Key Takeaways: FEMA regulations relating to IFSC Scheme for setting up of IFSC Banking Units (IBUs) Permissible activities of IBUs Rupee Derivatives at IFSCs

1. IFSC Regulators: Reserve Bank of
India
CA Divakar Vijayasarathy

2. Research Credits
Gracelin Lita
CA Jugal Gala

3. Legends used in the Presentation
ADR American Depository Receipt
AOP Association of Persons
BOD Board of Directors
BOI Body of Individuals
BSE Bombay Stock Exchange
CME Chicago Mercantile Exchange
CRR Cash Reserve Ratio
DGCX Dubai Gold and Commodities Exchange
FEMA Foreign Exchange and Management Act
FMC Forward Market Commission
GDR Global Depository Receipt
GIFT City Gujarat International Finance Tech-City
HNI High Networth Individual
IBUs IFSC Banking Units
IFSC International Financial Services Centre
IRDA Insurance Regulatory Development
Authority
LCR Liquidity Coverage Ratio
MSEI Metropolitan Stock Exchange of India Ltd.
NBFC Non-Banking Financial Companies
NDF Non-Deliverable Forward
NSE National Stock Exchange
NSFR Net Stable Funding Ratio
PFRDA Pension Fund Regulatory and
Development Authority
RBI Reserve Bank of India
SEBI Securities and Exchange Board of India
SLR Statutory Liquidity Ratio
SGX Singapore Exchange
TF Task Force

4. Presentation Schema
Introduction
Foreign Exchange
Management (IFSC)
Regulations
Setting up of IBUs
Permissible Activities
of IBUs
Rupee Derivatives at
IFSCs
Potential Benefits of
Rupee Derivatives at
IFSCs
Concerns from Non-
deliverable Rupee
derivatives at IFSCs

5. Introduction
Any financial institution set up in the IFSC shall be treated as a person not resident in India and hence
all its transactions shall be subject to provisions of FEMA
The Foreign Exchange Management (IFSC) Regulations, 2015 sets out regulations relating to
financial institutions set up in IFSCs
Accordingly, the RBI has formulated a scheme for the setting up of IFSC Banking Units (IBUs) in
IFSCs
In this webinar, we will be discussing on the RBI operational guidelines and directions issued to
regulate IBUs

6. Foreign Exchange Management (IFSC)
Regulations, 2015

7. Regulations relating to IFSCs
In exercise of the powers conferred by FEMA, the RBI has made the Foreign Exchange Management (IFSC)
Regulations relating to financial institutions set up in IFSCs
What is a Financial Institution ?
A financial institution shall include a company, firm, AOP or a BOI whether incorporated or not or any other
artificial juridical person, engaged in rendering financial services* or carrying out financial transactions**
The term ‘financial institution’ shall include Banks, NBFCs, Insurance companies, Brokerage firms, Pension
Funds, Mutual funds, Investment funds, Trusts, Exchanges, Clearing houses or any other entity specified by the
GoI or a Financial Regulatory Authority
* Financial service shall mean activities a financial institution is allowed to carry out as specified in the
respective Act of the Parliament or by the Government of India or by any Regulatory Authority [RBI, SEBI, IRDA,
PFRDA, FMC] empowered to regulate the concerned financial institution (Eg: Derivative Transactions, Acceptance
of Fixed Deposits in foreign currency, etc.)
 Making any payment to or for the credit of any person
 Receiving any payment for, by order or on behalf of any person
 Drawing, issuing or negotiating any bill of exchange or promissory note
 Transferring any security or acknowledging any debt
**Financial Transaction shall mean

8. Financial Institutions
• Any financial institution or branch of a financial institution set up in the IFSC and
permitted/recognised as such by the GoI or a Regulatory Authority shall be treated as person
resident outside India and therefore their transaction with a resident of India shall be treated as a
transaction between a resident and non-resident and shall be subject to provisions of FEMA and
the Rules/Regulations/Directions issued thereunder
• A financial institution shall conduct such business in such currency and with such persons as the
Regulatory Authority may determine [Provided, a financial institution shall conduct business in
Indian Rupee if RBI allows the same through General/Specific Permission]
Pursuant to the FEM (IFSC) Regulations, the Reserve bank has formulated a scheme for the setting up of IFSC
Banking Units (IBUs) by banks in IFSCs [discussed in further slides]

