IFSCA: Fintech Hubs To Get Policy Support; Fresh Channels Of Funding

IFSCA Schemes For Fintech Entities

Cross-boundary transactions and investments have long been subjected to various regulatory hurdles from regulatory bodies such as RBI, SEBI etc. To reduce the impact of these hurdles on Foreign Direct Investment, the government created the first IFSC, i.e. International Financial Service Centre in India. IFSCs are international centres that get benefits like tax exemptions, regulatory relaxations, grants, etc. to ease international business procedures. However, there was a need for an umbrella regulator to supervise these special transactions. Hence, in April 2020, IFSCA was created. 

Overview of IFSCA Schemes for Fintech Entities (2022) 

The International Financial Services Centres Authority (IFSCA) is a unified regulator vested with the regulatory powers of four financial services regulators in India, namely, Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), and Pension Fund Regulatory Development Authority of India (PFRDAI) [1]. It is responsible for developing and regulating financial products, financial services, and financial institutions in the IFSCs established in India. IFSCA aims to encourage the promotion of financial technologies (fintech) initiatives. Since its regulatory framework has special exemptions to attract global capital flows, it enjoys a special offshore status within India [2].

It is evident from the recent initiatives taken by the IFSCA that fintech entities are gaining significance worldwide, both independently and in association with various sectors. On 27th April 2022, the IFSCA officially released a ‘Framework for FinTech Entity (FE) in the IFSCs’ to boost the development of FEs operating in the capital market, banking, insurance, and financial services space. Similarly, three days before the framework was notified, the IFSCA introduced another initiative based on the same objective – the IFSCA Fintech Incentive scheme.

The fundamental objective behind these plans and promotional measures such as the ‘Global FinTech Hackathon,’ ‘FinTech Thought Leadership Forum,’ etc., is to establish a world-class FinTech Hub at IFSC GIFT (Gujarat). Placed right at the top among 15 international centres [3], India’s first IFSC acts as a global hub enabling registered investors across the world to operate, innovate, and succeed in the Indian economy through banking, investment, insurance, reinsurance, and the capital market sector.  

Framework For FinTech Entities In IFSCs 

The new regulatory regime tends to cover both ‘fintech’ products and ‘techfin’ companies. Despite their common motive of using technology for financial services, the main distinction between the two lies in their core business product. ‘Fintech’ companies like Paytm, Razorpay, etc, have financial businesses such as banking applications as their primary model. On the other hand, ‘techfin’ companies like Amazon and Apple use their existing customer data and technology to set up separate branches of financial services. The framework covers techfin technology that aid or assist activities in financial business.  

IFSCA FinTech Regulatory And Innovation Sandbox 

Once an entity is authorised as a Fintech Entity (FE) under the IFSCA, it is officially allowed to make an application to develop or test its ideas and solutions in the IFSCA FinTech Regulatory Sandbox, FinTech Innovation Sandbox, or Inter-Operable Regulatory Sandbox (IoRS) [4]. A regulatory sandbox essentially means a live playground for fintech entities operating in the capital market, banking, insurance, and financial services space to test innovations and solutions under relaxed regulations with a limited number of customers for a brief time period. Similarly, an innovation sandbox is a live environment where FEs can test their solutions in isolation from the live market, based on market-related data. 

 For an idea to be eligible for the sandbox, specific requirements need to be met. 

• It should be innovative enough to add value to existing products/services.  
• A genuine need for relaxation and testing should be demonstrated. 
• Limited prior testing should be carried out. 
• It should offer identifiable benefits to users. 
• It should pose no risks to the financial system. 
• It should be ready to support testing in the sandbox. 
• It should be deployable on a broader scale. 

After evaluation, if the FE meets all requirements listed by the authority, the IFSCA grants the entity ‘Limited Use Authorisation’ to test its innovation for twelve months. However, being authorised under the regulatory and innovative sandbox holds much more weight for fintech entities than mere testing since entities eligible under this category automatically also become eligible for the incentives/grants under IFSCA FinTech Incentive Scheme 2022. This also includes the start-ups participating in accelerators/special programs and the ones that have signed an MoU with IFSCA. 

The IFSCA FinTech Incentive Scheme 2022 

On 25th April 2022, the IFSCA came out with an incentive scheme for providing financial support to the Fintech Hub of IFSC. As the name suggests, rather than granting regulatory relaxations, the scheme is focused on providing funding for domestic fintechs and market access to foreign fintechs. The procedure of receiving incentives under the scheme nearly resembles that of the regulatory and innovation sandbox. If all requirements are met, the application form submitted by a FE is evaluated by a committee. The evaluation committee then submits its recommendations. It is pertinent to note here that the grants under this scheme primarily focus on early-stage capital flow for fintech start-ups.  

