Key Takeaways: - A brief history of IFSC - Legal requirements - Incorporation process - Advantages and disadvantages - Tax exemptions

1. AIF in IFSC
CS Meenakshi Jayaraman

2. Research Credits
Iswariya BS
Subash

3. Legends Used
AOA Articles of Association IRDAI Insurance Regulatory and Development
Authority of India
AIF Alternative Investment Fund LRS Liberalised Remittance Scheme
AIPAC Alternative Investment Policy Advisory
Committee
MOA Memorandum of Association
CG Central Government NRI Non-Resident Indian
FDI Foreign Direct Investment ODI Overseas Direct Investment
FEMA Foreign Exchange Management Act PFRDA Pension Fund Regulatory &
Development Authority
FPI Foreign Portfolio Investment PRI Person Resident in India
FVCI Foreign Venture Capital Investment PROI Person Resident Outside India
GIFT
city
Gujarat International Finance Tec city RBI Reserve Bank of India
IFSC International Financial Service Centre SEBI Securities and Exchange Board of India
IFSCA International Financial Service Centre
Authority
SEZ Special Economic Zone

4. Presentation Schema
A brief history of IFSC Legal Requirements
Process of incorporating an
AIF in IFSC
Pros and Cons of an AIF in IFSC
Tax exemptions and
registration cost
Statistics

5. A brief history of IFSC

6. History behind IFSC
Sections 18 and 55 of
the SEZ Act, 2005
provides power to the
CG to set up and
operate an IFSC in SEZ
India’s first IFSC became
operational at GIFT city
during April, 2015
IFSCA Act came
into force on 20th
December, 2019
IFSCA has been established
on 27th April, 2020
Headquartered @ GIFT
city, Gandhinagar, Gujarat
Caveat: Only 1 IFSC can be set up in a SEZ

7. Contd.
Why IFSC?
• A platform to undertake financial services transactions by overseas financial institutions and overseas
branches / subsidiaries of Indian financial institutions in foreign currency in India, which at present are
carried on outside India
Prior to the establishment of IFSCA
• Business in IFSC was regulated by domestic financial regulators, namely, RBI, SEBI, PFRDA and IRDAI
Overriding effect
• The provisions of IFSCA shall have effect notwithstanding anything inconsistent contained in any other
law as per Section 30 of the IFSCA Act

8. Timeline Chart

9. Legal Requirements

10. Legal requirements under SEBI
SEBI IFSC Guideline during 27th March, 2015 – for all financial institutions in general
Who is permitted to invest in an AIF set up
in IFSC?
a PROI a NRI
Institutional investor resident in
India eligible under FEMA
regulations to invest funds
offshore - to the extent of
outward investment permitted
PRI (having minimum net worth
of USD 1 million during preceding
FY) eligible under FEMA to invest
funds offshore - to the extent
allowed in LRS
Subject to RBI guidelines
Units of other
AIFs set up in
IFSC subject to
AIF regulations
Securities in
which a
domestic AIF
is permitted
to invest
Permissible investments
Securities
which are
listed in IFSC
Securities
issued by
companies
incorporated
in IFSC
Securities issued by
companies
belonging to
foreign jurisdiction

11. Contd.
SEBI's operating guideline for AIFs in IFSC dated 26th November, 2018
Investment routes
available for an AIF to
invest in India
FDI
FPI
FVCI
Incorporating a
Company / LLP in IFSC
Setting up a branch in
IFSC
Sponsor /
Manager of an
existing AIF in
IFSC
New Sponsor /
Manager of an
AIF in IFSC
Options available to a Sponsor / Manager of an AIF
or

12. Legal requirements under IFSCA Act
Section 13 of IFSCA Act, 2019 gives superior power to the authority for regulating financial products /
services / institutions in IFSC over other authorities
IFSCA with the approval of CG shall establish its office and appoint such members as it deems fit for
carrying out the necessary functions under IFSCA Act
Every transaction of financial services in an IFSC shall be in such foreign currency as specified in
regulations in consultation with the CG

13. Process of incorporating an AIF
in IFSC

14. Process of incorporating an AIF in IFSC
• Office space to be identified
in IFSC
• Provisional letter of
allotment by GIFT SEZ for
providing office space and
setting up IFSC unit in SEZ
Step 1
• Company / LLP / Trust has to
be incorporated / formed as
per the appropriate laws
Step 2
• Upon incorporation /
formation, application shall
be made to SEZ, IFSCA and
SEBI for their approval
• Application in Form F (SEZ
Approval) and Form A (IFSCA
approval)
Step 3