9. Setting up of IBUs

10. Scheme for Setting up of IBUs
Annex-I and II of the Notification No.FEMA.339/2015-RB dated March 2nd, 2015 (amended time to time) issued by
the RBI sets out regulations governing IBUs set up in IFSCs by Indian and Foreign Banks
IBUs by Indian Banks IBUs by Foreign Banks
Eligibility
Criteria
Public sector and Private sector banks
authorized to deal in foreign exchange can set
up IBUs
Only foreign banks already having presence in
India will be eligible to set up IBUs [Shall not be
treated as normal branch expansion and
therefore special permission from the home
country regulator is required]
Each eligible bank would be permitted to establish only one IBU in each IFSC
Licensing
Prior permission to be obtained from RBI under Sec 23(1)(a) of the Banking Regulation Act, 1949*
For most regulatory purposes, an IBU will be
treated on par with a foreign branch of an
Indian Bank
The applications of foreign banks will be
considered on the basis of extant guidelines for
setting up branches in India subject to the
additional requirement of the home country
regulator’s confirmation in writing of their
regulatory comfort for the bank’s presence in the
IFSC
* Under Sec 23(1)(a) of the Banking Regulation Act, 1949, any banking company shall open a new place of business
in India or change the existing place of business with the prior permission of RBI

11. Capital, Reserves and Deployment
IBUs by Indian Banks IBUs by Foreign banks
Capital The parent bank will be required to provide a minimum capital of USD 20 million or equivalent
in any foreign currency to its IBU which should be maintained at all times
However, the minimum prescribed
regulatory capital, including for the
exposures of the IBU*, shall be maintained
on an on-going basis at the parent level
 The minimum prescribed regulatory capital,
including for the exposures of the IBU*, shall
be maintained on an on-going basis at the
parent level as per home country regulations
and a certificate to this effect should be
submitted to RBI on a half-yearly basis
 The parent bank should provide a Letter of
Comfort for extending financial assistance in
the form of capital/liquidity support to IBU
Reserve
Requirements
The liabilities of the IBU are exempt from both CRR and SLR requirements of RBI
Resources
and
Deployment
 The sources for raising funds including borrowing in foreign currency will be from persons
not resident in India and overseas branches of Indian banks
 The deployment of funds can be with both persons resident in India as well as persons not
resident in India
However, deployment of funds with persons resident in India shall be subject to the provisions
of FEMA, 1999
*The exposure ceiling for IBUs shall be 5% of the parent bank’s Tier-1 capital in case of a single borrower and
10% in case of a borrower group

12. Regulation and Reporting
IBUs by Indian Banks IBUs by Foreign Banks
Anti-Money
Laundering
measures
 The IBUs will be required to scrupulously follow "Know Your Customer (KYC)", Combating
of Financing of Terrorism (CFT) and other anti-money laundering instructions issued by the
RBI from time to time including the reporting thereof, as prescribed by the RBI/other
agencies in India
 IBUs are prohibited from undertaking cash transactions
Regulation
and
Supervision
The IBUs will be regulated and supervised by the RBI
Reporting
Requirements
The IBUs will be required to furnish information relating to their operations as prescribed by
the RBI from time to time. These may take the form of offsite reporting, audited financial
statements for IBUs, etc.
Priority
Sector
Lending
The loans and advances of IBUs would not be reckoned as part of the Net Bank Credit of the
parent bank/ foreign bank in India for computing priority sector lending obligations
Deposit
Insurance
Deposits of IBUs will not be covered by deposit insurance
Lender of Last
Resort (LOLR)
No liquidity support or LOLR* support will be available to IBUs from the RBI
*The RBI extends LOLR facility to the rescue of a bank that is solvent but faces temporary liquidity problems by
supplying it with much needed liquidity

13. List of Indian Banks having IBUs in GIFT
City
Public Sector Banks
1 Bank of Baroda
2 State Bank of India
Private Sector Banks
1 Axis Bank
2 Federal Bank
3 HDFC Bank Ltd.
4 ICICI Bank
5 IDBI Bank Ltd.
6 Indus Ind Bank
7 Kotak Mahindra Bank
8 RBL Bank
9 YES Bank
Note: List issued by RBI for banks having IBUs in GIFT City as on September 30th, 2019

14. Permissible Activities of IBUs

15. Permissible Activities of IBUs
• IBUs can undertake transactions with resident (for deployment of funds) and non-resident (for both raising of
resources and deployment of funds) entities other than individuals including HNIs or Retail Customers
• All transactions of IBUs shall be in currency other than INR
• IBUs can deal with the Wholly Owned Subsidiaries/ Joint Ventures of Indian Companies registered abroad
• IBUs are permitted to undertake factoring/forfaiting* of export receivables
• IBUs can accept fixed deposits in foreign currency of tenure less than 1 year from non-bank entities and can
also repay fixed deposits prematurely without any time restrictions [Subject to raising of resources and
deployment of funds conditions]
• RBI will not prescribe any limit for raising short-term liabilities from banks
• However, IBUs must maintain LCR** as applicable to Indian banks on a stand-alone basis and strictly follow
the liquidity risk management guidelines issued by RBI to banks
• NSFR** will also be applicable to IBUs as and when it is applied to Indian banks
**Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) are regulatory standards prescribed by the
BASEL Committee in view of liquidity risk management
*Forfaiting enables exporters to receive immediate cash for a shipment without any risk where the payment is
guaranteed by the bank

