The Union Cabinet has recently given a green light to the International Financial Services Centres Authority Bill, 2019. This bill is aimed at establishing a unified authority that will be in charge of regulating all financial services offered in International Financial Services Centres (IFSCs) in India.
Understanding the Role and Significance of IFSC
An IFSC offers services to customers outside the jurisdiction of the domestic economy, handling flows of finance, financial products, and services across borders. The idea of making Mumbai an international financial centre was proposed by a panel of experts led by Percy Mistry, an economist who formerly worked with the World Bank. The panel submitted their report in 2007.
However, the financial crisis that rocked the globe in 2008 made countries, including India, cautious about rapidly opening up their financial sectors. In the Indian context, the definition of an IFSC is outlined in the SEZ Act, 2005. With India imposing many restrictions on its financial sector like partial capital account convertibility, high statutory liquidity ratio requirements, and foreign investment restrictions, a Special Economic Zone (SEZ) can serve as a practical experimental field for financial sector reforms before implementing them nationally.
India’s First Tryst with Special Economic Zone (SEZ)
India’s first-ever policy concerning Special Economic Zones (SEZs) was announced in April 2000. The next significant step came in May 2005 when the Parliament passed the Special Economic Zones Act, 2005, which officially came into effect in the following year, 2006.
SEZs in India aim to solve the problem of multiple controls and clearances, deliver world-class infrastructure, and provide a stable fiscal regime. The principal focus of these zones is economic growth, bolstered by quality infrastructure and supplemented by an attractive fiscal package at both the Centre and State level, with minimal regulatory interventions.
GIFT (Gujarat International Finance Tec-City) in Gandhinagar bears the distinction of being India’s first International Financial Services Centre.
Regulatory Landscape of IFSCs
In the present setup, the regulatory oversight of the banking, capital markets, and insurance sectors in IFSCs is shared between multiple regulators, such as the RBI, SEBI, and IRDAI. The dynamic business environment of the IFSCs necessitates a high degree of inter-regulatory coordination. Regular clarifications and amendments in the current regulations governing financial activities in IFSCs are also required due to the evolving nature of activities in these centres.
The growth of financial services and products in IFSCs will need focused and dedicated regulatory interventions, which underscores the necessity for a unified financial regulator for IFSCs in India. From an ease-of-doing-business perspective, this is vital. Additionally, a unified authority will provide the needed thrust for further development of IFSC in India, in line with global best practices.
A Closer Look at the IFSC Authority
Composition: The proposed Authority will be composed of a Chairperson, one nominated Member each from various regulatory bodies like the RBI, SEBI, IRDAI, and the Pension Fund Regulatory and Development Authority (PFRDA). Alongside these, there will be two members nominated by the Central Government and two other members who may either be full-time or part-time.
Functions: The Authority will regulate all financial services, products, and Financial Institutions within an IFSC. It also holds the power to recommend to the Central Government additional financial products, services, and institutions that can be included in the IFSCs.
Powers: All powers currently enjoyed by respective financial sector regulators under their respective Acts will now be solely exercised by the Authority in the IFSCs, concerning the regulation of financial products, services, and Financial Institutions permitted in the IFSC.
Processes and procedures: The processes and procedures followed by the Authority will adhere to the provisions of the respective Acts of Parliament of India applicable to such financial products, services, or institutions.
Key Facts about the IFSC Authority
| Fact | Description |
|---|---|
| Grants by the Central Govt. | The Central Government may make available to the Authority grants of sums deemed suitable after due appropriation made by Parliament by law. |
| Transactions in foreign currency | The Authority will specify the foreign currencies in which transactions of financial services in the IFSCs will take place, following consultation with the Central Government. |
The Way Forward for the IFSC Authority
The establishment of the IFSC Authority signals a new era of financial regulation in India. With this unified regulator in place, the financial services within IFSCs can be managed more effectively, offering a boost to these centres’ growth and development. It’s not just about creating a world-class regulatory environment but also paving the way for ease of doing business. Guided by these principles, the IFSC Authority stands ready to usher Indian financial services into a future aligned with global best practices.