15. Contd.
Form F has to be filed with DC Kandla SEZ and
IFSCA @ https://www.sezonline-ndml.com/
Attachments (in case of a Private Limited
Company):
• Incorporation form and certificate, MOA, AOA
• Demand Draft- Rs.10,000
• Entity Profile and Project Report
• Board Resolution
• List of indigenous and imported capital goods
required for setting up office in IFSC
• Directors ID and Address Proof
• ITR Acknowledgment past 3 years of the
directors
• PAN Card of entity
• Provisional letter of allotment
• Affidavit (in stamp paper)
Step 3 in detail
On receipt of approval from the SEZ
and IFSCA, Form A has to be filed
with SEBI https://siportal.sebi.gov.in
and IFSCA
On receipt of SEBI’s approval, final
letter of allotment will be issued for
allocation of office space
Lease deed to be executed with the
developer for office space

16. Pros & Cons of an AIF in IFSC

17. Pros
An AIF set up in IFSC is treated as a PROI, thus it enjoys the privileges of a non-resident under FEMA
provisions. Income accruing or received by NRI from offshore investments through Category I & II AIF in
IFSC are not regulated.
Various tax benefits and regulatory incentives
Lower operating costs due to subsidies granted by the Gujarat Government
Indian fund managers looking to set up offshore funds to invest outside India may find an AIF in IFSC as
a viable alternative due to relaxed conditions on investments abroad
Proximity to the onshore market
Access to multiple markets from IFSC

18. Cons
Pursuant to RBI circular (dated May 12,2021) any sponsor contribution from a sponsor Indian Party (IP) to
an AIF set up in IFSC, will be treated as ODI and the IP must have earned net profit during the preceding
three financial years from the financial services activities. Otherwise, approval route has to be taken.
Procedure for registration have not been streamlined and therefore would require the help of
consultants.
Initial compliance requirements are high as approval is required from SEZ, IFSCA and SEBI.

19. Tax Exemption & Cost involved

20. Tax exemptions under Income Tax Act
Cat-I and Cat-II AIF have tax pass-through status for Indian income-tax purposes (except for business
income, which is taxable in the hands of the AIF for which 100% tax holiday can be claimed for a
period of 10 consecutive years out of a block of first 15 years). [Sec 80LA]
Income accruing or arising or received by non-resident investors from offshore investments through
a Category I and II AIF is not taxable in India. [Sec 10(4D)]
Investors can claim losses (other than business loss) of AIF on pass through basis, provided the units
of such AIF are held for a period of 12 months or more. However, any business loss can be carried
forward only at the AIF level. [Sec 115UB]
Exemption to non-resident investors from filing return of income, provided they earn income only
from investments made in a Cat I or Cat II AIFs in IFSC and tax has been deducted on the distribution
made by such AIFs to non-resident investors. [Rule 114AAB]
The Minimum Alternate Tax (‘MAT’) rate has been reduced to 9% (as against 18.5%). [Sec 115JB]

21. Cost involved in setting up an AIF in IFSC
Particulars Fee
Application fee USD 1,500
Registration fee for Category I AIF other than
Angel Funds
USD 7,500
Registration fee for Category II AIF USD 15,000
Registration fee for Category III AIF USD 22,500
Registration fee for Angel Funds USD 3,000
Scheme Fee for AIF other than Angel Funds USD 1,500
Re- Registration fee USD 1,500

22. Statistics

23. GIFT-City’s ranking
In the latest edition of Global Financial Centres Index 29 (GFCI) - London released on 17th March,
2021, GIFT IFSC is ranked as follows:
• Ranks first in the list of the GFCI report which has 15 centres that are likely to become more
significant in the next few years
• Ranks tenth in the Finance sector sub-indices
Further, ranks first in the huge reputational advantage.
Reputational advantage is derived from the difference between:
• weighted average assessment given to a financial centre (average score a centre receives from finance
professionals across the world) and
• the overall rating in the index (GFCI rating)
India is thus rated more than its intrinsic worth perceived by professionals across the globe

24. FDI Inflows
Particulars Amount (in Rs.) (in crores) Percentage
Gujarat 1,58,089 41.27%
Maharashtra 1,01,278 26.43%
Karnataka 47,413 12.37%
Other States 76,275 19.91%
Total FDI Inflow 3,83,055 100.00%
FDI Inflows during the period April – December, 2020
Source: DPIIT Publications
• Gujarat is leading the list of top 10 states receiving FDI inflows followed by
Maharashtra and Karnataka
• Till the period ending June, 2020, Gujarat was either ranking in 4th or 5th place in FDI
inflows
• But, increase in FDI inflows from July to September, 2020 (2nd Quarter of FY 2020-
2021) led to attaining 1st rank in FDI inflows by Gujarat

25. Conclusion
Setting up of an IFSC at GIFT city is a welcome-move by the Government to attract
foreign investments
Since it allows the Indian entities to enjoy the privilege of NRI within the Indian
territory, it results in ease of doing business
With the entry of IFSC, FDI inflows into the country has increased by 19.8% during the
period from April to December, 2020

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