Introduction
The onset of Global In-house Centres (“GICs”) in India was driven by global financial services companies seeking to drive costs down and access India’s large talent pool across various locations. These factors together made it a compelling case for GICs to invest in India to setup large centres which performed a variety of functions across technology, risk, AML, operations, research, credit analysis, etc., for a wide variety of businesses, from retail banking, wholesale banking to investment banking, located in various foreign countries. This model has been visibly successful in driving the upskilling of a large talent pool in India and enabling significant cost advantages to the financial services companies that have implemented this model.
The International Financial Services Centre (“IFSC”) located in GIFT City, Gandhinagar, was setup with the intention of creating a global hub, which will house and support a thriving ecosystem of financial services organisations, providing cutting edge financial services and financial products at par with international standards. One of the key benefits IFSC has is the favourable taxation regime, which enables entities setup there to operate without paying taxes for any 10 consecutive years, out of 15 years post setting up.
In order to create a thriving business environment in IFSC, GIFT City, the Indian government has taken the visionary step of setting up an integrated regulator, i.e. the International Financial Services Authority (“IFSCA”), which functions as the unified regulator for banks, insurance companies, capital markets entities, asset managers and non-banking financial companies set up and operating in the IFSC. This development has resulted in a marked increase in financial sector entities moving into IFSC, GIFT City. It has also eased the process of getting approval and licence to undertake such operations in IFSC.
Against this backdrop, GICs have also been evaluating a move to IFSC. This will enable them to setup an entity in IFSC, and function under the purview of an umbrella regulator, i.e., the IFSCA. This will provide them with the flexibility to provide services, closely aligned to their strategy and business intention, from the IFSC. Further, the tax incentives and the operations of the GIC being outside FEMA control would provide regulatory independence to these entities.
The Regulatory Environment
The IFSCA has been proactive in its approach and notified the IFSCA (Global In-House Centres) Regulations, 2020 (“GIC Regulations”), on November 12, 2020. As per the GIC Regulations, “Global In-House Centre” means “a unit set up in the International Financial Services Centre for providing support services, directly or indirectly, to entities within its financial services group[1], 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.”[2]
An entity is eligible to be registered as a GIC if it fulfils the following eligibility criteria:
(i) It shall exclusively cater to its financial services group wherein the entities served must be located in Financial Action Task Force compliant jurisdictions; and
(ii) The support services provided to its financial services group should be for the purpose of carrying out a financial service in respect of a financial product.
Such a GIC in the IFSC can be set up either as a company or an LLP or in branch mode or any other mode as maybe prescribed by the IFSCA. A GIC that fulfils the eligibility criteria can provide such services to non-resident entities only.[3]
Thus, the regulatory regime provided by the IFSCA is quite conducive for operationalisation of GICs.
Determining Factors
Some of the key advantages of setting up a GIC in the IFSC are:
(a) it would be viewed as a person resident outside India with regard to the exchange control regulations,
(b) the operations will be carried out in freely convertible currencies, other than Indian Rupees,
(c) the cost of operations will be lower in comparison to other jurisdictions,
(d) and a host of tax benefits such as a tax holiday for 10 consecutive years out, of the first 15 years of operations and the freedom to repatriate profits.
While the IFSC is located close to Ahmedabad and Gandhinagar and is not in the proximity of centres where GICs have setup operations, a model can be evaluated where GICs leverage their existing contracts with large Indian IT vendors to deploy resources in IFSC to kickstart operations. This will provide GICs with relative operating autonomy, under the regulatory oversight of the IFSCA, whilst being an entity directly controlled by their global parent, benefitting from the favourable corporate tax regime and the large pools of skilled Indian resources to commence and enhance operations rapidly.
The influx of large pool of talent in GIFT City, IFSC will also result in accelerated growth and also encourage talent from local universities to consider GICs as a viable career option.
The 2022 Budget announcement to engage foreign universities in IFSC, GIFT City, with specialised focus on STEM, fintech, and financial management courses is an added impetus for talent pool upskilling and upscaling. Gujarat government has also recently announced a favourable IT & ITES Policy (2022-2027), which will act as a catalyst for IT companies to boom. The dual benefit of availability of talent pool and a growing IT economy further adds to the growth of GICs in the IFSC ecosystem.
In conclusion, GICs offering services to their offshore offices, by leveraging contracted staff is a combination that can unlock value for themselves, the local economy, the job market and constantly evolving GIFT City.
For further information, please contact:
Ketaki Mehta, Partner, Cyril Amarchand Mangaldas
ketaki.mehta@cyrilshroff.com
Disclaimer
The note is for informational purposes only. The information and/or observations contained in this note do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice. The views expressed in this note do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas.
[1] ‘Financial services group’ to include: (a) an entity that is regulated by a financial services regulator, and (b)- includes its holding, subsidiary or associate companies, branch, or subsidiary of a holding company to which it is also a subsidiary.
[2] Regulation 2(1)(e), GIC Regulations.
[3] Regulation 6(1), GIC Regulations.
