Securities and Exchange Board of India and the Reserve Bank of India issue guidelines for international financial services centres

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1 8 April 2015 EY Regulatory Alert Securities and Exchange Board of India and the Reserve Bank of India issue guidelines for international financial services centres Executive summary Regulatory Alerts cover significant regulatory news, developments and changes in legislation that affect Indian businesses. They act as technical summaries to keep you on top of the latest regulatory issues. For more information, please contact your Ernst & Young advisor To make India an International Financial Centre like Dubai and Singapore, the Finance Minister, Mr Arun Jaitley, while presenting the Union Budget 2015 on 28 February 2015, announced that appropriate guidelines will be issued to implement International Financial Services Centres (IFSCs) in India. In this regard, the Securities and Exchange Board of India (SEBI) has on 27 March 2015, issued the SEBI (International Financial Services Centres) Guidelines, 2015 (SEBI IFSC Guidelines). These Guidelines have come into force with effect from 1 April The SEBI IFSC Guidelines aim to provide a framework for setting up stock exchanges, clearing corporations, financial intermediaries, asset management companies and related capital market infrastructure in the IFSC, first of which has come up in Gujarat as Gujarat International Finance Tech-City (GIFT). The Reserve Bank of India (RBI) has also issued Foreign Exchange Management (International Financial Services Centre) Regulations, along with operational guidelines 2 (RBI IFSC Guidelines) which prescribe that a financial institution or a branch of a financial institution set-up in an IFSC shall be treated as a person resident outside India. This alert summarizes the key features of the SEBI IFSC Guidelines and RBI IFSC Guidelines. [1] Notification No. FEMA. 339/2015-RB dated 2 March 2015 [2] RBI/ /530 A.P. (DIR Series) Circular No. 92 dated 31 March 2015

2 Background To make India an International Financial Centre like Dubai and Singapore, the Finance Minister, Mr Arun Jaitley, while presenting the Union Budget 2015 on 28 February 2015, announced that appropriate guidelines will be issued to implement IFSCs in India. On 27 March 2015, SEBI notified the SEBI (International Financial Services Centres) Guidelines, 2015 (SEBI IFSC Guidelines). The SEBI IFSC Guidelines have come into force with effect from 1 April The SEBI IFSC Guidelines provide a framework for setting up stock exchanges, clearing corporations, financial intermediaries, asset management companies, and related capital market infrastructure in the IFSC 2. SEBI IFSC Guidelines Applicability and scope The SEBI IFSC Guidelines apply to any entity operating in an IFSC for rendering financial services 3 relating to the securities market. The provisions of securities law [i.e. the Securities Contracts (Regulation) Act, 1956 and Companies Act, 2013] shall apply to the financial institutions operating in the IFSC, unless specifically exempted. The SEBI IFSC Guidelines are subject to guidelines of the Government of India on foreign investment. The RBI has also issued Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 on 2 March 2015 followed by operational guidelines on 31 March 2015 (RBI IFSC Guidelines), which prescribe that a financial institution or a branch of a financial institution set up in an IFSC shall be treated as a person resident outside India. 3 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 Government of India or a Financial Regulatory Authority. Further, the term Financial Institution has been defined to include: This alert highlights the key features of the SEBI IFSC Guidelines and the RBI IFSC Guidelines. 2 The term IFSC shall have the meaning assigned to it in clause (q) of section 2 of the Special Economic Zones Act, As per the said section, an IFSC shall mean an IFSC as approved by the Central Government to be set-up in a Special Economic Zone. (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 in securities market or dealing in securities market in any manner. Explanation: For the purpose of this clause and without prejudice to the generality of the foregoing, the expression financial institution shall include stock brokers and sub-brokers, merchant banks, mutual funds, alternative investment funds, stock exchanges, clearing corporations, investment advisers, portfolio managers, etc.

