2023 Amendments To The IFSC Banking Regulations: Strengthening The Regulatory Framework For Banking In The IFSC

IFSCA Banking Regulations, 2020 (“Regulations”) is the primary legislation governing the banking and investment activities in IFSC. The Regulations cover a wide range of topics, including: (a) type of units of banks, licence requirements, for setting up in IFSC; (b) capital thresholds and requirements; (c) prudential regulatory requirements and norms; (d) permissible activities (e.g. currency for conducting business in IFSC, foreign currency accounts, etc.); (e) anti-money laundering, counter-terrorist financing (“AML/CFT”) and KYC measures; (f) corporate governance – reporting/ operational requirements; and (g) risk management.

These Regulations are a significant step forward in the development of the banking and investment activities in the IFSC. It provides a transparent regulatory framework with a focus on attracting foreign investment and promoting the growth of banking sector and investment environment in the IFSC. Key highlights of the IFSCA Banking Regulations are as follows:

• Licensing requirements: The Regulations provide for the types of banks that can be set up in IFSC. The application is to be made by Parent Bank (a foreign bank) with the IFSCA in a prescribed manner, which has to satisfy the requirements provided in the Regulation, which includes minimum capital requirement, no objection from the home regulator, and undertaking from Parent Bank on providing liquidity. IFSCA may accept or reject the application within the stipulated time, subject to satisfactory written submissions from the applicant.

• Prudential regulatory requirements and norms: The Regulations require units to adhere to norms and guidelines prescribed by IFSCA, from time to time, in relation to maintaining liquidity coverage ratio, net stable funding ratio, leverage ratio; exposure ceiling and ascertaining the liabilities pertaining to reserve ratio requirements, for the Parent Bank/ units (as the case may be). These norms are designed to ensure the stability of the banking sector in the IFSC.

• Permissible activities: The activities laid out in section 3(1)(e) of the IFSCA Act 2019 are permitted for banks in IFSC as per the Regulations. Further, it provides that the business shall be conducted in specified foreign currencies (including INR) as provided in the First Schedule of the Regulation. Further, accounts in the bank may be opened by individuals, corporate or institutional entities, resident in India or outside India. However, the Regulation prohibits cash transactions in foreign currencies.

• AML/CFT/KYC: Banks are mandated by the Regulations to comply with AML/ CFT/ KYC regulations and guidelines by IFSCA, to prevent banks from being used to launder money or finance terrorism or any illegal activity.

• Corporate governance: The Regulations obligate banks to have a robust corporate governance structure by complying with operational requirements such as reporting, furnishing information, submitting reports in US Dollars, maintenance of books of accounts, records, and documents, and maintaining accounts (also in INR for admin/ statutory expenses) to IFSCA (as may be prescribed).

• Risk management: The IFSCA Banking Regulations require deposits of banking units to be insured as per Deposit Insurance and Credit Guarantee Corporation Act, 1961, and rules/regulations thereto. Failure to comply with the conditions mandated in the Regulations entitles IFSCA to withdraw the license after giving the opportunity for submissions.

Previously the Regulations have been amended twice in the year 2021 (i.e., March and July, 2021) and once in the year 2022 (in the month of June). The very recent amendments to the Regulations were made in July, 2023. Some of the key 2023 amendments are:

• substitution of ‘freely convertible foreign currencies’ with ‘Specified foreign currencies’ which are listed in the First Schedule to the Regulations, defined in regulation 2(1) (na);

• introduction of the expression ‘Subsidiary company’ and its definition [reg. 2(1) (oa)]. The 2023 amendment to the Regulation provides, inter alia, for setting up IFSC Banking Company as a subsidiary company of the Parent Bank [reg. 3(1A) (b) and 3A], with USD 50 mn as minimum capital. Whereas, a banking unit can be set up as a branch of the Parent Bank;

• opportunity and flexibility to Parent Bank to withdraw an application for license/ permission [under reg. 3(2)] before grant of the same. This will reduce unnecessary and irrelevant processing time and involvement for both the applicant and the IFCA;

• introduction of prudential regulatory requirements whereby, banking units shall order to the norms and guidelines specified by IFSCA, and in the case of IFSC banking unit - it shall also comply with home regulator directions. Further, the exposure ceiling, and liquidity coverage ratio to be maintained by the banks (including in case of deposits raised from individual’s resident in India or outside) shall be as specified by the IFSCA, from time to time. This will give confidence to investors and service recipients of the banking units. Moreover, the IFSCA will have the scope to assess a unit’s financial standing, notify caution, and take actions including withdrawal of licence in the event of a breach of any prudential norms;

• a banking unit may not undertake any activity which is expressly prohibited either by the home regulator of the Parent Bank or by IFSCA. Such prohibition prevents the unit from undertaking activities that would be in violation of home regulations. This gives more authenticity and power to the IFSCA to make the Parent Bank accountable in case of any violation of guidelines and norms, stipulated from time to time;

• the AML/CFT guidelines and norms, to be complied, shall be as issued by the IFSCA, earlier it provided and included compliance with reporting requirements issued by Reserve Bank of India (“RBI”), from time to time, unless otherwise specified by IFSCA. Though the requirements under RBI are as per international norms, it would be interesting to see the reason for substituting this with IFSCA, under the present amendment, once the guidelines and norms are issued in this regard; and

• from the risk avoidance perspective deposits may be insured as provided under Deposit Insurance and Credit Guarantee Corporation Act, 1961, and any rules or regulations made thereunder. This is welcoming from the depositors’ and investors’ perspective, giving them confidence that IFSCA is safe and favourably regulated.

IFSCA is, over a period of time, endeavouring to draft robust IFSCA Banking Regulations with each passing year, which help ensure the soundness and stability of the banking sector in the IFSC. The Regulations are a positive step towards making the IFSC a leading financial hub in the region.

Authors: Rohit Jain, Managing Partner (rj@singhania.com) And Kunal Sharma, Partner, (kunal@singhania.com) Shinghania & Co. Views are personal.