IFSCA has its work cut out. Will it be an effective regulator?

The significance of the IFSCA cannot be lost on analysts of India’s financial markets. This in a way is similar to the establishment of several financial regulators in India: the RBI, the SEBI, the IRDAI.

The Union Budget made an array of announcements for developing the Gujarat International Fin-Tec City (GIFT City) as an international financial services centre. In an earlier article, I documented how finance ministers have made multiple announcements in their Budget speeches since 2018.

Of all the announcements, the one made by former finance minister Arun Jaitley in the Budget speech of 2018-19 was the most significant. He proposed establishing a unified authority for regulating all financial services in the International Financial Services Centres in India:

“International Financial Service Centre (IFSC) at GIFT City, which has become operational, needs a coherent and integrated regulatory framework to fully develop and to compete with other offshore financial centres. The government will establish a unified authority for regulating all financial services in IFSCs in India.”

The government followed up the announcement by establishing the International Financial Services Centre Authority (IFSCA) at Gandhinagar in 2020. The significance of the IFSCA cannot be lost on analysts of India’s financial markets. This in a way is similar to the establishment of several financial regulators in India: the Reserve Bank of India (RBI) in 1935, the Securities Exchange Board of India (SEBI) in 1992, the Insurance Regulation and Development Authority of India (IRDAI) in 1999 and so on. As we cannot really rewind time to study how these regulatory bodies unfold, it is interesting to watch how the IFSCA is doing its business of regulating IFSCs in India.

Carving Out A Role

In fact, the IFSCA’s job is both easier and tougher at the same time compared to other financial regulators – the IFSCA is currently looking at only one IFSC in GIFT City whereas other regulators had to look at the developments in the entire country right from the start.  This will change if India decides to establish more IFSCs going forward. The other regulators were instituted after many years of developments of the markets. For instance, banks existed much before the RBI and securities markets much before SEBI. The IFSCA was also established after activities had started in GIFT City, but with a shorter lag. So, the IFSCA is likely to have a much better grasp of the evolving financial system under its jurisdiction compared to other regulators.

However, the task of the IFSCA is tougher, as it is a unified authority which is supposed to look at all the markets whereas the other regulators were established to govern a specific segment of India’s financial markets. The IFSCA Act has accorded the authority all the powers to develop IFSCs in India. The Acts of all the other regulators have been amended to restrain them from exercising their powers on IFSCs.

The IFSCA may be a super-authority for financial services in IFSCs but other regulatory bodies have not been ignored. The IFSCA has a 10-member board, which included one member each from the RBI, SEBI, the IRDAI and the Pension Fund Regulatory and Development Authority. This is important as the authority needs help and ideas from all the other regulators.

More Powers

In the recent budget, the powers of the IFSCA have been enhanced further. Until now, the permission to create IFSCs was under the Special Economic Zones Act (SEZ Act 2005). The SEZs are specially designated geographical areas within a country meant to promote a particular economic activity. The rules and tax concessions are highly liberal in SEZs. The IFSC is nothing but a finance SEZ and, thus so far, it was governed under SEZ Act. Now, all IFSCs will be governed by the IFSCA Act which streamlines the overall processes, as one does not need permissions from multiple regulators.  In a way, the IFSCA has emerged as not just a financial authority but also as a one-stop window for IFSCs.

The IFSCA has made a decent start since its establishment during the pandemic in 2020. The IFSCA is organised across 10 departments currently. Regulations drafted by the other financial regulators for IFSCs before the establishment of the Authority are being transferred to the IFSCA. For instance, regulations for banking units in IFSCs developed by the RBI  have been transferred to IFSCA.  The authority is also working on new regulations. The Authority has also been setting up committees to develop markets in GIFT City. The committees have dabbled in reinsurance, global hub for shipping, offshore trading in Indian rupees, longevity finance, and so on. It has also tied up with educational institutions in Gandhinagar and Ahmedabad to train the workforce both within and externally.

The IFSCA’s annual reports for 2020-21 and 2021-22 released recently provide ideas on the work done so far and what it plans for the future. These annual reports also provide some data on financial activity in GIFT City which was completely absent till now. I covered some of the data in the earlier article. The IFSCA should release data in a timely manner and in a usable format to encourage research in this space.

Address Concerns

There are also some concerns that the IFSCA should seek to address. International Finance brings significant risks to the table as we have seen in the last 15 years. As of now, the IFSCA is just a regulator but what will be its role if a global financial crisis breaks out? Currently, the regulations suggest that IFSC banking units are not required to maintain a cash reserve ratio and statutory liquidity ratio. However, they are required to a maintain leverage ratio, net stable funding ratio and retail deposit reserve ratio (which is like CRR). We have seen that meeting these ratios is necessary but never sufficient during a crisis.

To sum up, GIFT City has been in making for fifteen years now. The idea to establish an IFSC was brought forward by the Gujarat state government in 2008 when Narendra Modi was the chief minister. A year earlier, the central government instituted a committee to make Mumbai an International Financial Centre. Both ideas lagged due to the Global Financial Crisis. The fortunes of GIFT City changed in 2014 when Narendra Modi became the Prime Minister. Since then, we have seen how most Union budgets have tried to shape GIFT City. Of all the proposals, the one to establish IFSCA has been the most significant. All eyes will now be on IFSCA and how it goes on to develop GIFT City and other IFSCs (if at all there are more).

Amol Agrawal is faculty at Ahmedabad University. Views are personal and do not represent the stand of this publication.