Capital market services” shall mean and include investment advisory services, portfolio management services (“PMS”), by whatever name called, provided by a service provider which is a regulated financial entity, and such other services as may be specified by the IFSCA
[6] Regulation 5(a) of the New CMI Regulations
[7] Regulation 5 of the New CMI Regulations
[8] Regulation 5(b) of the New CMI Regulations
[9] Regulation 7 read with Schedule I of the New CMI Regulations
[10] Schedule II – Part A of the New CMI Regulations
[11] Schedule II – Part B (paragraph F) of the New CMI Regulations
[12] Regulation 32 read with Part F of Schedule II of the New CMI Regulations
[13] Regulation 32(1)(a) of the New CMI Regulations
[14] “Regulated financial entity” means an issuer or a service provider set up in India, an IFSC or any Foreign Jurisdiction, which is registered, authorised, licensed or regulated by any regulatory or supervisory authority of its home jurisdiction for carrying out activities related to asset management, funds management, investment advisory, portfolio management or any other similar activity, by whatever name called.
[15] Regulation 9 of the New CMI Regulations.
[16] Regulation 9(1) read with the definition of a ‘CMI’ in Regulation 3(1)(h).
[17] Regulation 9(1) read with the definition of a ‘CMI’ in Regulation 3(1)(h).
