IFSCA (Informal Guidance) Scheme, 2024: A New Avenue for Regulatory Clarity
I. Introduction
The International Financial Services Centres Authority (“IFSCA” or “Authority”) was established in 2020, to regulate and promote financial services in International Financial Services Centre (“IFSC”), under the International Financial Services Centres Authority Act, 2019 (“IFSCA Act”). Headquartered in Gandhinagar, Gujrat, IFSCA regulates the financial markets in the Gujarat International Finance Tec-City or the ‘GIFT City’. IFSCA aims to establish a world-class financial ecosystem with a focus on attracting global financial firms, facilitating cross-border transactions, and enhancing India’s role as a financial hub.
India’s first IFSC has been established in the Gujrat consisting of the Special Economic Zone (“SEZ”), while the other regions outside of the GIFT City are known as the Domestic Tariff Area (“DTA”). Prior to the establishment of IFSCA, the financial regulatory system for all the regions of India was governed by diverse specialized entities, overseeing the various segments of the financial sector. Key regulators inter-alia included Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), the Pension Fund Regulatory and Development Authority (PFRDA) and other concerned ministries. Such entities worked separately within their own spheres without a unified approach for the financial regulatory system in India until a single window clearance evolved. The establishment of IFSCA brought in harmony and a unified approach for the emerging needs of international financial services, in a specialized zone called the GIFT City.
Recently, IFSCA, in exercise of powers conferred by Section 12 and 13 of the IFSCA Act released the IFSCA (Informal Guidance) Scheme, 2024 (“Informal Guidance Scheme”), vide circular no. F. No. IFSCA-LPRA/11/2024[1]. This new key initiative is set to take effect from January 01, 2025.
II. Informal Guidance Scheme:
The Informal Guidance Scheme aims to provide a structured mechanism for applicants seeking clarity and guidance pertaining to the various issues of potential business activity under the regulatory ambit of IFSCA and on any other legal issues arising out of the acts or laws administered by IFSCA. The Informal Guidance Scheme has been introduced to limit the ambiguities which an individual or financial institution may incur while interpreting legal or regulatory provisions of IFSCA, facilitating such persons to navigate the regulatory landscape more smoothly and efficiently.
- Eligibility Criteria:
The Informal Guidance Scheme permits the following individuals to submit a request/ application under its provisions:
- Any individual licensed, registered, recognized or authorized by IFSCA; or
- Any person intending to undertake a business transaction in relation to financial product(s)/ financial service(s) regulated by IFSCA; or
- Any person desirous of setting up a unit in IFSC; or
- Such other person as may be specified or permitted by the IFSCA
2. Types of informal guidance:
The Informal Guidance Scheme introduces two key methods of seeking informal guidance from IFSCA to gain clarity on regulatory matters: (i) No-Action Letters (ii) Interpretive Letters.
The no-action letters may provide an indication of whether the concerned department would recommend any action to the Authority, should the proposed business transaction be finalized. Alternatively, the interpretive letters offer the interpretation of any act, rules, regulations, guidelines, circulars administered by IFSCA. This inter-alia includes circulars, guidelines or directions issued by RBI, SEBI, IRDAI and PFRDA, prior to the establishment of the IFSCA but which are presently being administered by it.
3. Procedure for application:
The Authority provides a detailed procedure for the submission of applications along with an appropriate timeline. The applications must be submitted electronically through the IFSCA’s Single Window IT System (“SWITS”), or via email to the nodal co-ordination cell of IFSCA at ‘igdesk@ifsca.gov.in.’, until SWITS is operational. The application shall be accompanied with a fee of $ 1,000 (One Thousand United States Dollars only), which shall be split into two parts: 75% of the specified fee shall be guidance fee and the remaining 25% shall be considered as the processing fees.
Upon the receipt of the application, the concerned department may request additional information or clarification to which the applicant must respond within 15 days or within an extended period, as approved by the department. Failure to respond within the specified time may result in the rejection of application. The Authority aims to process the application within 30 days, excluding the time taken by the applicant to provide the requested information or clarification.
4. Rejection of the application:
The concerned department may refrain from entertaining certain applications if they fall under the circumstances, as outlined herein. The Authority assures that in such cases, the fee shall be refunded to the applicant, after the deduction of the processing fee.
