Setting up a Finance Company Under IFSCA (Finance Company) Regulations, 2021

International Financial Services Centres Authority (Authority) introduced the International Financial Services Centres Authority (Finance Company) Regulations, 2021 (Regulations) for setting up a Finance Company under the International Financial Services Centres in India. A ‘Finance Company’ under these Regulations is a financial institution separately incorporated  to deal in either of the permissible activities specified as under:

• It does not accept public deposit from residents and non-residents;
• It is not registered with the Authority as a Banking Unit;

On the other hand, a ‘Finance Unit’ means a financial institution set up as a branch permitted under these Regulations to deal with the same permissible activities as specified under a finance company.

 

 

An entity can commence business as a ‘Finance Company’ or ‘Finance Unit’ in International  Financial  Services  Centres  (IFSCs)  only  after  obtaining  a  certificate of registration from  the

Authority for carrying out certain activities.

 

A  Finance  Company can be set up either as a subsidiary or a joint venture,  or  as  a  newly incorporated  company  under  the  Companies  Act,  2013,  or  in  any  other  form  as  specified  by  the Authority. An important thing to note here is that  if  an  investing  entity  in  a  Finance  Company  is  carrying  out  a  regulated financial activity  in  its  home  jurisdiction,  it  has to  obtain  a  No-objection  Certificate  from its  home country regulator for setting up a Finance Company in the IFSCs, wherever applicable. Similarly, a Finance Unit too can be set up if the investing entity or the ultimate parent of the investing entity is carrying out a regulated financial activity in its home jurisdiction and has obtained the No-Objection Certificate from the home country regulator for setting up a Finance Unit in the IFSCs.

 

An application for grant of registration as a Finance Company or a Finance Unit can be made by an applicant in the form and manner as specified by the Authority.

 

 

The applicant must fulfil the following conditions for seeking registration with the Authority:

• In case the applicant is seeking registration as a ‘Finance Company?, it must have and maintain a minimum owned fund, depending on the activity proposed to be undertaken by it, or  such  other  higher  amount  as  may  be  specified  by  the Authority.
• In  case  the  applicant is seeking registration as a ‘Finance Unit’, its parent company must then provide and maintain a minimum  owned  fund  on an unimpaired  basis  at  all  times,  depending  on  the  activity proposed to be undertaken by the Finance Unit or such other higher amount as may be specified by the Authority.

 

The applicant entity must be from a Financial Action Task Force (FATF) compliant jurisdiction and comply with  international  standards  set  by  the  FATF  to  combat  money  laundering  and terrorist financing.

 

 

After considering the application made by the applicant, if the Authority is satisfied that the terms and conditions as specified in these regulations have been complied with, it would grant a certificate of registration to the applicant. If an applicant wants to make a request to the Authority for more time to comply with conditions of registration, the Authority, if it is satisfied that the applicant can be given more time to comply with certain conditions for grant of registration,  it may,  for the reasons  to  be  recorded  in  writing,  consider  grant  of  provisional  registration  giving additional time to the applicant. This provisional registration can however be withdrawn by the Authority if the Authority is satisfied that the applicant is unable to comply with any of the conditions under which the provisional registration was granted.

 

After considering the application for registration, if the Authority is of the opinion that registration cannot be granted, it has to communicate the deficiencies to the applicant giving it a thirty day period to rectify them.

 

If  the  applicant fails  to  rectify  the  deficiencies  which were specified by the Authority to them within the specified time, then the Authority can refuse to grant a certificate of registration and must communicate the same to the applicant, giving reasons for their refusal. It must be noted that  no refusal can be made by the Authority without giving the applicant an opportunity to make written submissions on the grounds on which the registration is proposed to be refused

 

 

The prudential regulations applicable to a Finance Company or a Finance Unit as follows:

 

• Capital Ratio (CR): A Finance Company or a Finance Unit has to maintain a minimum capital ratio at eight per cent of its regulatory capital to its risk-weighted assets or any other percentage as may be specified by the Authority.
• Liquidity Coverage Ratio (LCR): A Finance Company or a Finance Unit has to maintain LCR on a stand-alone basis, at all times, as has been determined by the Authority. In the case of a Finance Unit, the LCR may be allowed to be maintained by the parent entity, with specific approval of the Authority.
• Exposure Ceiling (EC): The  sum  of  all  the  exposures  of  a  Finance  Company  or  a  Finance Unit  to  a  single counterparty  or  group  of  connected  counterparties  must  not  exceed  twenty-five per  cent of  its  available eligible capital base without the approval of the Authority.

 

 

A Finance Company or a Finance Unit are allowed to undertake the following permitted core and non-core activities, subject to compliance with certain terms and conditions or guidelines:

• Credit enhancement;
• Factoring and forfaiting of receivables;

 

• Lend  in  the  form  of  loans,  commitments  and  guarantees,  securitisation,  and  sale and purchase of portfolios;
• Undertake  investments,  including  subscribing,  acquiring,  holding,  or  transferring securities or such other instruments;
• Undertake equipment leasing,
• Carry out financial lease transactions for aircraft lease and ship lease;
• Buy or Sell derivatives;
• Global/Regional Corporate Treasury Centres;

 

Subject  to  specific  registration  requirements,  wherever  applicable,  permitted  non-core activities  for  a  Finance  Company  or  a  Finance  Unit includes the following activities:

• Merchant Banking;
• Authorised person;
• Registrar and Share Transfer Agent;
• Trusteeship Services;
• Investment Advisory Services;
• Portfolio Management Services;
• Distribution of mutual fund units;
• Distribution of insurance products;
• Function as trading and clearing members or professional clearing member of exchanges and clearing corporations set up in IFSC;
• Transactions permitted under the Framework for Aircraft Operating Lease;
• Transactions  permitted  under  the  Framework  for  Ship  Operating  Lease;
• Asset  Management  support  services  permitted  under  the  Framework  for  Enabling Ancillary Services.

 

 

A Finance Company or a Finance Unit are permitted to carry out their operation in a freely convertible foreign currency and with such persons, whether resident or otherwise. They are permitted to have an INR account out of the freely convertible foreign currency to defray their administrative and statutory expenses.

Every Finance Company or a Finance Unit must maintain its balance sheet only in United  States Dollars (USD). A Finance Unit has to ensure that accounts pertaining to its transactions are kept distinct from that of its parent company.