IFSCA Allows IFSC Banking Companies to Set up Banking Units in IFSC in Addition to IFSC Banking Units

Notification No. IFSCA/2023-24/GN/REG041., Dated: 06.07.2023

The IFSCA has notified an amendment to the IFSCA (Banking) Regulations, 2020. The amendment allows for the setting up of a Banking unit in an International Financial Services Centre (IFSC) as either an IFSC Banking Unit (IBU) or an IFSC Banking Company (IBC). Earlier, the option to set up an IFSC in a banking company was not available. The amendment shall be effective from 06.07.2023.

The key highlights of the amendment are as follows –

1. IFSCA introduces/replaces/substitutes various definitions

The IFSCA has inserted, replaced, and substituted various definitions under Regulation 2 of the IFSCA (Banking) Regulations, 2020. The definition of ‘Banking Unit’ under Regulation 2(1)(c) has been substituted.

The term “Banking Unit” or BU means a financial institution defined under Section 3(1)(c) of the Act that is licensed or permitted by the Authority to undertake permissible activities under these regulations.

Further, the definitions of “IFSC Banking Company” and “IFSC Banking Unit” have been introduced under Regulations 2(1)(eb) & 2(1)(ec) respectively.

As per the amendment, the term “IFSC Banking Company” or IBC means a Banking Unit licensed or permitted by the Authority to operate in an IFSC as a subsidiary company of the Parent Bank.

While, the term “IFSC Banking Unit” or IBU means a Banking Unit licensed or permitted by the Authority to operate in an IFSC as a branch of the Parent Bank. Also, the clause defining the term “Representative Office” under Regulation 2(1)(la) has been replaced with the term “Referral services”.

2. IFSCA grants permission to IFSC banking companies to establish banking units within IFSC

The IFSCA has introduced a new Regulation 3(1A). Now, a Banking unit may be set up in an IFSC as an IFSC Banking Unit or IBU and IFSC Banking Company or IBC. The condition is that a parent bank that has already set up an IBU in an IFSC may be permitted to convert it to an IBC, with the prior approval of the Authority.

An application for setting up a Banking Unit shall be made by the Parent Bank in the form and manner as specified by the Authority. Further, the parent Bank can withdraw the application at any time before the Authority grants the license or permission.

3. IFSCA prescribes criteria for grant of licence or permission to set up an IFSC Banking Company

The existing requirements for granting a licence or permission by the Authority to set up a Banking Unit will now also apply to IFSC Banking Units under Regulation 3(3).

For IFSC Banking Company (IBC), the IFSCA has introduced new Regulation 3(3A), which defines the requirements for obtaining a license or permission by the Authority. Thus, the applicant must satisfy the following requirements for a grant of license or permission by the Authority –

(a) The Parent bank must provide the necessary capital for the IBC, subject to a minimum of USD 50 million or such other level of capital that may be specified by the Authority. Such capital must be calculated and must be maintained as specified by the Authority.

(b) The Parent bank must obtain a No Objection Letter from its Home Regulator regarding the setting up of the Banking Unit in the IFSC as a subsidiary company of the parent bank.

(c) Any other condition specified by the Authority.

Further, a Foreign Bank that does not have a presence in India and wishes to set up a Banking Unit in an IFSC, must comply with such additional requirements as specified by the IFSCA.

4. IFSCA amends ‘Reserve Requirements’ for Banking Units

The IFSCA has substituted the already existing ‘Reserve Requirements’ under Regulation 8. Now, the IFSC Banking Company must maintain such reserves and in such manner as mandated under the Banking Regulation Act, 1949 and the Reserve Bank of India, 1934.

5. IFSCA specifies foreign currencies under ‘Banking Regulations’

The IFSCA has introduced a new Schedule I to the IFSCA (Banking) Regulations, 2020 which specifies the foreign currencies to be used and dealt with under the Banking regulations. The specified currencies include the US Dollar (USD), Euro (EUR), Japanese Yen (JPY), Russian Rouble (RUB), Hong Kong Dollar (HKD) etc. As a result of the introduction of these ‘specified currencies”, various other amendments were also notified.