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Regulatory Alert: Regulations notified for recognition and operation of Global In-House Centres (GICs) in International Financial Service Centre

20 November 2020

Background

The Indian International Financial Service Centre (‘IFSC’) is a Special Economic Zone (‘SEZ’) located in GIFT City, Gujarat, India. IFSC has been set-up to enable undertaking of financial services transactions that are currently carried on outside India by overseas financial institutions as well as overseas branches / subsidiaries of Indian financial institutions. The key institutions operating in sectors such as banking, insurance, capital markets, information technology and information technology enabled services can set-up units in the IFSC. The government has recently also set-up a unified regulator which is known as IFSC Authority (‘IFSCA’) for effecting single window clearance and further ease in doing business for the units set-up in IFSC.

Set-up of Global In-House Centres

The Central Government had earlier notified[i] Global In-House Centres (‘GIC’), as a ‘financial service’ to provide services relating to financial products and financial services. Thereafter, the IFSCA published the IFSC Authority (Global In-House Centres) Regulations, 2020 (‘Regulations’)[ii] in order to provide a framework for recognition and operation of the GIC units set-up in the IFSC.

Key aspects of the Regulations

  • GIC is defined as unit set up for providing support services, directly or indirectly, to entities within its ‘financial services group’, for carrying out a financial service in respect of a financial product. This includes provision of support services to entities such as banks and non-banking financial companies, financial intermediaries, investment banks, insurance companies, re-insurance companies, actuaries, brokerage firms, funds, stock exchanges, clearing houses, depositories, and custodians.
  • ‘Financial services group’ refers to any entity (including holding, subsidiary, associate companies, etc) which is regulated by a financial services regulator or any other competent body regulating financial services activities in its home jurisdiction. The Regulations also enable filing of an application with the IFSCA, to confirm whether the group constitutes a financial service group.
  • Who is eligible to set-up?
    • GIC unit to exclusively cater to the financial services group;
    • Entities served must be located in Financial Action Task Force (‘FATF’) compliant jurisdictions; and
    • Support services provided to its financial services group should be for carrying out a financial service in respect of a financial product.
  • Registration Process:
    • Applicants are required to submit the prescribed form along with the applicable annual fee for setting-up a GIC unit (discussed below).
    • Registrations granted by the IFSCA may be withdrawn in case post the registration, the GIC unit fails to fulfil the conditions specified at the time of grant of registration.
  • Permissible services and activities:
    • GIC unit to provide services to non-resident entities only;
    • Relocation of employees from an existing entity in domestic area in India is allowed only for supervisory personnel (upto 20% of their total strength) with the prior approval of the IFSCA.
  • GICs have been permitted to deal in freely convertible foreign currency only. However, administrative expenses can be made in Indian National Rupees (‘INR’) by maintaining an INR account.
  • GIC may conduct business in any mode prescribed by the IFSCA, including branch mode and are required to maintain its books of accounts, records and documents in their declared foreign currency.

Application Process and Reporting Requirements

The IFSCA in its recent Circular[iii] has also prescribed an application form for set-up of a GIC, annual membership fees based on employee strength and certain reporting requirements, pursuant to the aforementioned regulations. The key information to be provided in the application form are listed below -

  • Business plan (including capital expenditure and estimated employees) for 5 years;
  • Targeted activities to be carried out;
  • Group entities to which services would be rendered;
  • Entities in non-FATF compliant jurisdictions;
  • Organisation chart of the GIC unit; and
  • Level of supervision by parent/ intermediate entity.

Along with the application, applicants are required to submit certain documents viz. constitutional documents, last 3 years consolidated financial statements, etc. GICs are also required to furnish periodical reports in USD, in relation to their operations.

The Circular also specifically clarifies that in addition to the application prescribed, an approval under the SEZs Act, 2005 needs to be obtained separately from the Development Commissioner of SEZ.

BDO Comments

The above regulations have paved a way for allowing GICs to be set-up in the IFSC. This will benefit the global businesses as India is currently one of the most favourable destination for setting up a GIC considering low-cost and efficient resources, availability of high-skilled talent etc. Considering that a GIC can now be set-up in the IFSC, fiscal and other incentives, and infrastructural facilities available for units set-up in the IFSC would be an added advantage.

The regulations mention that support services to be provided by the GIC should be for carrying out a financial service in respect of a financial product. The terms ‘financial service’ and ‘financial product’ have not been defined under the above regulations. However, one can refer to IFSCA Act, 2019 for the definition of the said terms. As per the IFSCA Act, 2019, financial product means securities, contracts of insurance, deposits, credit arrangements, foreign currency contracts other than contracts to exchange one currency for another that are to be settled immediately. In addition to these products, the Central Government has also notified[iv] inclusion of operating / financial lease or a hybrid of operating and financial lease of an aircraft or a helicopter (including engines or other parts) as a financial product. In case a multinational group deals in any of these products, a GIC unit can be set-up for providing support services to such groups. Further, ‘financial services’ is exhaustively defined in the IFSCA Act, 2019 and includes buying, selling, or subscribing to a financial product, acceptance of deposits, safeguarding, administering or managing assets consisting of financial products, effecting contracts of insurance, establishing or operating an investment scheme, maintaining or transferring records of ownership of a financial product, underwriting the issuance or subscription of a financial product, etc. Accordingly, a GIC unit can be set-up to provide support services to its group companies providing any of the abovementioned services.

The introduction of these regulations is a critical step in expanding the scope of activities that can be undertaken in the IFSC and is likely to garner additional interest from multinational groups engaged in financial services desirous of adopting tax friendly regimes for setting up their support service centres. Setting up of GICs would also be a step towards improving India's global outreach in the financial services sector through the IFSC, and providing India a level playing field with other leading International Finance Centres in the world.


[i] Notification No. F. No. 3/4/EM-2020 dated 16 October 2020

[ii] International Financial Services Centres Authority (Global In-House Centres) Regulations, 2020 published vide notification dated 12 November 2020

[iii] Circular No. F. No. 29/IFSCA/GIC/2020-21 dated 18 November 2020

[iv] Notification No. F. No. 3/4/EM-2020 dated 16 October 2020