3 Stock Exchanges, Clearing Corporations and Depositories Stock Exchanges Eligibility - Indian recognised stock exchange or stock exchange of a foreign jurisdiction 4 operating in the IFSC as a subsidiary can render services of a stock exchange in the IFSC. Shareholding - At least 51% of the paid-up share capital is held by such exchange and the remaining shares may be offered to any other recognised stock exchange, whether Indian or of a foreign jurisdiction. Minimum net worth - INR 250 million initially to be increased to INR 1 billion over three years from the date of approval. Permissible securities - The stock exchanges operating in IFSC may permit dealing in following types of securities and products in such securities in any currency other than Indian Rupee, with a specified trading lot size on their trading platform subject to prior approval from SEBI: equity shares of a company incorporated outside India; 4 The term foreign jurisdiction means a country, other than India, whose securities market regulator is a signatory to International Organization of Securities Commission s Multilateral Memorandum of Understanding (IOSCO's MMOU) or a signatory to bilateral Memorandum of Understanding with SEBI, and which is not identified in the public statement of Financial Action Task Force (FATF) as: a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the FATF to address the deficiencies. depository receipt(s); debt securities issued by eligible issuers; currency and interest rate derivatives; index based derivatives; and such other securities as may be specified by SEBI. Exemptions - Stock exchanges permitted to operate in IFSCs are exempt from the requirement of crediting 25% of profits every year to the Settlement Guarantee Fund/ Trade Guarantee Fund. Further, exemptions have been provided from certain provisions of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, Clearing Corporations Eligibility - Indian recognised stock exchange or clearing corporation or stock exchange or clearing corporation of a foreign jurisdiction operating in the IFSC as a subsidiary can render services of a clearing corporation in the IFSC. Shareholding - At least 51% of the paid-up share capital is held by such exchange/ clearing corporation and the remaining shares may be offered to any other recognised stock exchange/ clearing corporation, whether Indian or of a foreign jurisdiction. Minimum net worth INR 500 million initially to be increased to INR 3 billion over three years from the date of approval. Exemptions - Clearing corporations permitted to operate in IFSCs are exempt from the requirement of crediting 25% of profits every year to the Settlement Guarantee Fund/ Trade Guarantee Fund. Further, exemptions have been provided from certain

4 provisions of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, Depositories Eligibility - Indian registered depository or depository of a foreign jurisdiction operating in the IFSC as a subsidiary can render depository services in the IFSC. Shareholding - At least 51% of the paid-up share capital is held by such depository and the remaining shares may be offered to any other registered depository/ recognised stock exchange/ clearing corporation, whether Indian or of a foreign jurisdiction. Minimum net worth - INR 250 million initially to be increased to INR 1 billion over three years from the date of approval. Exemptions - Depositories permitted to operate in IFSCs are exempt from the requirement of crediting 25% of profits every year to the investor protection fund. Further, exemptions have been provided from certain provisions of the Securities and Exchange Board of India (Depositories and Participants) Regulations, Intermediaries Nature of clients company to provide financial services to the following categories of clients [subject to guidelines of the RBI]: a person not resident in India; a non-resident Indian; a financial institution resident in India who is eligible under the Foreign Exchange Management Act, 1999 (FEMA) to invest funds offshore; or a person resident in India who is eligible under FEMA to invest funds offshore to the extent allowed under the Liberalized Remittance Scheme (LRS) of the RBI. The above categories of clients can also avail investment advisory or portfolio management services in the IFSC. However, in the case of a person resident in India desirous of availing investment advisory or portfolio management services from an intermediary based in an IFSC, the person will have to meet the minimum net worth requirement of US$ 1 million. Permitted securities for a portfolio manager A portfolio manager operating in an IFSC shall be permitted to invest in the following: securities which are listed in the IFSC; securities issued by companies incorporated in the IFSC; or securities issued by companies belonging to a foreign jurisdiction. Any intermediary 5 permitted by SEBI for operating within the IFSC may form a 5 The term intermediary means and includes a: stock broker; merchant banker; banker to an issue; trustee of trust deed; registrars to an issue; share transfer agent; underwriter; investment adviser; portfolio manager; depositary participant; custodian of securities; foreign portfolio investor; credit rating agency; or any other intermediary or any person associated with the securities market, specified by SEBI from time to time.

