India, being one of the major consumers of international financial services, has been pushing the envelope on making itself the hub for such services. With this objective, the Government of India had operationalised India’s first (and currently the only) International Financial Services Centre (“IFSC”) at GIFT Multi Services Special Economic Zone (“SEZ”) in Gujarat in April 2015. In this regard and to further this objective, the International Financial Services Centres Authority Act was enacted in December 2019 to set up a unified regulator, viz the International Financial Services Centres Authority (“IFSCA”), which commenced operation in October 2020. The IFSCA has been vested with the roles and powers of four domestic regulators, namely the Reserve Bank of India (“RBI”), the Securities and Exchange Board of India (“SEBI”), the Insurance Regulatory and Development Authority of India (“IRDAI”), and the Pension Fund Regulatory and Development Authority. IFSCA has been set up to develop and regulate financial institutions, financial services, and financial products within the IFSCs in India.
In furtherance of its objectives and as a light touch and modern day regulator, the IFSCA has over a period of less than a year developed a regulatory regime not just for the traditional financial services and financial products available in India, but also introduced several financial services and products that will put India on the global map, with regard to the financial services sector and some of the other emerging sectors, including aircraft leasing, global inhouse centres, an international bullion exchange, insurtech, fintech and special purpose acquisition companies (“SPACs”).
In one such effort, the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“IFSC Listing Regulations”), were notified by the IFSCA on July 16, 2021, which provide for a comprehensive framework for issuance and listing of securities at the IFSC. The IFSC Listing Regulations inter alia permit and provide for the setting up and listing of SPACs, thereby providing a great opportunity to unlisted companies in India to list their securities in an IFSC. This in turn provides domestic and international sponsors the opportunity to acquire unlisted companies in India and overseas.
Part 1 of our 3 blogs series (Role of IFSC in Indian SPAC Dream) provides a brief flavour on the unique status of IFSCs as a ‘foreign territory’ in the Indian territory, the regulatory interplay of domestic laws and legal framework in IFSCs and the consequent development of a unique ecosystem and regulatory regime for listing of SPACs in the IFSCs.
What is IFSC and role of IFSCA?
IFSCs are established in SEZs as delineated area, where units can be set up for providing international financial services. Such an area is deemed to be foreign territory for the purposes of trade operations. IFSCs enable businesses to set up shop in India, leverage the expertise of qualified Indian professionals and pursue global opportunities by continuing to reside in India. The dynamic status of IFSCs and the inter-play between various domestic financial regulators necessitated the setting up of a unified regulator to provide a sandboxed environment to financial market participants, to improve ease of doing business in IFSC and provide a competitive alternative to other global financial centres, such as New York, London, Tokyo, Hong Kong, Singapore and Dubai.
Accordingly, IFSCA was set up as a unified regulator, with the objective of regulating and developing financial products, financial services, and financial institutions operating at the IFSC. Prior to setting up of the IFSCA, SEBI, RBI and IRDAI along with the SEZ authorities had the power to regulate the setting up of banking units, capital market entities (such as stock exchanges, stock clearing corporations, AIFs, etc.) and insurance players in the IFSCs. With the setting up of IFSCA, the power to regulate such financial service providers has been entrusted with it. For instance, IFSCA (Banking) Regulations, 2020, was notified in November 2020, and it repeals and supersedes the scheme for setting of IFSC Banking Units provided by the RBI and provides for prudential regulatory requirements, know your customer and anti-money laundering measures applicable to banking units.
What is a SPAC?
SPACs are blank check companies listed on a stock exchange (such as NASDAQ), which are set up by investment funds/ sponsors exclusively for the purpose of acquiring operating companies within a prescribed time period, usually 18 to 24 months, with the acquisition resulting in listing of such operating companies. For further details on SPACs and the regulatory challenges in India for listing through SPACs on foreign exchanges, please refer to our blogs
Interplay of domestic laws vis-à-vis IFSCs
The interplay of the current domestic laws of India and their applicability/ inapplicability to units in the IFSC is critical in providing the unique ‘off-shore’ status to IFSCs, key features of which, as currently in place, are set out below:
- Any financial institution (such as banks, NBFCs, insurance companies, stock exchanges, investment banks, etc.) or a branch of financial institutions set up in IFSC is considered to be a person resident outside India for the purposes of the India foreign exchange control regulations;
- All provisions related to securities law are applicable to a financial institution operating in an IFSC, except as otherwise provided in SEBI (International Financial Services Centre) Guidelines, 2015 (“SEBI IFSC Guidelines”). With the enactment of IFSC Listing Regulations, the framework for issuance of securities as provided in the SEBI IFSC Guidelines stands repealed and further limits the jurisdiction of SEBI in IFSCs. IFSCs thus provide for a far simpler and less cumbersome process of listing as opposed to the current framework prescribed by SEBI for listing of securities on the domestic stock exchanges;
- In relation to capital markets intermediaries, the SEBI guidelines permit SEBI-registered intermediaries to provide financial services relating to securities market in IFSC without forming a separate entity in IFSC, where services are offered exclusively to institutional investors, without prior SEBI approval;
- SEBI registered foreign portfolio investors, proposing to operate in IFSC, are permitted to operate in IFSC without undergoing any additional documentation and/ or prior approval process. Further, the SEBI regulations, governing FPIs, have relaxed certain norms for entities established in IFSC (such as the eligibility norms), required to be fulfilled by FPIs for registration with SEBI; and
- The Ministry of Corporate Affairs has provided certain procedural exemptions/ relaxations to licenced companies set up in IFSC.
