International Financial Service Centre (IFSC)

An International Financial Services Centre (IFSC) is a designated jurisdiction that provides world-class financial services to both residents and non-residents, in foreign currency, across a range of sectors including banking, insurance, capital markets, asset management, and fintech. It functions as a global financial hub, facilitating the flow of capital, risk management, and cross-border investments for international clients.
In India, the first and only operational IFSC is located at Gujarat International Finance Tec-City (GIFT City) in Gandhinagar, Gujarat, established to bring financial services that were traditionally carried out in global centres like London, Singapore, and Dubai, within India’s own regulatory and economic framework.

Background and Concept

India’s need for an International Financial Services Centre arose from the growing globalisation of financial markets and the significant volume of international financial transactions being conducted offshore.
Prior to the establishment of an IFSC, Indian entities such as banks, insurance companies, and mutual funds often conducted international financial transactions through overseas centres like Singapore or Mauritius, leading to outflow of business and foreign exchange.
To address this, the Government of India conceptualised the creation of a dedicated financial centre under Section 18 of the Special Economic Zones (SEZ) Act, 2005, which allows the establishment of an IFSC within an SEZ to deal in foreign currency-denominated financial products and services.
The objective was to provide a competitive global platform for financial operations and to strengthen India’s position in international finance.

Establishment of GIFT-IFSC

The Gujarat International Finance Tec-City (GIFT City) was conceived as a Smart City and Global Financial Hub, jointly developed by the Government of Gujarat and Infrastructure Leasing & Financial Services (IL&FS).

• Announcement: The concept was introduced in 2007–08.
• Operationalisation: The IFSC at GIFT City became functional in April 2015.
• Regulatory Oversight: The International Financial Services Centres Authority (IFSCA), established in April 2020, now serves as the unified regulator for all financial services within the IFSC.

The GIFT-IFSC operates as an offshore financial centre within India, allowing Indian and international firms to conduct global financial transactions under a liberalised regulatory environment.

Objectives of Establishing an IFSC

• To bring back financial services and transactions currently conducted offshore by Indian firms.
• To promote India as a global financial hub and attract international capital flows.
• To offer competitive financial products and services comparable to other global financial centres.
• To create employment opportunities in high-skill financial and allied sectors.
• To develop world-class infrastructure supporting modern financial markets.
• To strengthen the rupee’s internationalisation in the long term.

Regulatory Framework

Initially, financial services within GIFT-IFSC were regulated jointly by:

• Reserve Bank of India (RBI) – for banking.
• Securities and Exchange Board of India (SEBI) – for capital markets.
• Insurance Regulatory and Development Authority of India (IRDAI) – for insurance.

However, to streamline supervision, the government established the International Financial Services Centres Authority (IFSCA) under the IFSCA Act, 2019, which came into effect in April 2020.

Key Features of IFSCA:

• Acts as the unified regulator for all financial products, services, and institutions in the IFSC.
• Has powers similar to those of RBI, SEBI, IRDAI, and PFRDA.
• Responsible for licensing, regulation, and development of financial activities in IFSC.
• Aims to create a dynamic, innovation-friendly regulatory environment.

Major Financial Activities Permitted in IFSC

The IFSC facilitates a wide range of international financial services across multiple domains:

1. Banking Services:

• Offshore banking units of Indian and foreign banks operate in foreign currencies.
• Services include external commercial borrowings (ECBs), trade finance, and corporate loans.

2. Capital Market Activities:

• Stock exchanges such as the India International Exchange (India INX) and NSE IFSC operate in the IFSC.
• Activities include listing of bonds, global depository receipts (GDRs), derivatives trading, and equity listings.

3. Insurance and Reinsurance:

• Global insurance and reinsurance companies operate under a separate regulatory framework.
• The GIC Re and international insurers have established presence in the IFSC.

4. Asset and Fund Management:

• Asset management companies (AMCs) and alternate investment funds (AIFs) can manage offshore funds.
• InvITs, REITs, and mutual funds can issue units to global investors.

5. Fintech and Innovation:

• The IFSCA FinTech Regulatory Sandbox promotes innovative financial technologies such as blockchain, AI-based trading, and digital banking.

6. Aircraft and Ship Leasing:

• GIFT-IFSC has become a hub for aircraft leasing, reducing dependence on global leasing hubs like Ireland and Dubai.
• Similar initiatives are under development for ship leasing and maritime finance.

7. Global In-House Centres (GICs):

• Allow multinational corporations to set up subsidiaries for back-office, risk management, and research operations.

Taxation and Incentives

To attract global investors and institutions, the IFSC offers a competitive tax and regulatory environment comparable to international financial hubs.

Key Incentives:

• 100% income tax exemption for 10 consecutive years out of 15 years for units in IFSC.
• No securities transaction tax (STT), commodity transaction tax (CTT), or stamp duty on transactions.
• GST exemptions on services received by IFSC units.
• No capital gains tax on transfer of specified securities.
• Foreign currency operations allowed freely, reducing exchange risk.

These incentives have made GIFT-IFSC an attractive destination for global financial entities seeking to operate in South Asia.

Infrastructure and Institutions in GIFT-IFSC

The GIFT City is equipped with state-of-the-art infrastructure designed for high-speed connectivity, data security, and business efficiency.

Major Institutions Operating in IFSC:

• India International Exchange (India INX) – promoted by BSE.
• NSE IFSC Exchange – subsidiary of the National Stock Exchange.
• Banks: SBI, ICICI, HDFC, Standard Chartered, Barclays, and others.
• Insurance firms: GIC Re, New India Assurance, and Lloyd’s of London affiliates.
• Investment funds: Various AIFs and portfolio management firms.
• Aircraft Leasing Firms: Several international lessors have set up units post-2021.

Additionally, International Bullion Exchange (IIBX) has been launched in GIFT-IFSC in 2022 to facilitate gold and precious metal trading.

Strategic and Economic Significance

The establishment of an IFSC contributes to India’s economic and financial ecosystem in multiple ways:

• Retention of financial business: Prevents capital and transaction outflow to foreign financial hubs.
• Attracts global capital: Encourages participation from international investors, banks, and funds.
• Boosts employment: Generates high-skill jobs in finance, law, and technology sectors.
• Strengthens financial infrastructure: Promotes innovation and diversification of financial services.
• Supports rupee internationalisation: Provides a platform for offshore rupee transactions in the long term.
• Enhances India’s global standing: Positions India as a major player in the global financial services industry.

Challenges and Way Forward

Challenges:

• Regulatory harmonisation: Continuous need to align IFSC regulations with international standards.
• Talent and skill shortage: Demand for trained professionals in global finance.
• Competition: From established hubs like Singapore, Dubai, and Hong Kong.
• Awareness and participation: Global investors’ familiarity with India’s IFSC framework remains limited.

Way Forward:

• Strengthen IFSCA’s autonomy and capacity to enable dynamic regulation.
• Promote FinTech, digital assets, and green finance sectors within IFSC.
• Enhance international collaboration and mutual recognition with global regulators.
• Invest in education and training to build a skilled workforce.
• Foster sustainable finance initiatives to align with global ESG standards.