CAIIB BFM Module A Unit 9 : International Financial Service Centre (IFSC), GIFT City

07/09/2023

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CAIIB Paper 2 BFM Module A Unit 9 : International Financial Service Centre (IFSC), GIFT City (New Syllabus)

IIBF has released the New Syllabus Exam Pattern for CAIIB Exam 2023. Following the format of the current exam, CAIIB 2023 will have now four papers. The CAIIB Paper 2 (Bank Financial Management) includes an important topic called “International Financial Service Centre (IFSC), GIFT City”. Every candidate who are appearing for the CAIIB Certification Examination 2023 must understand each unit included in the syllabus.

In this article, we are going to cover all the necessary details of CAIIB Paper 2 (BFM) Module A (INTERNATIONAL BANKING) Unit 9 : International Financial Service Centre (IFSC), GIFT City, Aspirants must go through this article to better understand the topic, International Financial Service Centre (IFSC), GIFT City and practice using our Online Mock Test Series to strengthen their knowledge of International Financial Service Centre (IFSC), GIFT City. Unit 9 : International Financial Service Centre (IFSC), GIFT City

Introduction

An International Financial Service Centre (IFSC) caters to customers outside the jurisdiction of the domestic economy.

Such centres deal with flows of finance, financial products and services across the borders with emphasis on the following:

Fund raising services for Individuals, Corporates 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 of asset-liability matching.
Risk management operations such as insurance and reinsurance
Merger and acquisition activities among trans-national corporations

Scope Of IFSC In India

Banks in International Financial Service Centres operate as foreign banks in the home country and are not subject to domestic reserve requirements on deposits.
They seek deposits from non-resident citizens and can extend loans only to non-residents.
Banks in IFSCs are also permitted to lend in foreign currencies to both resident corporates (for trade transactions) and non-residents.
The main objective of the IFSC is to develop a strong global connect and focus on the needs of the Indian economy as well as to serve as an international destination for the Corporates in their financial activities.
The SEZ Act 2005 (Special Economic Zones Act, 2005) allows setting up an IFSC in an SEZ or as an SEZ after obtaining approval from the Central Government.
India has many restrictions on the financial sector, such as partial capital account convertibility, high SLR 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 u/s 98 of the Finance Act, 2004, in case of taxable securities transactions that are entered into by non-residents through an IFSC.

Gujarat International Financial Technology Tec-City (GIFT City)

Established at Gandhinagar, Gujarat
Started functioning from 5th Dec 2019
With 225 companies including 3 PSBs, 9 Private. Sector Banks & 3 MNC Banks.

Opportunities At Gift City

Access to large hinterland economy
Access to international markets
Connecting 30 Mn strong Indian diaspora which has a combined worth of USD 3 trillion to India through the IFSC
Inbound and outbound gateway for international financial services
Potential to be a leading destination for Global in-house Centers with a globally competitive cost structure
Attracting global talent to the world class fin tech hub in Gift city
Emerging as a leading hub for fund administration.

Key business opportunities – (segment-wise)

Wholesale banking – ECB and Trade Finance., Factoring and Forfaiting Services, Guarantee and Indemnity business, Equipment leasing, Credit enhancement & Insurance, Risk Participation, Participation in Intl. trade finance services, Participation in aircraft leasing, syndicated loans.
Capital markets – merchant banking, trading and clearing members of IFSC Exchange, funding of alternative investment funds, custodian of securities.
Retail Banking – private banking, wealth management, retail banking products such as structured deposits, deposit accounts, certificate of deposits.
Treasury management – ALM, Derivatives in Forex, Credit and interest rates, consolidate group-wise derivative trading, including NDF in INR and other foreign currencies to manage risk.
Other opportunities – distributor of MF units, insurance and other financial products, Investment advisory services, Portfolio Management Services, trustee and fiduciary services Regional Administrative Office (RAD) and Representative office.

Guidelines For Setting Up Of IFSC Banking Units (Ibu) By Indian Banks

Eligibility –

Indian banks viz., Banks in the Public Sector and the Private Sector authorized to deal in foreign exchange will be eligible to set up IBUs.
Each eligible bank would be permitted to set up only one IBU in each IFSC.

Licensing –

Eligible Banks interested in setting up IBUs will be required to obtain prior permission of the RBI for opening an IBU.
For most regulatory purposes, an IBU will be treated on par with a foreign branch of an Indian bank.

Capital –

The parent bank will be required to provide a minimum capital of USD 20 Mn or equivalent in any foreign currency to its IBU which should be maintained at all times.

Reserve requirements –

The liabilities of the IBU are exempt from, both, CRR and SLR requirements of RBI.
Resources and deployment – The funds raised will be from Non Residents and Overseas branches

Resources and deployment

The funds raised will be from Non Residents and Overseas branches of Indian Banks.
Deployment of funds can be with, both, persons resident in India as well as persons resident outside India.
However, deployment of funds with persons resident in India shall be subject to the provisions of FEMA 1999.

