IFSCA in Discussions with RBI Regarding Foreign Asset Reporting Requirements for GIFT City Funds

GIFT City Funds Face Uncertainty Over Regulatory Status

Mumbai: The International Financial Services Centres Authority (IFSCA) has requested that funds operating in GIFT City hold off on taking action following a Reserve Bank of India (RBI) Frequently Asked Questions (FAQ) that triggered confusion over their regulatory status.

The uncertainty stems from a 25 March RBI FAQ, which stated that entities operating in the GIFT International Financial Services Centre (IFSC) must file annual Foreign Liabilities and Assets (FLA) returns if they receive foreign investment or hold overseas assets. Additionally, the FAQ stated that subsidiaries set up in the IFSC by foreign entities would be treated as foreign direct investment (FDI), triggering related reporting requirements.

This interpretation has raised concerns that funds in the GIFT IFSC could be treated as resident Indian entities, potentially at odds with their current classification under the Foreign Exchange Management Act (FEMA), where they are regarded as non-residents. The distinction is significant because it underpins key regulatory and operational advantages for IFSC-based entities.

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The Foreign Liabilities and Assets return is a mandatory annual disclosure to the RBI that captures details of foreign investment in Indian entities, as well as their overseas assets and liabilities. The data is used to compile India’s balance of payments and its international investment position.

Entities in the GIFT IFSC have so far been treated as non-residents under foreign exchange rules. The RBI FAQ has prompted concern within the industry. An industry body representing alternative investment funds (AIFs) had written to the Department of Economic Affairs seeking a joint clarification on the issue.

In a 10 April letter to the Department of Economic Affairs (DEA), the AIF Chief Financial Officers Association flagged what it called a “critical regulatory overlap” arising from RBI’s requirement to file FLA returns. It said the mandate conflicts with the special regulatory framework typically extended to funds operating in the international financial zone.

The GIFT IFSC operates as a distinct regulatory enclave within GIFT City and is treated as a foreign jurisdiction for financial transactions. The association has urged the Centre to engage with RBI and issue a joint clarification exempting IFSCA-registered entities from the FLA filing requirement.

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As of now, GIFT City hosts 314 alternative investment funds across Categories I, II, and III, according to IFSCA data.

Note: The table above provides a breakdown of the number of alternative investment funds operating in GIFT City across different categories.