- If the query is vague, general or hypothetical in nature.
- If the applicant does not have a direct or proximate interest in the matter.
- If the applicant does not cite the relevant legal provisions in the application.
- If a similar question involving similar facts has already been addressed by any department of IFSCA.
- If an investigation or enforcement action has already been initiated on the matter in question.
- If the issue is currently pending before a court or tribunal and the issue is sub-judice.
- If the policy concerns prevent the department from providing guidance.
- In such other case as the department may deem fit.
III. Advantages of the Informal Guidance Scheme over the Outdated Procedures:
The Authority recognises that time is of the essence in the financial services market, along with the making of informed decisions in business transactions. The Informal Guidance Scheme proposes to establish a formalized system wherein seeking guidance can streamline and expediate the decision-making processes.
One of the standout benefits of the Informal Guidance Scheme is the ability to provide businesses with clear and timely guidance through interpretive letters, helping businesses accurately interpret any act, rules, regulations, guidelines, circulars administered by the Authority. This enables the businesses to understand how specific rules may apply to their unique circumstances. Additionally, guidance provided through no-action letters assists applicants in mitigating legal uncertainties and reducing regulatory risks along with its associated penalties.
Furthermore, the Authority has a strict policy regarding the integrity of applications submitted under the Informal Guidance Scheme. If any guidance has been obtained by way of fraud or misrepresentation of facts, it may be declared non-est and the applicant shall be dealt with in a manner as if such guidance had never been rendered.
The Authority assures a definitive response within a period of 30 days, ensuring that the applicant receives prompt and relevant feedback, which is essential in the competitive and fast-paced financial sector. The Informal Guidance Scheme seems to be a proactive approach which shall not only foster a transparent regulatory environment, but also encourage more businesses to invest within the IFSC.
IV. Challenges and Considerations
- While the Informal Guidance Scheme bestows various benefits, it does not come without its potential drawbacks. By its very name, the guidance provided by the Authority is informal and non-binding in nature. Businesses may not be able to rely on guidance as a final assurance. This means that the applicants may still face uncertainties in the financial market, despite having sought guidance. Additionally, the Authority has clarified that it may, at its own discretion, decide to act or not act in accordance with the guidance outlined in no-action or interpretive letters, creating an unforeseeable future. The guidance provided only represents the view of the Authority basis the said letters which lack the binding value.
- Another significant challenge under the Informal Guidance Scheme is the fee structure, which requires an upfront payment of $ 1,000 (One Thousand United States Dollars only) along with the application. This fee may be excessive for startups or smaller businesses with limited financial resources. This in turn could result in the larger businesses with more resources being positioned better, gaining an advantage by accessing information on regulatory compliance.
- Lastly, the Authority has outlined the provisions for non-confidentiality of the guidance. The guidance sought by an applicant shall be subject to public disclosure and will be made available on the IFSCA website. The Authority only provides a limited scope of confidentiality which includes the option of redacting certain information from an application or withholding the guidance from the public domain for a period of 90 days, upon applicant’s request. This may potentially discourage applicants from seeking guidance from the Authority,.
V. Conclusion:
To conclude, the Informal Guidance Scheme, coming into force on January 01, 2025, shall represent a significant step towards creating a more transparent and efficient regulatory framework within the GIFT City. By offering clear and specific guidance on unique matters of the businesses shall help them in navigating the complex financial markets with greater confidence and efficiency. This will help in attracting the market forces from all over the globe to invest in India’s GIFT City situated in Gujrat, driving growth and development. However, it is pertinent to note the potential drawbacks including the non-binding or non-confidentiality nature of the guidance, which may limit the scope of applicants.
Despite its challenges, the Informal Guidance Scheme is poised to be a valuable tool for the financial institutions and individuals operating within the GIFT City. With the Authority’s potential to provide tailored, informal regulatory support, IFSCA continues to position itself as the pivotal player in making GIFT City of India the preferred destination for international financial services.
DISCLAIMER
The content provided in this newsletter is intended for general awareness and should not be considered as legal advice. Readers are advised to consult with a qualified legal professional regarding any specific issues mentioned herein. If you have any questions about any of these developments or would like to see something different next month, reach out to us at knowledge@sarthaklaw.com.
We will be back next month with another update. Thank you for reading!