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GIFT City Update – Guidelines on Setting Up and Operation of International Trade Finance Service Platform

Guidelines on Setting Up and Operation of International Trade Finance Service Platform

International Financial Services Centres Authority (“IFSCA” or “Authority”), with powers conferred under Regulation 10 (1) of International Financial Services Centres Authority (Finance Company) Regulations, 2021, issued a circular vide Circular No. IFSCA-FCR0FCR/3/2023-Banking/2024-25/[1], regarding the Guidelines on Setting Up and Operation of International Trade Finance Service Platform, 2024 (the “Guidelines”). These Guidelines are the revised guidelines which aim to act as a comprehensive framework for the operation, registration, and management of International Trade Finance Service platforms (“ITFS”) within International Financial Services Centres (“IFSC”). ITFS refers to an electronic platform for facilitating the financing of trade receivables or trade payables. The Guidelines shall come into force with immediate effect and repeal the circular titled “Framework for setting up of ITFS” dated July 9, 2021. However, the actions taken under the previous circular will remain valid under the new Guidelines.

Key features of the Guidelines:

I. Applicability of the Guidelines:

    These guidelines shall apply to the following: 

    • ITFS operators registered under the circular, dated July 9, 2021, regarding the ‘Framework for setting up of ITFS’;
    • Entities seeking registration as an ITFS operator in IFSC; 
    • Participants in an ITFS.

    II. Eligibility Criteria for registration under the Guidelines:

      • General Requirements:

      An entity seeking to set up as an ITFS operator shall be incorporated as a newly incorporated company under the Companies Act, 2013. The entity shall be required to apply to IFSCA through the Single Window IT System (SWITS) to obtain a certificate of registration as a finance company, in line with the IFSCA (Finance Company) Regulations, 2021. Additionally, the parent entity of the applicant shall have at least three years of experience in operating trading infrastructure in financial markets or managing a fintech platform. The applicant shall also possess or be willing to invest in the necessary infrastructure in the IFSC, including adequate office space, equipment, communication facilities, and manpower to support the permitted activities. To ensure financial stability, the entity shall provide information confirming the sound financial position of its parent entity and demonstrate that the applicant and relevant persons meet the ‘fit and proper’ requirements specified by the Authority. The applicant must disclose if its parent entity has previously been refused registration or authorization by the IFSCA and provide the grounds for such refusal. Furthermore, the entity must confirm that neither the applicant nor relevant persons are involved in any legal proceedings related to breaches of law in any jurisdiction.

      • Financial Requirements:

      The entity desirous of setting up an ITFS shall always meet a minimum owned fund requirement of $ 0.2 million (Two Hundred Thousand United States Dollars).

      • Technical Requirements:

      The entity desirous of setting up an ITFS must have a sound technological infrastructure to support its operations, this includes providing an electronic platform for all participants and ensuring that information about all bills, invoices, discounting, and quotes are disseminated in real time through a reliable Management Information System (MIS). The ITFS must also have a well-defined Business Continuity Plan (BCP) with a disaster recovery site to ensure operational resilience. Additionally, the ITFS shall have an online surveillance capability to monitor positions, prices, and volumes in real time.

      III. Registration under the Guidelines:

        • Issue of Provisional Registration:

        Upon consideration of an application, if the Authority believes that the applicant meets the adequate conditions for registration, a ‘provisional registration’ letter may be issued to the applicant. The applicant shall be required to fulfil certain conditions within a given timeframe as specified by the Authority before the final registration is granted. However, it is pertinent to note that the issuance of provisional registration does not guarantee that the applicant will receive final registration. The grant of final registration remains at the sole discretion of the Authority, and provisional registration does not mean an automatic entitlement to the final registration.

        The applicant shall be required to notify the Authority of any change in ownership or control while the provisional registration is active. If the Authority becomes aware of such changes, it will review the provisional registration decision and communicate the outcome of such review to the applicant. If, the review results in the Authority intending to revoke the provisional registration, the Authority shall provide the applicant with a reasonable opportunity for hearing before making a final decision.

        • Grant of Registration:

        Once the Authority is satisfied that the applicant has met all the conditions outlined in these Guidelines and under the provisional registration, the Authority shall grant a certificate of registration. This certificate may be subject to additional conditions as the Authority deems necessary. The certificate of registration shall remain valid unless revoked by the Authority or voluntarily surrendered by the ITFS operator. Post the grant of registration, the ITFS operator shall inform the Authority of any material changes to the information or particulars provided during the application for provisional registration or the certificate of registration.

        • Refusal of Registration:

        If the Authority determines that registration cannot be granted, it will communicate the reasons to the applicant and provide an opportunity to rectify the deficiencies within 30 (Thirty) days. Failure to rectify the deficiencies within the specified time shall result in the refusal of registration, with the applicant being given a reasonable opportunity to be heard.