Operational Aspects

Cash transactions and savings bank accounts are not permitted. Deposits can be maintained in current accounts and term deposits.
Indian KYC-AML and delinquency norms are applicable.
Deposits with IBUs are not insured.

Role Of IFSCA

International Financial Services Centres Authority (IFSCA) is a unified authority for the development and regulation of financial products, financial services and financial institutions in the IFSC in India.
IFSCA has been established on April 27th 2020 under the IFSCA Act 2019 with headquarters in Gandhinagar, Gujarat.
Since it requires a high degree of inter-regulatory coordination within the financial sector
IFSCA has been established as a unified regulator with a holistic vision in order to promote ease of doing business in IFSC and provide world class regulatory environment.
Main objectives : to develop a strong global connect and focus on the needs of the Indian economy as well as to serve as an international financial platform for the entire region and the global economy as a whole

Regulatory Framework

Indian and Foreign Banks intending to set up an IBU in IFSC are required to obtain license from IFSCA.

The Parent Bank is required to satisfy the following conditions:

Maintain necessary regulatory capital subject to a minimum of USD 20 Mn at the Parent Bank level.
Obtain No Objection letter from home country regulator for setting up an IBU in IFSC.
Letter of comfort from Parent Bank regarding liquidity and resource support to IBU.
IBUs are not required to maintain SLR and CRR.
IBUs are required to maintain LCR and Net Stable Funding Ratio at IBU level. However, the same may be maintained at the parent level with IFSCA permission.
Leverage ratio for IBUs may be maintained by the Parent Bank and at the level specified by the home regulator and subject to the regulations applicable to the parent bank.
IBUs are required to maintain a retail deposit reserve ratio on daily basis at 3% of the deposits raised from individuals outstanding as at the end of the previous working day.
IBUs are required to comply with the prudential directions and instructions issued by their home regulator unless otherwise specified by the IFSCA.

Permissible Activities At IBUs

IBUs can undertake transactions with
Residents (for deployment of funds)
Non-residents entities other than individuals including HNIs/retail customers (for both raising of resources and deployment of funds).
All transactions shall in currency other than INR.
IBUs can deal with WOS/JVs of Indian companies registered abroad.
IBUs are not allowed to open SB accounts.
They can open foreign currency current accounts of units operating in IFSCs and of Non-resident institutional investors to facilitate their investment transactions.
They can open foreign currency current accounts (including escrow accounts) of their corporate borrowers subject to FEMA.
No cheque facility will be available for holders of current accounts in the IBUs.
All transactions are to be done through bank transfers.
IBUs are permitted to undertake factoring/forfaiting of export receivables.
IBUs shall obtain prior approval of RBI for offering derivative products.
IBUs are allowed to open foreign currency Escrow accounts of Indian resident entities for the purpose of temporarily subscriptions to GDR/ADR issues, until issuance of receipts.
IBUs are allowed to act as underwriter/arranger of INR denominated Overseas bonds issued by Indian entities in Overseas markets.
Exposure ceiling for IBUs shall be 5% of the parent’s Bank Tier I Capital in case of Single borrower and 10% of the parent Bank’s Tier I Capital in the case of a borrower group.
All AML/CFT instructions issued by RBI to be followed.
The IBUs will be regulated and supervised by the RBI.
The IBUs would operate and maintain balance sheet only in foreign currency and will not be allowed to deal in Indian rupees except for having a special rupee account for the purpose of defraying their administrative and statutory expenses. Such operations/transactions of these units in INR would be through the AD (distinct from IBU) which would be subject to the extant foreign exchange regulations.
IBUs are not allowed to participate in the Indian domestic call, notice, term, forex, money and other onshore markets and domestic payment systems.
IBUs will be required to maintain separate Nostro accounts with correspondent banks which would be distinct from Nostro accounts maintained by other branches of the same bank.
IBUs may maintain SNRR (Special Non-Resident Rupee) accounts with the domestic AD and these accounts must be funded only by foreign currency remittances through international channel.
The loans and advances of IBUs would not be reckoned as part of the Net Bank Credit of the Parent Bank for computing priority sector lending obligations.
No liquidity support will be available to the IBUs from the RBI.

Relaxations For The FPI (Foreign Portfolio Investors) Entities At Gift City

SEBI has permitted FPIs registered in India to trade on exchanges operating in the GIFT City.
FPIs are also allowed to trade in commodity derivatives on IFSC exchanges.
Companies do not pay securities transaction tax or commodity transaction costs.
All exchanges operate 22 hours a day and FPIs permitted to operate without any additional documentation.
Waiver of short term capital gains tax on derivatives trade (at present FPIs pay 30% as short term capital gains tax.)
Allowing retail investors to trade to build liquidity in the market.

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CAIIB BFM Module A Unit 8 Exim Bank – Role, Functions and Facilities (Ambitious Baba)