Context

International Financial Services Centres Authority Bill, 2019 was introduced in Lok Sabha by Union Finance Minister.

About

• The Bill provides for the establishment of an Authority to develop and regulate the financial services market in the International Financial Services Centres in India. 
• Key features of the Bill include:
  • It will apply to all International Financial Services Centres (IFSCs) set up under the Special Economic Zones Act, 2005.
  • It sets up the International Financial Services Centres Authority (IFFSCA)
  • Composition:
    • IFFSCA will consist of nine members, appointed by the central government. 
    • Members of the Authority will include: (i) the Chairperson, (ii) one member each to be nominated from the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority of India (IRDAI), and the Pension Fund Regulatory and Development Authority (PFRDA), (iii) two members from among officials of the Ministry of Finance, and (iv) two members to be appointed on the recommendation of a Search Committee. 
    • Members will have a term of three years, subject to reappointment.  
  • Functions of the Authority:
    • To regulate financial products (such as securities, deposits or contracts of insurance), financial services, and financial institutions which have been previously approved by any appropriate regulator (such as RBI or SEBI), in an IFSC.  
    • It will follow all processes which are applicable to such financial products, financial services, and financial institutions under their respective laws. 
    • The appropriate regulators are listed in a Schedule to the Bill and include the RBI, SEBI, IRDAI, and PFRDA.  The central government may amend this schedule through a notification. 
    • Regulating any other financial products, financial services, or financial institutions in an IFSC, which may be notified by the central government, and recommending any other financial products, financial services, or financial institutions to the central government, which may be permitted in an IFSC. 
  • The Bill sets up the International Financial Services Centres Authority Fund. The following items will be credited to the Fund: (i) all grants, fees and charges received by the Authority, and (ii) all sums received by the Authority from various sources, as decided by the central government.  The Fund will be used for: (i) salaries, allowances and other remuneration of members and employees of the Authority, and (ii) expenses incurred by the Authority.  Further, the central government may provide grants to the Authority for the regulation of IFSCs. 
  • The IFFSCA will constitute a Performance Review Committee to review its functioning.  The Review Committee will consist of at least two members of the Authority.  It will review whether: (i) the Authority has adhered to the provisions of the applicable laws while exercising powers or performing functions, (ii) the regulations made by the Authority promote transparency and best practices of governance, and (iii) the Authority is managing risks to its functioning in a reasonable manner.  The Committee must submit a report of its findings to the Authority at least once every year. 
  • As per the Bill, all transactions of financial services in IFSCs will be in such foreign currency as specified by the Authority, in consultation with the central government.

What is International Financial Services Centre? 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. Gujarat International Finance Tec-City Co. Ltd is being developed as the country’s first international financial services centre (IFSC) 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 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.

Need for and the benefits of a unified authority

• Multiple regulators: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.

Conclusion

Therefore, the bill providing a unified financial regulator for IFSCs in India would provide world class regulatory environment to financial market participants. This is also essential from an ease of doing business perspective.