        The applicant may withdraw the application at any time prior to the grant of registration by notifying the Authority. In the event of refusal or withdrawal of the application, the applicant may submit a new application for registration after the passing of 6 (Six) months from the date of communication of refusal or withdrawal of the application.

        • Revocation or Surrender of Registration:

        The Authority may revoke the registration of an ITFS operator if such operator fails to comply with registration conditions, guidelines, or directions. However, the ITFS operator shall be given a reasonable opportunity to be heard. Further, the Guidelines also provide the entities an option to surrender their application or registration as an ITFS operator, either before or after commencing operations, in the manner specified by the Authority. The Authority may permit such surrender subject to the satisfaction of any conditions that it deems necessary.

        • Commencement of Operations:

        The ITFS operator shall commence its operations within 6 (Six) months from the issuance of the certificate of registration. The operator shall deploy resources within the IFSC that are appropriate for the scale and nature of its operations.

        If the operator requires an extension, it may apply for the same, subject to the approval by a board resolution, at least two months before the deadline. The application must include detailed reasons for the delay, the requested extension period, steps taken to address the delay, and any other relevant information. If the Authority is satisfied with the reasons provided, it may grant an extension not exceeding three months.

        IV. Operational Framework of ITFS:

          Chapter IV of the Guidelines provide for the operational framework of the ITFS, which includes permissible activities, principles of operation, technology requirements, clearing or settlement services and more.

          • Permissible Activities:

          The permissible activities shall include transactions related to factoring, reverse factoring, bill discounting under letter of credit, supply chain financing, pre-shipment credit, forfaiting, and any other activities permitted by the Authority. The ITFS may also allow secondary market transactions of the products listed herein.

          • Principles of operation:

          The ITFS operator shall maintain comprehensive rules and regulations governing participant onboarding, membership suspension, roles and responsibilities, liability frameworks, processing of orders, and risk management. The financiers seeking to join must meet the following criteria:

          1. Minimum $ 5 million (Five Million United States Dollars) in loans, advances, or Assets Under Management (AUM).
          2. At least $ 5 million (Five Million United States Dollars) in capital.
          3. Proven credit/ debt recovery capability and a credible management team.
          4. Incorporated in a jurisdiction not listed by Financial Action Task Force (FATF) as “High-Risk”.

          The Guidelines provide for the ITFS operator to comply with IFSCA Anti-Money Laundering and KYC Guidelines and ensure transparent and competitive bidding. The ITFS operator shall provide an electronic platform that allows participants to opt for one-time bidding. Further, the ITFS operator assumes no credit risk, and defaults are handled directly between financiers and participants. Legal proceedings initiated by the financer(s) are outside the ITFS’ scope. The ITFS operator may connect with other platforms with prior approval and must establish a grievance redressal mechanism. The compliance with all applicable laws in India and other jurisdictions shall be necessary.

          • Technology:

          The ITFS operator must maintain a robust technology infrastructure that ensures high reliability, availability, scalability, and security to support its operations and manage risks. The ITFS operator shall also have a Business Continuity Plan (BCP) with contingency and disaster recovery arrangements tailored to the business’ scale and complexity. An annual IT/ IS audit of the ITFS platform shall be required within 30 days of the financial year-end and prior to major technical changes. The audits must be conducted by the individuals specified by the Authority in the Guidelines.

          • Clearing and Settlement:

          The ITFS operator shall seek authorization from the IFSCA as a payment system operator under the IFSCA (Payment and Settlement Systems) Regulations, 2024, before offering clearing and/ or settlement of funds.

          • Risk management:

          The ITFS operator shall establish a comprehensive risk management framework to address all operational risks. It is essential that the operator identifies and prudently manages the risks associated with the ITFS platform’s activities.

          • Outsourcing:

          The ITFS operator shall either own or have a license for the software used on its electronic platform. If the same has been licensed, the terms should allow the operator to use the software with its own staff. In both ownership and licensing models, reliance on external software service providers should be minimized. Certain activities cannot be outsourced, including the day-to-day operations of the ITFS platform. The ITFS operator must adhere to the compliances at the time of outsourcing any activities, as provided in the Guidelines.

          • Currency of Operations:

          The ITFS operator must maintain its books of accounts, records, and documents in United States Dollars (USD). However, the transactions on the platform can be settled in any specified foreign currency. Additionally, the operator may open an Indian Rupee (INR) account in accordance with Section 1 of Schedule 4 of the Foreign Exchange Management (Deposit) Regulations, 2016, as amended.

          V. Governance:

          The ITFS operator must have a board-approved corporate governance policy aligned with the circular on Guidelines on Corporate Governance and Disclosure Requirements of a Finance Company dated August 9, 2021. Additionally, the ITFS operator shall ensure that its relevant person(s) meet the ‘Fit and Proper’ requirements specified in Schedule I of the Guidelines.

