GIFT City IFSC Platform For Fintech Startups & Sandbox Initiatives & Relaxation Under Companies Act

Author: Jayshree Chandra, Senior Partner and Nitika Bakshi, Senior Associate

Published in LiveLaw

The Government of India, with a view to establish a globally competitive financial platform offering a full range of international financial services at the regional and global level, has approved the setting up of International Financial Services Centre (IFSC) in Special Economic Zones across the country and the very first IFSC of India has been established in the Gujrat International Finance Tec-City (GIFT City) at Gandhinagar in the state of Gujarat. It is envisioned that the IFSC at Gift City will reinforce India’s strategic position as a global hub for financial services and as a preferred destination for raising capital and transacting in a broad array of financial products and services.

The IFSC at GIFT City provides global investors/ financial entities easy access to the Indian economy and furthermore access to India’s large hinterland economy. It also allows Indian entities to access international markets/ global market through the IFSC.

The IFSCs provide investors with the opportunity to set-up units in the IFSC to carry out business in the areas of banking, investment, insurance and re-insurance, capital market, asset management and allied/ support services. Such registered units/entities are permitted to operate under a special offshore status within India. Furthermore, units in IFSC also enjoy special considerations under several domestic laws in India. Notably the Ministry of Corporate Affairs (MCA) has notified exemptions and modifications in respect of certain provisions of the Companies Act, 2013 in their application to a specified IFSC Private Company and Specified IFSC Public Company which are licensed to operate from an IFSC.

Key modifications/ exemptions under the Companies Act, 2013 for a specified IFSC Private Company include:

  • Appointment of Directors: The requirement to have at least 1 (one) director who has stayed in India for a total period of not less than 182 days in the previous calendar year will apply to the IFSC bound private companies from the second financial year from the date of their incorporation.
  • Secretarial Standards and Compliances: Such Companies are exempted from complying with the secretarial standards with respect to general and board meetings as specified by the Institute of Company Secretaries of India.
  • Corporate Social Responsibility (CSR): Provisions relating to CSR will be applicable on them after 5 (five) years from the commencement of business.
  • Board Meetings: Such companies are required to hold its first board meeting within 60 (sixty) days of its incorporation and thereafter is required to hold at least one meeting of the board of directors in each half of a calendar year – as opposed to the minimum number of 4 meetings every year, prescribed for private companies under the Act.

Furthermore, the timeline relaxations have been given to IFSC bound private companies for submitting certain forms and returns under the Companies Act, 2013, including notice to the registrar of change of the situation of the registered office, delivery of certificates to subscribers after incorporation, allotment, transfer or transmission, declaration in respect of beneficial interest, registration of resolutions and agreements etc.

It is also important to note that the tax regime has also been made highly competitive with a 10 (ten) year tax holiday, no GST, no capital gains tax etc. with respect to Units and their business operations in the IFSC.

To regulate the IFSCs, the Government of India established the International Financial Services Centers Authority (IFSCA) in April 2020 under the International Financial Services Centers Authority Act, 2019.

For ensuring a comprehensive, consistent, streamlined and unified regulatory framework governing units in IFSCs, the regulatory powers of India’s financial services regulators i.e., the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory Development Authority of India (PFRDAI) have been vested in the IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC. Given the nature of transactions and services in the IFSC, the IFSCA is also committed to ensuring that the regulatory environment is fully FATF compliant with strong enforcement measures of AML and CFT in place.

The IFSCA has taken up further initiatives to promote IFSCs as a leading fund-raising destination for both Indian and foreign issuers and as a major international center for AIFs specially focusing on green finance and social impact capital.

Considering the importance of financial technology solutions or FinTech in promoting innovation of ideas and solutions in financial services market IFSCs are also positioned as a global hub for fintech start-ups in furtherance of which the authority has notified a regulatory sandbox framework and special incentives/schemes for fintech start-ups. Under the Framework for FinTech Entity in the International Financial Services Centers, various sandboxing initiatives such as Innovation Sandbox (i.e., a testing environment where FinTech Entities can test their ideas and solutions in isolation from the live market), Inter-Operable Regulatory Sandbox (IORS) (i.e., a testing environment for innovative hybrid financial products/ services falling within the regulatory ambit of domestic financial sector regulators), Regulatory Sandbox (i.e., a live environment with a limited set of real customers for limited time-frame) have been permitted, to give impetus to FinTech start-ups.

Furthermore, the IFSC Authority (FinTech Incentive) Scheme has been notified to provide financial support to FinTech activities in the form of specific grants including specifically for developing solutions facilitating sustainable finance and sustainability linked finance.

Though an appropriate regulatory framework for setting-up of IFSCs has been put into place, the underlying ecosystem for establishing IFSCs is still in its nascent stages. That being said, this endeavor to propagate India as a preferred destination for raising capital, trading in various types of financial products and availing all types of financial services, is commendable.