16. Opening of Bank Accounts
IBUs are not allowed to open Savings Accounts
IBUs can open Foreign Currency Current accounts of units operating in IFSC and of non-resident institutional
investors to facilitate their investment transactions
IBUs can also open foreign currency current accounts (including escrow accounts*) of their corporate borrowers
subject to provisions and regulations of FEMA
IBUs can open foreign currency escrow account of Indian resident entities to temporally hold subscriptions to the
GDR/ADR** issues until issuance of the receipts after which the funds should immediately be transferred to the
client’s account outside the IBU and cannot be retained by the bank in any form including in long term deposits
IBUs cannot raise liabilities from retail customers including HNIs
No cheque facility will be available for holders of current accounts. All transactions through these accounts must
be through bank transfers
*Escrow Account is a third-party account i.e. a bank account where the asset value is held until the fulfillment of
specific conditions of the transaction. An escrow arrangement safeguards the seller against any risk of payment
default by the buyer as it removes the control of cash flow from the buyer to an independent party
**ADRs are shares issued in the U.S. from a foreign company through a depository bank intermediary while GDRs
are shares of a single foreign company issued in more than one country as part of a GDR program

17. Derivative Transactions
• With the prior approval of their BOD, IBUs may undertake derivative transactions including structured
products* that the banks operating in India as been allowed to as per existing RBI directions
• However, IBUs should obtain prior approval of RBI for offering any other derivative products
• Before seeking RBI’s approval, banks shall ensure that their IBUs have necessary expertise to price,
value and compute the capital charge and manage the risks associated with the products /
transactions intended to be offered
• IBUs are allowed to participate in exchange traded currency derivatives on Rupee (with settlement in
foreign currency) listed on stock exchanges set up at IFSCs [The Directions of the RBI in this regard is
discussed in further slides]
• An IBU can be a Trading Member of an exchange in the IFSC for trading in interest rate and currency
derivatives segments that the banks operating in India have been allowed to undertake as per extant
RBI directions
*Structured products are pre-packaged investments that normally include assets linked to interest plus one or
more derivatives

18. Underwriting and Bank Guarantees
IBUs are allowed to act as underwriter or arranger of INR denominated overseas bonds
issued by Indian entities inn overseas market in terms of existing RBI instructions
However, in cases where part of the issuance underwritten by an IBU devolves on it,
efforts must be made to sell the underwritten holdings and after 6 months of the issue
date these holdings must not exceed 5% of the issue size
IBUs are allowed to extend facility of bank guarantees and short term loans to IFSC Stock
Broking or Commodity Broking entities subject to conditions of RBI in this regard

19. Professional Clearing Member (PCM)
An IBU can become a PCM of the exchange in IFSC for clearing and settling in any derivative segments subject to
the following conditions
The parent bank of the IBU shall fulfill the prudential requirements of the RBI in this regard
The IBU shall with the approval of the bank’s Board put in place effective risk control measures, prudential
limits on risk exposure in respect of each of its trading clients taking into account their net worth, business
turnover, etc.
The IBU may as a PCM of derivatives segments, guarantee trades executed by its clients as trading
members of the exchanges subject to the condition that the total exposure which the bank would take on
its registered clients should be determined by the Board in relation to the net worth of the bank and
monitored regularly ( However, IBU should not guarantee any transaction other than what is required in its
role as a PCM)
The IBU shall ensure strict compliance with various margin requirements as may be prescribed by the
bank’s Board as also the extant RBI guidelines regarding guarantees issued on behalf of commodity brokers
The IBU shall comply with all the conditions stipulated by other regulatory bodies that are relevant for
their role as a PCM.

