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.
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) . 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 .
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 , 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.
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.
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) . 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.
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.
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  to the eligible entities are,
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'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.