Given that IFSCA has been recently set up, it is working towards further streamlining the regulations and reducing dependencies on domestic regulators, while being very proactive and light touch in its approach. This would further enable a friendlier framework and infrastructure, and thereby reduce the oversight and compliance required by various domestic regulators and improve the ease of doing business.
Stock Exchanges in IFSC
For the purposes of listing securities in IFSC, SEBI has permitted recognised stock exchanges in India or recognised stock exchanges of a foreign jurisdiction to set up a subsidiary to provide the services of stock exchange in IFSC. Such stock exchanges, operating in the IFSC, are permitted to offer trading in equity shares of companies incorporated outside India, depository receipts, debt securities of eligible issuers, currency, index, interest rate and non-agriculture commodity derivatives and all categories of exchange traded products that are available for trading in stock exchanges in Financial Action Task Force/ International Organization of Securities Commission complaint jurisdiction. Pursuant to the SEBI IFSC Guidelines, currently, only persons not resident in India, a non-resident Indian, a financial institutions resident in India and persons resident in India, to the extent eligible under FEMA to invest funds offshore, can avail services from the intermediaries (such as the trading members of the stock exchanges) in IFSC. Accordingly, only the foregoing categories would be permitted to trade on the stock exchanges in IFSC.
Development of a unique ecosystem and regulatory regime for SPACS in IFSCs
With the enactment of IFSC Listing Regulations, a refined framework has now been put in place for issuance and listing of securities by (a) company incorporated in IFSC; (b) a company incorporated in India; and (c) a company incorporated in any foreign jurisdiction. The IFSC Listing Regulations inter alia provide for IPOs, follow-on public offers, listing by start-ups, IPO by SPAC, etc., in each case for listing and trading in IFSCs.
With the introduction of the IFSC Listing Regulations, IFSCs have the potential to capture the frenzy around SPACs and permit listing of SPACs by Indian or international sponsors/ investors. Some of the key advantages offered by the IFSC include: (a) the setting up of a unified and proactive regulator (i.e. IFSCA), which provides for a single window clearance without having to go to multiple regulators for a variety of approvals and consequently reducing oversight by other domestic regulators on entities set up in IFSC; (b) IFSCs provide Indian companies easy access to offshore market through liquid stocks; (c) IFSC could act as a conduit between offshore companies and Indian market; (d) IFSC provides for harnessing expertise of offshore sophisticated investors and offshore investment managers; (e) IFSCs offer simpler processes under the regulations framed by the IFSCA, coupled with lesser approvals including for constructs of reverse merger (which may be an integral aspect of a De-SPAC transaction); (f) Given that the companies set up in IFSCs would be dealing in foreign currency, there will not be any hedging risk for offshore entities (whether as offshore SPAC with targets in IFSC or IFSC SPAC with offshore targets) engaging with IFSC entities; and (g) Given the domestic location of a SPAC listed in IFSC, while being in a deemed foreign territory, merger of the Indian target (at the time of De-SPAC) with such SPAC is likely to be easier than a cross-border merger with a SPAC listed in another jurisdiction.
Accordingly, with the regulations in place for traditional and modern structures, the focus on ease of doing business at the IFSC, proactive and business friendly approach of the IFSCA and recent introduction of the IFSC Listing Regulations, the stage is all set to realise the Indian SPAC dream at the IFSC and provide opportunities to a large number of Indian and foreign entities to explore listing through the SPAC route at the Indian IFSC.
Watch this space for the next parts in this series. In Part 2 of this series, we will touch upon the key features of the IFSC Listing Regulation in relation to listing of SPACs and in Part 3 of this series, we will analyse the legal gaps that the domestic regulations pose on listing of SPACs and suggest areas of improvement to further leverage the benefits that IFSC as a ‘foreign territory’ offers.