20. Prudential Regulations
Specifically IBUs would be required to follow the 90 days’ payment delinquency norm for income
recognition, asset classification and provisioning as applicable to Indian banks [shall not be applicable
to IBUs by Foreign Banks]
The bank’s board may set out appropriate credit risk management policy and exposure limits for
their IBUs consistent with the regulatory prescriptions of the RBI
The IBUs would be required to adopt liquidity and interest rate risk management policies
prescribed by the RBI in respect of overseas branches of Indian banks and function within the
overall risk management and Asset-Liability Management (ALM) framework of the bank subject
to monitoring by the board at prescribed intervals
The bank’s board would be required to set comprehensive overnight limits for each currency* for
these Units, which would be separate from the open position limit of the parent bank
All prudential norms applicable to overseas branches of Indian banks would apply to IBUs
*An overnight position limit is the maximum net position in one or more currencies that a trader is allowed
carry over from one trading day to the next

21. Ring Fencing the Activities of IBUs
IBUs are required to maintain separate nostro accounts* with correspondent banks which would be distinct from
nostro accounts maintained by other branches of the same bank
IBUs are not allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and
domestic payment systems
Such operations or transactions of these units in INR would be through Authorised Dealers (distinct from IBU) in
the domestic sector and funded only by foreign currency remittances though an appropriate channel which would
be subject to existing Foreign Exchange regulations
The IBUs would operate and maintain balance sheet only in foreign currency and will not be allowed to deal in INR
except for having a Special Non-Resident Rupee Account (SNRRA) out of convertible fund to defray t*heir
administrative and statutory expenses
*A Nostro account refers to an account that a bank holds in a foreign currency in another bank . They simplify the
process of exchanging and trading in foreign currencies

22. Rupee Derivatives at IFSC

23. Introduction of Rupee Derivatives at IFSCs
Currency Futures and Currency options contracts may be listed on recognised stock exchanges at IFSCs subject to
RBI directions
Rupee derivatives (with settlement in foreign currency) are allowed to be traded in IFSCs starting with Exchange
Traded Currency Derivatives (ETCD)
The RBI on October 4th, 2019 in its Statement on Development and Regulatory Policies stated that on
recommendation of the Task Force on Offshore Rupee Markets,

24. RBI Directions relating to Currency Futures and
Options Contracts
Currency futures and option contracts* are permitted in any currency pair involving the Rupee or
otherwise
Persons resident in India shall not be eligible to undertake currency futures and option contracts
(unless specifically permitted by RBI)
Persons resident outside India shall be eligible to undertake currency futures and option contracts
*Currency future contract is a standardised foreign exchange derivative contract traded on a recognised
stock exchange in IFSCs to buy or sell one currency against another on a specified future date, at a price
specified on the date of contract but does not include a forward contract
The RBI issued the Currency Futures in IFSCs (Reserve Bank) and Currency Options in IFSCs (Reserve Bank)
Direction, 2020 to regulate dealings in Currency Futures and Options contracts
*Currency option contract means a standardized foreign exchange derivative contract traded on a recognised
stock exchange where the purchaser of the option has the right but not the obligation to purchase/sell and
the seller of the option agrees to sell/purchase an agreed amount of a specified currency at a price agreed in
advance and denominated in another currency (known as the strike price) on a specified date in the future

25. Features of Currency Futures and
Currency Options
All currency futures and option contracts shall be settled in a currency other than the Indian Rupee
The premium for all currency option contracts shall be quoted in a currency other than the Indian
Rupee
The settlement price for currency futures/option contracts involving Rupee shall be the FBIL Reference
rate* on the last trading day/expiry day of the contract
For contracts involving Rupee where FBIL reference rates are not available and for other currency
pairs, the mechanism for arriving at the settlement price shall be decided by the recognized stock
exchange in consultation with SEBI
The size, maturity and other specifications of the currency futures and option contracts shall be
decided by the recognised stock exchange in consultation with SEBI
*FBIL Reference rate means the rates of currency pairs computed and published on a daily basis, on all
Mumbai business days by Financial Benchmarks India Pvt. Ltd.

26. Other Directions
Particulars Currency Futures and Currency Futures Contracts
Position Limits The position limits for various classes of participants in the currency option and
currency futures market shall be subject to SEBI guidelines and shall operate
within the prudential limits issued by RBI
Risk Management Measures The trading of currency options/currency futures shall be subject to maintaining
initial, extreme loss and calendar spread margins and the Clearing Corporation
/ Clearing House of the recognized stock exchange shall ensure maintenance of
such margins by the participants on the basis of the SEBI guidelines issued from
time to time
Surveillance and Disclosures The surveillance and disclosures of transactions shall be carried out in
accordance with the guidelines issued by SEBI
Authorisation to Exchanges or
Clearing Corporations
Recognised stock exchanges and their respective Clearing Corporations /
Clearing Houses shall not deal in or otherwise undertake the business relating to
currency futures/currency options unless they hold an authorization issued by
the Reserve Bank
Powers of Reserve Bank The RBI may from time to time modify the eligibility criteria for the
participants, modify participant-wise position limits, prescribe margin, impose
specific margins for identified participants, fix or modify any other prudential
limits, or take such other actions as deemed necessary in public interest, in the
interest of financial stability and orderly development and maintenance of
foreign exchange market in India

