What is an IFSC and how does it work?

An international financial services centre caters to customers outside the jurisdiction of domestic economy, dealing with flows of finance, financial products and services across borders

Asit Ranjan Mishra
Updated15 Jan 2015
The BSE will invest Rs150 crore in Gujarat&#8217;s GIFT City to develop India&#8217;s first international financial services centre (IFSC). Photo: Hemant Mishra/Mint<br />
The BSE will invest Rs150 crore in Gujarat&#8217;s GIFT City to develop India&#8217;s first international financial services centre (IFSC). Photo: Hemant Mishra/Mint

Gujarat International Finance Tec-City Co. Ltd is being developed as the country’s first international financial services centre (IFSC). Mint explains the concept of an IFSC and how it functions.

What is an IFSC?

An IFSC caters to customers outside the jurisdiction of the domestic economy. Such centres deal with flows of finance, financial products and services across borders. London, New York and Singapore can be counted as global financial centres. Many emerging IFSCs around the world, such as Shanghai and Dubai, are aspiring to play a global role in the years to come. An expert panel headed by former World Bank economist Percy Mistry submitted a report on making Mumbai an international financial centre in 2007. However, the global financial crisis that unfolded in 2008 made countries including India cautious about rapidly opening up their financial sectors.

What are the services an IFSC can provide?

—Fund-raising services for individuals, corporations and governments

—Asset management and global portfolio diversification undertaken by pension funds, insurance companies and mutual funds

—Wealth management

—Global tax management and cross-border tax liability optimization, which provides a business opportunity for financial intermediaries, accountants and law firms.

—Global and regional corporate treasury management operations that involve fund-raising, liquidity investment and management and asset-liability matching

—Risk management operations such as insurance and reinsurance

—Merger and acquisition activities among trans-national corporations

Can an IFSC be set up in a special economic zone (SEZ)?

The SEZ Act 2005 allows setting up an IFSC in an SEZ or as an SEZ after approval from the central government.

What does an IFSC require?

IFSCs such as Dubai International Financial Centre and Shanghai International Financial Centre, which are located within SEZs, have six key building blocks:

—Rational legal regulatory framework

—Sustainable local economy

—Stable political environment

—Developed infrastructure

—Strategic location

—Good quality of life

Should an IFSC be located within an SEZ?

Since India has many restrictions on the financial sector, such as partial capital account convertibility, high SLR (statutory liquidity ratio) requirements and foreign investment restrictions, an SEZ can serve as a testing ground for financial sector reforms before they are rolled out in the entire nation. Apart from SEZ-related incentives, as per the SEZ Act, there is an exemption from the securities transaction tax levied under Section 98 of the Finance Act, 2004, in case taxable securities transactions are entered into by a non-resident through an IFSC.

Why are banks taking up space in the GIFT SEZ?

Commercial banks are allowed to open offshore banking units (OBUs) within SEZs, which are deemed as overseas branches. Such OBUs can trade in foreign currencies in overseas markets and also with Indian banks, raise funds in foreign currency as deposits and borrowings from non-resident sources and provide loans and liability products for clients. State Bank of India set up its first OBU at Santacruz Electronics Export Processing Zone in Mumbai, in 2003.

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