Instructions and Clarifications on Circulars issued under the IFSC (Banking) Regulations, 2020 (last updated on February 11, 2021)

International Financial Services Centres Authority F.No.110/IFSCA/Banking Regulation/2020-21/7 December 24, 2020 To All Banking Units Dear Sir/Madam, Subject: Instructions and clarifications on circulars issued under the IFSC (Banking) Regulations, 2020 Banking Units (BUs) may please refer to the following circulars and directions, dated December 4, 2020, issued after notification of the IFSC (Banking) Regulations, 2020: a) IFSC (Banking) Regulation, 2020 – Directions for implementation b) OTC Derivatives at IFSCs c) IFSCA (Deposits) Directions, 2020 d) Directions on business in foreign currency at IFSCs 2. Based on the queries/suggestions received from BUs it has been decided to issue the instructions and clarifications in the Annex to this circular. 3. These instructions and clarifications are to be read with the circulars and directions mentioned above. Instructions and clarifications which amend or extend the existing instructions have been cross referenced through footnotes to the above circulars and directions. 4. BUs are directed to ensure compliance with the provisions of this circular. Yours faithfully (Supriyo Bhattacharjee) General Manager supriyo.b@ifsca.gov.in Annex 1. Licensing requirement of existing BUs BUs operating at IFSC on the date of issue of the circular “IFSC (Banking) Regulation, 2020 – Directions for implementation” (December 4, 2020) shall be deemed to have been licensed by the Authority and need not reapply for licensing. Parent banks of such BUs shall not be required, for the present, to submit an undertaking to the Authority for providing liquidity to its BU whenever needed. However, the Authority reserves the right to seek such an undertaking in future based on the operations of the BU and/or as a condition for permitting the BU to maintain LCR and/or NSFR at the parent bank level. 2. Offering services to domestic customers/market ( e.g. Post shipment credit, Derivatives) It is clarified that FEMA, 1999 (including regulations, directions etc. issued thereunder) is applicable to transactions between BUs (treated as person resident outside India) and a person resident in India. Therefore, while undertaking any transaction with residents, BUs will have to adhere to the directions issued by the Authority while also being aware of the directions issued by the Reserve Bank of India (RBI) pertaining to transactions that a person resident in India may undertake with a person resident outside India. This requirement has been emphasised in: (a) paras 9,10,11 & 12 of the circular “IFSC (Banking) Regulation, 2020 – Directions for implementation” (December 4, 2020) (b) para 7 of the of the circular on “OTC Derivatives at IFSCs” (December 4, 2020) (c) proviso to paras 7(i) and 7(ii) and para 8 of the “Directions on business in foreign currency at International Financial Services Centres(IFSCs)” (December 4,2020) 3. Applicability of domestic laws to IFSC Unless specifically exempted, all domestic laws apply to IFSC. BUs may consider obtaining legal opinion on the applicability of specific laws to their business operations and activities in IFSC. 4. Permissible activities of BUs - Credit insurance backed lending, acting as FPI, Wealth Management products (a) Detailed directions on BUs acting as a Foreign Portfolio Investor shall be issued separately (b) BUs are allowed to avail Credit insurance for their lending operations out of IFSC.The Board of the parent bank of the BU or any duly approved committee may lay down the guidelines for the same. (c) Investment Advisory services and Wealth management services are not currently included in the list of permissible activities for BUs under the IFSCA (Banking) Regulations, 2020 5. Ombudsman for individual client complaints The Banking Ombudsman Scheme, 2006 has been framed and notified by the Reserve Bank of India u/s 35A of the Banking Regulation Act, 1949. The scheme does not apply to the operations of foreign branches of Indian banks. Since IBUs are treated as foreign branches of Indian banks by RBI, therefore Banking Ombudsman Scheme, 2006 shall not applicable to BUs. The Authority shall consider framing appropriate directions for protecting the interest of individual clients at an appropriate time. 6. Queries on IFSC (Deposit) Directions,2020 (a) Definition of Bulk deposit Single term deposit of USD 500000 or above and equivalent amount in any other freely convertible foreign currency shall be treated as “Bulk deposit”. The deposit should meet the above threshold on the date of commencement of the deposit. (b) Deposits with negative interest rates Deposits with negative interests may be offered subject to compliance with the requirements of the Interest rate framework in para 5 Chapter III of the IFSCA (Deposits) Directions, 2020. 7. Inclusion of IFSC under the definition of “established financial centers” under RBI’s circular on “Operations of foreign branches and subsidiaries of the Indian banks – Compliance with statutory/regulatory/administrative prohibitions/restrictions” dated May 12,2014 The listing of the centers under the term “established financial centers” in the above circular is indicative and not exhaustive. Considering that one of the purposes behind setting up of IFSCs was to allow transactions, including derivative transactions, which are not currently permitted from the domestic market, IFSC may be considered on the same footing as other “established financial centres”. However, since the circular in question has been issued by the Reserve Bank of India, the parent Bank of the BU may consider seeking their views regarding offering structured derivative products currently not allowed in India out of IFSC. 8. Offering NDCC to persons resident outside India and in FCY-FCY As para 6 of the circular on “OTC Derivatives at IFSCs” dated December 4, 2020 clarifies, the default position is that BUs are allowed to undertake derivative transactions with other BUs, Financial Institutions and persons resident outside India. The modification to para 7 of the “Comprehensive Guidelines on derivatives” (in the Annex to the above circular) lists NDDCs in FCY-FCY as a valid derivative that may be undertaken by BUs. Therefore, FCY-FCY NDDCs may be offered to persons resident outside India. 9. Reserve Bank of India (Interest Rate on Advances) Directions, 2016 – applicable provision for BUs On a review, it has been decided not to make the Reserve Bank of India (Interest Rate on Advances) Directions, 2016 applicable to BUs. Accordingly, the reference to the circular shall be omitted from the Annexure to the circular on “IFSC (Banking) Regulation, 2020 – Directions for implementation” (December 4, 2020)”. BU’s shall frame a policy on interest rates on advances duly approved by the Board of Directors of its parent bank or any committee of the Board to which powers have been delegated. Subject to such policy, BU’s are free to determine the interest rate on advances charged to its customers. 10. Clarity on operations that has to be carried out of GIFT city Para 6 and 7 of the circular on “IFSC (Banking) Regulation, 2020 – Directions for implementation” (December 4, 2020) requires BUs to conduct Risk management, Compliance and Front office operations out of the BU’s infrastructure at GIFT City within six months from the date of issue of the circular. Other operations of such BUs shall be conducted from the BU’s infrastructure GIFT City within two years of the date of the circular. For BUs established post the date of the circular, the above periods shall be calculated from the date of commencement of operations. Based on the feedback received from the BUs and internal deliberation, the Authority has decided to replace the instructions in paras 6 and 7 above with the following with immediate effect: