In consonance with the steps taken by the Government of India to development of India’s maiden International Financial Services Centre (“IFSC”) situated at Gujarat International Finance Tec-City (“GIFT City”), the Reserve Bank of India (“RBI”) has allowed Indian individuals to remit to IFSC, City for permissible purposes under its Liberalised Remittance Scheme (“LRS”). This blog aims to analyse the impact of such recent notification of the RBI.
Remittance in IFSC, GIFT City: The erstwhile regime
The RBI’s February 16, 2021 circular on LRS in IFSC[1] permitted remittance by resident Indians in IFSC, GIFT City only for the limited purpose of (i) making investments in IFSCs in securities, other than those issued by entities/companies resident (outside IFSC) in India; and (ii) opening a non interest bearing Foreign Currency Account (“FCA”) in IFSCs, for making the above permissible investments under LRS. Further, any funds lying idle in the account for a period of up to 15 days from the date of its receipt into the account were required to be immediately repatriated to domestic INR account of the investor in India. Resident Indians were not allowed to settle any domestic transactions with other residents through these FCAs held in IFSC.
However, following continuous policy advocacy by concerned stakeholders on such restrictions on LRS in IFSC, GIFT City, the regulations were revised vide notifications dated April 26, 2023[2] and June 22, 2023[3]. In addition, resident Indians were allowed to make payment of fees for education to foreign universities or foreign institutions set up in IFSC, GIFT City and the restriction on repatriation of funds (if they stayed idle for a period of 15 days) was withdrawn.
LRS in IFSC, GIFT City: A quest for parity
Despite a slew of changes in the LRS regime over a period of three years, transactions made in IFSC, GIFT City through this route were treated differentially versus those in other foreign jurisdictions. In quest for seeking parity, IFSC has now achieved a level playing field with the recent RBI Notification dated July 10, 2024[4] (“RBI Notification”) that now permits resident Indians to remit funds for all permissible purposes under LRS to IFSCs for: (i) Availing financial services or financial products as per the International Financial Services Centres Authority Act, 2019 within IFSCs; and (ii) All current or capital account transactions, in any other foreign jurisdiction (other than IFSCs) through an FCA held in IFSCs. Therefore, while a resident Indian could open a Foreign Currency (“FCY“) account in IFSC, he/she could only use it to invest in IFSC securities and not for offshore expenses like funding foreign education outside IFSC or covering a relative’s medical needs outside India, which would be permissible under the LRS regime. The RBI Notification has now changed this position by providing IFSC an at-par regime like other offshore jurisdictions vis-à-vis India under the LRS route. This change is reflective of the demand of the Indian diaspora and the undisputable growth of financial services sector in IFSC, GIFT City. . The move demonstrates the RBI’s intent to treat IFSC, GIFT City on an equal footing with other international financial centres and to truly “onshore the offshore” activities undertaken by resident Indians.
RBI Notification and its impact:
The RBI Notification has impacted two key stakeholders, namely the financial institutions in IFSC, GIFT City and the Indian diaspora. Many domestic banks having offshore branch presence, consolidated and transferred their international books to their IFSC Banking Unit (“IBU”) set-up to gain from a suite of fiscal and non-fiscal benefits while enjoying proximity to their Head Office and maintaining international presence. Unlike other banks with offshore presence in various jurisdictions, domestic banks that made their foray into international banking by setting up their first offshore branch at IFSC, GIFT City, could not offer the whole host of LRS solutions to its resident Indian customers because of the restrictive erstwhile LRS regime in IFSC, GIFT City. The RBI Notification has now streamlined operations for these domestic Indian banks, providing their resident Indian customers the comfort to continue banking with their trusted Indian banks through IFSC, GIFT City. Additionally, resident individuals will also have the opportunity to participate in wealth management/ PMS products, global securities, and other global financial products, platforms and financial services offered out of IFSC, GIFT City. This move will result in increased liquidity in the IFSC ecosystem, contributing to its economic growth owing to FCY accounts, which can now be opened and operated from the homegrown global financial hub at IFSC, GIFT City.
Benefits to resident investors:
An FCY account in IFSC, GIFT City, would allow Indian individuals to participate in financial services/ products offered by IFSC entities and keep their funds within the Indian financial system while participating in global financial activities and undertaking their offshore current and capital account transactions under the LRS regime. These FCY accounts in IFSCs[5] can also help resident Indians hedge/thwart currency fluctuations to some extent. Resident individuals can use their FCY accounts to undertake international transactions directly from India and through their existing Indian banks, thereby reducing currency conversion costs and administrative burdens.
The RBI Notification gives Indian residents control over their foreign exchange transactions by facilitating seamless remittances for permissible purposes such as education, medical expenses, and investments. Resident individuals can now gain direct access to global financial markets through IFSCs and diversify their investment portfolio by investing in international stocks, bonds, mutual funds, and other foreign currency denominated financial instruments.
Concluding thoughts:
The RBI Notification is a long-awaited development and will be greatly welcomed and appreciated by the industry. Enhanced inter-regulatory cooperation will significantly develop the Indian financial regulatory services landscape, especially the IFSC, GIFT City jurisdiction.
Since its inception as a specialised international financial centre 2015, the IFSC Gift City has considerably expanded its scope by 2024, aiming. to establish itself as world-class education and fintech hub to provide the necessary manpower and skillset required for financial institutions in an IFSC. To achieve this goal, it becomes imperative that all forms of transactions permitted to a resident Indian under the LRS regime in an offshore jurisdiction be allowed in IFSC as well. For e.g., donation to a foreign university in other jurisdiction by a resident individual/ alumnus is allowed but prohibited for a foreign university located in IFSC, GIFT City. Given that both the foreign universities IFSC, GIFT City (Deakin University and University of Wollongong) have begun their operations, a clarification from relevant regulators on such aspect will be crucial. Additionally, given the current RBI and IRDAI regime, a deep analysis is required to determine whether such RBI Notification has truly allowed availing insurance from IFSC, GIFT City.
For further information, please contact:
Ketaki Gor Mehta, Partner, Cyril Amarchand Mangaldas
ketaki.mehta@cyrilshroff.com
[1]Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12029&Mode=0
[2] Available at: https://rbi.org.in/Scripts/BS_CircularIndexDisplay.aspx?Id=12494
[3] Available at: A.P. (DIR Series) Circular No. 06 dated June 22, 2023.
[4]Available at: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=12699&Mode=0
[5] As per International Financial Services Centres Authority (Banking) Regulations, 2020, FCA can be opened in IFSC, GIFT City in the following currencies, namely: (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); (xi) Russian Rouble (RUB); (xii) Swedish Krone (SEK); (xiii) Norwegian Krone (NOK); (xiv) New Zealand Dollar (NZD); and (xv) Danish Krone (DKK).
