RBI details regulations for IFSC banking units

The Reserve Bank of India, which had earlier issued a notification under FEMA setting out RBI regulations relating to financial institutions set up in International Financial Services Centres (IFSC), has now directed Indian banks intending to set up IBU to approach the RBI's Foreign Exchange Management department.

The central government has already announced the setting up of an IFSC in Gujarat, namely, Gujarat International Finance Tec-City (GIFT) in Gandhinagar, Gujarat. RBI said the guidelines contained in its circular will be applicable to IBUs set up in GIFT as well as in other IFSCs which may be set up in India.

Under the RBI regulations, Indian banks, viz, banks in the public sector and the private sector authorised to deal in foreign exchange will be eligible to set up IBUs. Each of the eligible banks would be permitted to establish only one IBU in each IFSC.

Eligible banks interested in setting up IBUs will be required to obtain prior permission of the Reserve Bank for opening an IBU. For most regulatory purposes, an IBU will be treated on par with a foreign branch of an Indian bank, RBI* said.

For enabling IBUs to start operations, the parent bank will be required to provide a minimum capital of $20 million or equivalent in any foreign currency to its IBU. The IBU should maintain the minimum prescribed regulatory capital on an on-going basis as per regulations amended from time to time.

The liabilities of the IBU are exempt from both CRR and SLR requirements of Reserve Bank of India.

The sources for raising funds, including borrowing in foreign currency, will be persons not resident in India and deployment of the funds can be with both persons resident in India as well as persons not resident in India. However, the deployment of funds with persons resident in India will be subject to the provisions of FEMA.

Permissible activities

The IBUs will be permitted to engage in the form of business mentioned below, subject to the conditions, if any, of the licence issued to them:

  • Undertake transactions with non-resident entities other than individual / retail customers / HNIs - all transactions of IBUs shall be in currency other than Indian rupee.
  • Deal with the wholly owned subsidiaries / joint ventures of Indian companies registered abroad;
  • May have liabilities, including borrowing in foreign currency, only with original maturity period greater than one year. They can however raise short term liabilities from banks subject to limits as may be prescribed by the Reserve Bank;
  • Undertake factoring / forfaiting of export receivables; and
  • Undertake transactions in all types of derivatives and structured products with the prior approval of their board of directors. IBUs dealing with such products should have adequate knowledge, understanding, and risk management capability for handling such products.

They will not be allowed to open any current or savings accounts. They cannot issue bearer instruments or cheques. All payment transactions must be undertaken via bank transfers.

RBI also issued prudential regulations for foreign banks i8n India wanting to set up banking units in the IFSC.