Why in News?

• The Union Cabinet has recently approved International Financial Services Centres Authority Bill, 2019 which seeks to establish a unified authority for regulating all financial services in International Financial Services Centres (IFSCs) in India.

Background Information:

• Before learning about International Financial Services Centres Authority, we should be aware of the International Financial Services Centre (IFSC) first of all.

What is the International Financial Services Centre (IFSC)?

• IFSC is a jurisdiction that provides financial services to resident and non-resident Indians in foreign currencies.
• IFSC will be a deemed foreign territory dealing in foreign currency. The units in IFSC will be recognised as non-resident entity under the FEMA regulations of Reserve Bank of India.
• The first IFSC in India has been set up at the Gujarat International Finance Tec-City (GIFT City) in Gandhinagar.

Objective of setting up IFSC:

• The aim is to develop a world-class smart city that becomes a global financial hub with the development of an International Financial Services Centre.
• The government is also trying to bring back the financial services and transactions that are currently carried out in offshore financial centres by local corporate entities and overseas branches or subsidiaries of financial institutions (FIs) to India.
• It would also provide Indian corporate easier access to Global Financial Markets.

Who can set up offices in IFSC?

• Entities regulated by RBI, Securities & Exchange Board of India, and the Insurance Regulatory & Development Authority of India can set up offices in IFSC. For instance, banks, insurance companies, stock broking firms, alternate investment funds and investment advisors, among others, can be part of it.
• The key aim of GIFT City is to bring global financial services on-shore which are currently being rendered from other overseas jurisdictions

IFSC as per Special Economic Zone Act, 2005:

• The Central Government may approve the setting up of an International Financial Service Centre in a Special Economic Zone and may prescribe the requirements for setting up and operation of such centre.
• The Central Government shall approve only one International Financial Services Centre in a Special Economic Zone.

Services provided by IFSC:

• 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.

The International Financial Services Centres Authority.

• The above bill seeks to setup this authority with the following features:

1. Composition of the Authority:

• Consisting of a Chairperson, one Member each to be nominated by the Reserve Bank of India (RBI), the Securities Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI) and the Pension Fund Regulatory and Development Authority (PFRDA), two members to be nominated by the Central Government and two other whole-time or full-time or part-time members.

2. Functions of the Authority:

• Regulate all such financial services, financial products and FIs in an IFSC which has already been permitted by the Financial Sector Regulators for IFSCs.
• Regulate such other financial products, financial services or FIs as may be notified by the Central Government from time to time.
• Recommend to the Central Government such other financial products, financial services and financial institutions which may be permitted in the IFSCs.

3. Powers of the Authority:

• All powers exercisable by the respective financial sector regulatory (viz. RBI, SEBI, IRDAI, and PFRDA etc.) under the respective Acts shall be solely exercised by the Authority in the IFSCs in so far as the regulation of financial products, financial services and FIs that are permitted in the IFSC are concerned.

4. Processes and Procedures:

• The processes and procedures to be followed by the Authority shall be governed in accordance with the provisions of the respective Acts of Parliament of India applicable to such financial products, services or institutions, as the case may be.

5. Grants by the Central Govt.

• The Central Govt. may, after due appropriation made by Parliament by law in this behalf, make to the Authority grants of such sums of money as the Central Government may think fit for being utilized for the purposes of the Authority.

6. Transactions in Foreign Currency

• The transactions of financial services in the IFSCs shall be done in the foreign currency as specified by the Authority in consultation with the Central Govt

Who is Covered?

• The Bill will be applicable to all International Financial Services Centres (IFSCs) set up under the Special Economic Zones Act, 2005.
• The first IFSC in India has been set up at the Gujarat International Finance Tec-City (GIFT City) in Gandhinagar.

Need for and the benefits of a Unified Authority:

• Currently, the banking, capital markets and insurance sectors in IFSC are regulated by multiple regulators, i.e. RBI, SEBI and IRDAI.
• The dynamic nature of business in the IFSCs necessitates a high degree of inter-regulatory coordination. It also requires regular clarifications and frequent amendments in the existing regulations governing financial activities in IFSCs.
• The development of financial services and products in IFSCs would require focussed and dedicated regulatory interventions.
• Therefore, a unified financial regulator for IFSCs in India would provide world class regulatory environment to financial market participants. This also essential from an ease of doing business perspective.
• Further, this would also be essential from an ease of doing business perspective. The unified authority would also provide the much needed impetus to further development of IFSC in India in-sync with the global best practices.