5 Issue of capital Raising of capital by domestic companies Domestic companies intending to raise capital in any currency other than Indian Rupee in an IFSC will be required to comply with the provisions of the Foreign Currency Depository Receipts Scheme, notified by the Government of India. Raising of capital by foreign companies - Foreign companies intending to raise capital in a currency other than Indian Rupee will be required to comply with the provisions of the Companies Act, 2013 and SEBI (Issue of Capital and Disclosure Requirements), 2009 as if the securities are being issued under the said regulations as applicable. Listing - Companies (domestic or foreign) may list and trade their securities in accordance with the norms specified by SEBI. Issue of debt Eligible issuers An entity desirous of issuing debt securities is required to comply with the following criteria: the issuer 7 is eligible to issue debt securities as per its constitution; the issuer should not have been debarred by any regulatory authority in its home jurisdiction or any other jurisdiction, where it is operating or has raised any capital; the issuer or its directors should not be convicted of any economic offence in its home jurisdiction or any other jurisdiction where it is operating or has raised any capital; and any other criteria as may be prescribed by SEBI from time-to-time. Conditions to be fulfilled Minimum subscription size in case of a private placement Per investor amount shall not be less than US$ 100,000 or equivalent or such amount as may be specified by SEBI. Mandatory listing - The issuer desirous of issuing debt instruments will be required to make an application for listing of such securities to one or more stock exchanges set-up in the IFSC. Administrative requirements The issuer will have to meet administrative requirements viz: appoint a trustee; create an appropriate debenture redemption reserve; make an advertisement for debt issues within IFSC in any print media; obtain credit rating from a recognised credit rating agency registered with SEBI or in a foreign jurisdiction; enter into an agreement with a depository or custodian eligible to operate in the IFSC for issue of debt securities, for holding and safekeeping of such securities and to facilitate transfer, redemption and other corporate actions. 6 Notification F. No. 9/1/2013-ECB dated 21 October The term issuer shall mean a company incorporated in India seeking to raise capital in foreign currency other than Indian Rupee which has obtained requisite approval under FEMA or exchange control regulations as may be applicable, or a company incorporated in a foreign jurisdiction. Trading of debt securities - The debt securities listed on the stock exchanges shall be traded on the platform of the stock exchanges and be cleared through a clearing corporation set-up in the IFSC.

6 Alternative Investment Funds (AIFs) and Mutual Funds (MFs) Eligible investors Any AIF or MF operating in an IFSC can accept money only in foreign currency, from any of the eligible investors listed below: a person resident outside India; a non-resident Indian; institutional investor resident in India who is eligible under FEMA to invest funds offshore, to the extent outward investment is permitted; person resident in India having a net worth of at least US$ 1 million during the preceding financial year who is eligible under FEMA to invest funds offshore, to the extent allowed in the LRS of the RBI. Permitted investments Any AIF or MF operating in an IFSC shall be permitted to invest in the following: securities which are listed in the IFSC; securities issued by companies incorporated in the IFSC; and securities issued by companies belonging to foreign jurisdiction. Other criteria of schemes, professional qualifications, etc. RBI IFSC Guidelines A financial institution or a branch of a financial institution set-up in the IFSC and permitted/ recognised as such by the Government or a Regulatory authority shall be regarded as a person resident outside India. Therefore, their financial transaction 8 with a person resident in India shall be treated as a transaction between two non-residents and shall be subject to the provisions of FEMA. A financial institution or branch or a financial institution shall conduct such business in such foreign currency and with such persons, whether resident or otherwise, as the concerned Regulatory authority may determine. Comments The IFSC Guidelines are a welcome move in bringing into action, the proposal of the Government of India to introduce globally comparable financial centres and help create vibrant capital market activity in such centres. Minimum net worth - An asset management company of an MF operating in the IFSC will have to maintain minimum net worth of US$ 2 million which is to be increased to US$ 10 million within three years from commencement of business in the IFSC. Other financial sector regulators viz Insurance Regulatory Development Authority, Pension Fund Regulatory and Development Authority and Forward Markets Commission have yet to issue regulations in this regard. Administrative requirements - SEBI may prescribe requirements viz for appointment of trustee, custodian, manager, minimum investment amount, minimum corpus of fund, disclosures, investment conditions, valuations, type 8 Financial transaction shall mean activities a financial institution is allowed to carry out as specified in the respective Act of the Parliament or by the Government of India or by any Regulatory Authority empowered to regulate the concerned financial institution.

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