Grants offered [5] to the eligible entities are, 

• FinTech start-up grants: For start-ups developing a product or a service and related ‘go to market’ initiatives for a start-up with FinTech ideas or solutions available at a broad scale, this grant can be granted. 
  Reference: “An eligible FE may receive up to Rs. 15 lacs under this scheme. The grant is expected to meet expenses towards product development, manpower costs, IT costs, etc. At this stage, the focus is on converting the idea into an MVP.”

• Proof of Concept (PoC) grant: POC is essential in FinTech start-ups compared to others as it determines whether a Fintech idea has any real-life market value before its total development. The grant shall be used to conduct a PoC by an early or mature FE in the domestic market or overseas.  
  Reference: “An amount of up to Rs. 50 lacs may be provided to an eligible FE to conduct a PoC either in Indian markets or overseas and shall cover expenses towards manpower costs, IT costs, marketing, prototyping costs etc.” 

• Sand-box grant: As discussed earlier, a regulatory sandbox gives an innovation or product the chance to experiment while free of regulatory obstructions. FEs shall utilise this grant to experiment with innovative products or services in a sandbox.   
  Reference: “An amount of up to Rs. 30 lacs may be provided to an eligible FE to cover the costs of developing a software, prototyping, manpower costs, consulting, tech-related, IT-related, admin costs, etc.” 

• Green fintech grant: Given the growing prioritization of ESG in FinTech services, this grant assists in developing solutions facilitating sustainable finance and sustainability-linked to finance, including ‘Environmental, Social and Governance (ESG)’ investments. 
  Reference: “An amount of up to Rs. 75 lacs of a grant may be provided to an eligible FE focussed on sustainable finance.” 

• Accelerator grant: For FinTech start-ups working in the Accelerators/Cohort/Special Programs for access to mentors, investors, etc. This grant shall support third-party incubations such as accelerators at the IFSC. 
  Reference: “An amount of up to Rs. 10 lacs of a grant may be provided to an eligible Accelerator applicant for capacity building, build capabilities around mentors, bringing investors, bringing more projects or PoC, tie-ups, etc.” 

• Listing support grant: Domestic FEs aspiring to go for listing on stock exchanges recognised by the Authority can use this grant.
  Reference: “An amount of up to Rs. 15 lacs may be provided to an eligible Domestic FE for meeting expenses pertaining to road shows, international travel and listing requirements, etc.” 

Remarks

Setting up the IFSCA appears to have encouraged fintech firms to progress with innovative solutions across the banking, capital, or insurance sectors. It is a step towards the provision of seamless interactions with all sectors, under the supervision of a unified regulator. The recently introduced framework and scheme further expand its scope by adding regulatory and financial benefits further to ease the process of product development and cross-boundary transactions.

However, a few things are yet to be addressed concerning the fintech entities. For instance, the Budget 2022[6]’s discussion regarding the development of fintech entities made it clear that fiscal and non-fiscal incentives and TDS deduction are essential steps to ensure better capital flow in the sector. Furthermore, despite the tightening of the internal framework, dispute-resolution mechanisms available to FEs under IFSC regulations are yet to be considered. Given the growing significance of fintech firms in all global market sectors, these proposals must be addressed soon. 

1. ‘About IFSCA’, IFSCA, available at (https://ifsca.gov.in/Pages/Contents/AboutIFSCA) 
2. ‘IFSCA Issues the Framework for FinTech Entity in the International Financial Services Centers (IFSCs)’, IFSCA, Press release, April 27th, 2022 
3. ‘Isfc Features Among Top 15 Emerging Global Financial Centres’, Economic Times, available at https://economictimes.indiatimes.com/markets/stocks/news/gift-ifsc-features-among-top-15-emerging-global-financial-centres/articleshow/60922246.cms 
4. Chapter-II, F.No. 521/IFSCA/FinTech/FE Framework/2022-23 
5. No. IFSCA/2021-22/GN/022 
6. ‘Budget 2022-Fintech Industry Hopes for incentives to push financial inclusion’ Economic Times, available at (https://economictimes.indiatimes.com/tech/technology/budget-2022-fintech-industry-hopes-for-incentives-to-push-financial-inclusion/articleshow/89201871.cms)