Date: Wednesday, February 27th, 2019 by Sakate Khaitan.
The Indian Government and the regulators are making every attempt to showcase the country’s first International Financial Services Centre – GIFT City IFSC as India’s answer to global hubs for financial services like Dubai and Singapore.
In the first week of February, the Union cabinet cleared the draft law to create a super-regulator, a first of its kind, for IFSCs. The objective is to create a unified regulator to oversee dynamic financial services undertaken in GIFT City IFSC and ease inter-regulatory coordination. The news of the super-regulator follows a slew of measures announced by the Indian insurance regulator – Insurance Regulatory and Development Authority of India (IRDAI) in the last two months, including preferential treatment for reinsurers registered in GIFT City IFSC and creating a framework for registration and operation of insurance intermediaries in GIFT City IFSC.
For those who came in late, GIFT City IFSC is a ‘smart’ city with high-quality physical infrastructure and a special economic zone with a raft of tax and regulator advantages. Incentives include a 10 year tax holiday and foreign entities like insurers and reinsurers are permitted open shop (as branch offices) without the need of a joint venture partner, unlike mainland India that restricts foreign participation to 49% in direct insurance.
From the beginning of 2019, IRDAI notified the new reinsurance regulations that require Indian cedants to comply with ‘order of preference’ while making reinsurance placements. While the national reinsurer and reinsurers registered in India predictably got the top slots under the ‘order of preference,’ the units set up in IFSC were able to find themselves a notch above the cross border reinsurers (CBRs). It may be pointed out that over 300 CBRs seek reinsurance placements from India. Such treatment of GIFT City IFSC units was clear reflection of the importance accorded to GIFT City IFSC in regulatory policy.
The need for a coherent regulatory framework for India’s first IFSC was recognized in the Union Budget 2018, when the Finance Minister of India proposed the idea of a unified regulator to play the key role of a catalyst and provide an integrated and undivided approach to the ease of doing business with a single window clearance. It was also advocated that one of the most important roles of a unified regulator would be to act as an enabler by creating a conducive regulatory framework that is benchmarked globally. It would not be helmed around domestic rules and regulations, and instead would try to create a level playing field for the IFSC to compete globally.
This development forms part of a series of steps that the government has taken recently to promote GIFT City IFSC. Over the last three years, the Regulators in India namely Reserve Bank of India (banking and exchange control), Securities & Exchange Board of India (capital markets), IRDAI (insurance, reinsurance and insurance intermediaries) have created the issued regulatory framework allowing Indian and foreign financial institutions to open their offices in GIFT City IFSC.
The framework for allowing foreign insurers and reinsurers to set up shop in GIFT City IFSC was already provided by insurance regulator IRDAI in December 2017. Foreign insurers and reinsurers, subject to meeting eligibility criteria can set up units in GIFT City IFSC. While insurers can do direct insurance business in GIFT City IFSC and other SEZs across India, the reinsurers can seek placement from India subject to order of preference. There is no restriction on insurers and reinsurers on writing insurance/reinsurance business outside India.
Recently in January, the framework to facilitate the entry and operations of domestic intermediaries in GIFT City was unveiled by IRDAI. Incentives in direct and indirect tax coupled with regulatory ease for setting up and operations have made the prospects of new business and growth brighter for insurance intermediaries.
It may be pointed out that Global Financial Centres Index, the world’s most authoritative comparison of the competitiveness of the world’s leading financial centres has recently featured GIFT City as one of the significant emerging IFSCs in the latest edition of ‘Global Financial Centres Index 24 (GFCI)’, released in London in September 2018. GIFT is ranked third in the list of the GFCI report, which has highlighted 15 centres that are likely to become more significant in the next few years.
The rank takes into consideration five major factors (business environment, human capital, reputation, infrastructure & financial sector development). This is a significant achievement for a centre entering for the first time in the main index. The GIFT City profile in the latest GFCI report also states that GIFT City is a gateway for inbound and outbound business from India and is fast emerging as a preferred destination for undertaking International Financial Services.
All in all, the situation for foreign insurers and reinsurers in India has at last taken a major step forward, and one which will be welcomed by many international companies.
Sakate Khaitan is Senior Partner and head of the insurance and reinsurance practice at Khaitan Legal Associates (part of Global Insurance Law Connect). He divides his time between London and Mumbai.
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