The RBI notified the FEMA (IFSC) Regulations on March 2, 2015 in exercise of the power under section 47 of the Foreign Exchange Management Act, 1999 (“FEMA Act”). The FEMA (IFSC) Regulations are applicable to all financial institutions or branch of financial institution set up in the IFSC.
The FEMA (IFSC) Regulations provides non-obstante clause stating that nothing contained in any other regulations shall apply to a financial institution or branch of a financial institution set up in an IFSC. FEMA (IFSC) Regulations, inter-alia provides as under:
a. Any financial institution or branch of a financial institution set up in the IFSC and permitted / recognized as such by the GoI or a Regulatory Authority shall be treated as a person resident outside India as provided in Regulation 3 to FEMA (IFSC) Regulation.
The term financial institution has been defined to include i) a company, or ii) a firm, or iii) an association of persons or a body of individuals, whether incorporated or not, or iv) any artificial juridical person, not falling within any of the preceding categories engaged in rendering financial services or carrying out financial transaction.
‘Financial service’ shall mean activities a financial institution is allowed to carry out as specified in the respective Act of the Parliament or by the GoI or by any Regulatory Authority empowered to regulate the concerned financial institution;
‘Financial transaction’ shall mean making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any bill of exchange or promissory note, or transferring any security or acknowledging any debt
It is further provided that ‘financial institution’ shall include banks, non-banking financial companies, insurance companies, brokerage firms, merchant banks, investment banks, pension funds, mutual funds, trusts, exchanges, clearing houses, and any other entity that may be specified by the GoI or a Financial Regulatory Authority.
b. A financial institution or branch of a financial institution is required to conduct business in foreign currency other than Indian Rupees (INR), whether with a resident or otherwise as provided in Regulation 4 to FEMA (IFSC) Regulation.
However, recently, the FEMA (IFSC) Regulations were amended to provide that RBI may allow a financial institution or branch of a financial institution, through specific or general permission, to conduct business in Indian Rupee, whether with a resident or otherwise. Further to the amendment in FEMA (IFSC) Regulations, the RBI has vide Circular No. 17 dated January 20, 2020, allowed the trading of Rupee Derivative (with settlement in foreign currency) in IFSCs starting with Exchange Traded Currency Derivatives.
While the IFSC is technically located on the Indian land, it is considered an offshore jurisdiction for foreign exchange purposes, allowing investors to invest in businesses located within the IFSC without having to comply with India’s foreign exchange regime. Accordingly, any transaction by resident Indian, in GIFT City would need to be complied with FEMA regulations.
For detailed discussion on the above subject, please feel free to connect at contact@devadhaantu.in