27. Potential Benefits of Permitting Non-
deliverable Rupee Derivatives in the
IFSC

28. Bringing NDF Market Volume to the IFSC
Over the last decade or so a significant market share in financial services related to India has moved to
other international financial centres like Singapore, Hong Kong and London
Bringing this business to India is clearly beneficial in terms of economic activity and employment
gains for India
Further, the size and growth of the offshore Rupee derivative market poses a significant challenge
to the efficiency of price discovery as well as the effectiveness of exchange rate management
policy
The possibility that the exchange rate of the Rupee, not a fully convertible currency, being
materially determined by transactions largely outside the legal and regulatory influence of India is a
matter of concern
Given the favourable tax regime and by virtue of it being outside the capital controls under FEMA, IFSC
may bring volumes and price discovery to India

29. Complete Bouquet of Financial Services in
the IFSC
Currently exchanges in IFSC are permitted to offer a well-diversified range of products spanning
various asset classes which include derivatives on Indian indices, derivatives on Indian stocks,
derivatives on foreign stocks, cross currency derivatives, commodity futures on Gold, Silver and
base metals etc..
Further, while listing and trading of Masala Bonds* is permitted in the IFSC, hedging Rupee
exchange rate risk on it is not permitted
Thus, introduction of Rupee derivatives will complete the entire range of asset classes available for
trading in the IFSC
*Masala bonds are bonds issued outside India but denominated in Indian Rupees rather than the local
currency. Unlike dollar bonds, where the borrower takes the currency risk, Masala bonds makes the
investors bear the risk

30. Access to Market Information
• The offshore Rupee market has been the subject matter of interest for all stakeholders, as these
markets have an impact on onshore markets
• However, in the absence of any authentic data, there are varying estimates about the volumes
traded in these markets, nature of participation, extent of open interest and the extent to which these
markets are used for hedging purposes
• If by opening up the IFSCs to Rupee trades, there is some migration of offshore Rupee market
volumes which will help the cause of better information flow regarding the market
Level Playing for Indian Banks
• Foreign bank’s branches outside India can deal in the offshore market as they are not bound by the
RBI’s regulations
• On the other hand, overseas branches of Indian banks cannot deal in Rupee derivatives in the
offshore market
• By introducing Rupee derivatives in IFSC and permitting IBUs to deal in such derivatives, a more level
playing field can be provided to Indian banks to service non-residents

31. Concerns from Non-deliverable
Rupee Derivatives Trading in the IFSC

32. Reduction in Onshore Business
One major concern arising out of the introduction of non-deliverable Rupee derivatives in the IFSC
is whether it would reduce the business of the onshore market instead of importing volumes
from abroad
Since the products in both IFSC and the onshore market would be more or less similar in terms of
characteristics, the domestic futures market getting gradually consumed by the IFSC, on the face of
it, appears probable
But a deeper analysis of the comparative regulatory framework would allay such concerns to a
large extent
The domestic currency futures market is majorly made up of resident participation and non-
residents are nearly absent in these markets and hence their shift to the IFSC is more a theoretical
proposition
It also important to note that the onshore market settles in INR, whereas derivative contracts in
the IFSC would settle in dollars and hence these markets will cater to two distinct classes of
participants

33. Impact on Exchange Rate Management Policy
and Development of the Onshore Market
• In consideration of the risk that participation of Indian banks may improve liquidity in the offshore
market and undermine the development of the onshore market the TF was of the view of that
Indian banks should not be permitted to deal in offshore Rupee market
• However, unlike other offshore Rupee market venues, IFSC has the potential of providing certain
benefits to India and therefore a distinction could be made between the two while examining the
case of permitting Rupee derivatives to be traded in the IFSC
Spillover of Risks from IFSC to Onshore Market
• This is a concern, since the two markets, being geographically contiguous, could create porous leakage
channels
• This concern can be addressed by stipulating distinct net open position limits for entities operating in
both IFSC and on-shore

34. Comparison between Onshore and Offshore
Exchange Traded INR-USD Futures [USD
Billions]
56.05%
43.95%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
2014-15 2015-16 2016-17 2017-18 2018-19
Market Share (%)
Onshore Market
Offshore Market
*Data for F.Y. 2018-19 is from April 1st, 2018 to March 22nd, 2019

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