          [1] https://ifsca.gov.in/Viewer?Path=Document%2FLegal%2Fitfs-circular-23-12 202424122024120306.pdf&Title=Guidelines%20on%20setting%20up%20and%20operation%20of%20International%20Trade%20Finance%20Service%20Platform&Date=23%2F12%2F2024

          • The changes introduce a provision permitting joint investment by 2 individuals with specific relationships.
          • The Authority restricts the associates, schemes of the FMEs or their associates, or a major investor from buying or selling securities without prior approval from 75% investors in the scheme by value. However, if the transaction involves a major investor, they shall be excluded from the voting process. For clarity, a major investor is an investor who has committed to at least 50% of the corpus of the scheme.
          • Lastly, the independent asset valuation requirement for fund-of-funds schemes has been exempted, if the underlying fund is valued by an independent service provider.

          II. Manpower requirements for FMEs:

          The Authority introduced various key changes in the requirements with respect to manpower for FMEs, as outlined below:

          • As per the extant regulations, the FMEs were required to seek IFSCA’s prior approval for appointing any Key Managerial Personnel (“KMPs”), however, as per the new regulations, the changes brought in simplify the process by requiring the FMEs to merely intimate IFSCA about such appointments.
          • The FMEs managing an Assets under Management (“AUM”) of minimum $ 1 Billion (One Billion United States Dollars), excluding the funds-of-funds scheme shall need to, at the close of a Financial Year (FY), appoint an additional KMP. However, such a requirement may be met before the filing of a retail scheme or Exchange Traded Funds (ETF) with the IFSCA.
          • The Authority streamlines the educational qualification and professional experience of the KMPs. Further, the changes brought in now require the employees of FMEs to undergo certifications from such institutions, as specified by IFSCA.

          III. Registered FME (Retail) and Retail Schemes:

          The Authority upon review of the track record of the registered FME (Retail) made the following amendments:

          • The existing criteria of requiring 5 years of experience of a registered FME (Retail) in managing AUM of $ 200 million (Two Hundred United States Dollars) and 25,000 (Twenty-Five Thousand) investors, may now be evaluated by considering the experience of the FME along with its holding company or their subsidiaries.
          • The revisions require the FMEs to have persons holding more than 25% (Twenty-Five Percent) shareholding in the FME and carrying on business related to fund management or other financial services for at least 5 (Five) years. The FME must also manage assets of at least $ 50 million (Fifty Million United States Dollars) for at least 1,000 (One Thousand) investors and have a net worth of $ 2 million (or any other net worth, as specified by IFSCA).
          • The minimum corpus of such schemes was earlier set at $ 5 million (Five Million United States Dollars) which has now been reduced to $ 3 million (Three Million United States Dollars). Further, the open-ended schemes may commence investment activities upon $ 1 million (One Million United States Dollars) and the minimum corpus to be achieved within 12 (Twelve) months by the open-ended schemes shall be $ 3 (Three Million United States Dollars).
          • Investment caps in sectoral, thematic, or index schemes are now based on the weight of the company, in the representative index, by an independent entity or at 15%, whichever is higher.
          • Moreover, if the underlying fund(s) for the fund-of-funds scheme comply with the specified regulations, they will be exempted from the investment restrictions outlined in the Fund Management Regulations along with the requirement of valuation of the scheme to be performed by an independent service provider.
          • The revisions further relaxed the requirement of listing of close-ended retail schemes on recognized stock exchanges by making such listing optional, in case the minimum amount of investment by each investor in the scheme is at least $ 10,000 (Ten Thousand United States Dollars).

          IV. Other Key Revisions:

          • Certain revisions have been made for the schemes requiring appointment of a custodian wherein, funds-of-funds schemes are exempt from the requirement of appointing a custodian. However, for any securities issued in foreign jurisdictions, a regulated custodian may be appointed, provided local laws mandate it. Further, a transition period of 12 (Twelve) months shall be provided for schemes requiring appointment of a custodian in the IFSC.
          • The Authority now permits the retail and non-retail schemes to invest in bank deposits and overnight schemes for any pending deployment of money along with existing permitted financial products.
          • For Portfolio Management Services (“PMS”), the minimum investment requirement has been reduced from $ 150,000 (One Hundred Fifty Thousand United States Dollars) to $ 75,000, (Seventy-Five Thousand United States Dollars) and clients under the PMS can transfer their funds into a designated broking account, which will then be managed under the PMS, subject to certain safeguards.
          • FMEs are also now permitted to open branch or representative offices in other jurisdictions for marketing and client servicing without requiring prior approval from IFSCA.
          • Lastly, the provisions related to valuation by credit rating agencies, investment restrictions, and other areas previously issued through circulars are being incorporated into the revised Fund Management Regulations.

          [1]https://ifsca.gov.in/Viewer?Path=Document%2FLegal%2Ffinal-press-release_1-021122024061409.pdf&Title=Review%20of%20IFSCA%20%28Fund%20Management%29%20Regulations%2C%202022&Date=21%2F12%2F2024

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