IFSC, GIFT City, IFSCA and IFSC Banking Units - Article

Introduction

An International Financial Services Centre (IFSC) provides a platform in India for financial services that are international in nature.

Activities that Indian businesses and investors might otherwise undertake through financial centres such as:

• Singapore;

• London;

• Dubai; or

• Hong Kong

can potentially be carried out from an Indian IFSC, subject to the applicable regulatory framework.

The current IIBF CAIIB BFM Module A syllabus specifically covers International Financial Services Centres, GIFT City, scope and opportunities of IFSC, setting up of IFSC Banking Units, role of IFSCA, regulatory framework and permissible activities of IBUs.

The four terms should be clearly distinguished:

IFSC = financial-services jurisdiction GIFT City = location/ecosystem IFSCA = regulator IBU = banking unit operating in the IFSC

Learning Objectives

After studying this topic, you should be able to:

• Explain the meaning and purpose of an IFSC.

• Distinguish GIFT City from GIFT IFSC.

• Explain the role of IFSCA.

• Understand what an IFSC Banking Unit is.

• Identify major activities that an IBU can undertake.

• Recognise important current developments in IFSC banking.

What Is an IFSC?

Under the International Financial Services Centres Authority Act, 2019, an International Financial Services Centre means an IFSC set up under Section 18 of the Special Economic Zones Act, 2005.

In practical terms, an IFSC is intended to provide international financial services from India through a specially regulated environment.

Its purpose is to facilitate activities such as:

• international banking;

• international capital markets;

• fund management;

• insurance and reinsurance;

• aircraft and ship leasing;

• international bullion trading;

• fintech;

• international treasury operations; and

• other permitted cross-border financial services.

Why Does India Need an IFSC?

Before the development of an Indian IFSC, a substantial amount of financial business connected with India was undertaken through overseas financial centres.

Examples include:

• borrowing in international markets;

• offshore fund management;

• aircraft leasing;

• international derivative transactions;

• overseas investment structures;

• foreign-currency financing; and

• international capital-market transactions.

An Indian IFSC seeks to bring more of this international financial activity into an Indian jurisdiction.

The broader objectives include:

• connecting India with global financial markets;

• attracting international financial institutions;

• providing international financing opportunities;

• improving access to global capital;

• promoting financial-market innovation;

• generating skilled financial-services employment; and

• creating a globally competitive financial ecosystem.

IFSCA describes its objective as developing a strong global connection while serving the requirements of the Indian economy, the region and the wider global economy.

What Is GIFT City?

GIFT City stands for Gujarat International Finance Tec-City.

It is located between Ahmedabad and Gandhinagar in Gujarat.

GIFT City consists broadly of two zones:

• Domestic Tariff Area (DTA)

• Special Economic Zone (SEZ)

The International Financial Services Centre operates within the SEZ component of GIFT City.

This distinction is important.

GIFT City Is Not the Same as GIFT IFSC

GIFT City is the larger urban and business development.

GIFT IFSC is the international financial-services jurisdiction situated within its SEZ.

Therefore:

Every activity in GIFT City is not automatically an IFSC activity.

GIFT IFSC: India’s International Financial Hub

IFSCA describes GIFT IFSC as India’s maiden IFSC.

Its financial ecosystem covers areas such as:

• banking;

• capital markets;

• fund management;

• insurance;

• fintech;

• bullion;

• aircraft leasing;

• ship leasing; and

• other international financial services.

GIFT IFSC therefore should not be understood as only an offshore banking centre.

Banking is one important component of a much wider financial ecosystem.

What Is IFSCA?

IFSCA stands for the International Financial Services Centres Authority.

It was established on 27 April 2020 under the International Financial Services Centres Authority Act, 2019 and is headquartered at GIFT City, Gandhinagar.

IFSCA is the unified regulator for financial products, financial services and financial institutions operating in India’s IFSC.

Why Was a Unified Regulator Created?

Before IFSCA, different components of IFSC financial business were regulated by domestic-sector regulators such as:

• RBI;

• SEBI;

• IRDAI; and

• PFRDA.

International financial markets often involve products cutting across several traditional regulatory boundaries.

A unified regulator was therefore created to provide:

• coordinated regulation;

• faster regulatory development;

• greater ease of doing business;

• internationally aligned standards; and

• a holistic approach to IFSC development.

IFSCA has a dual role:

1. Regulation

2. Development

It is therefore not merely a supervisory authority. It is also responsible for developing the IFSC financial ecosystem.

IFSCA vs RBI

This is a high-value CAIIB distinction.

RBI continues to remain highly relevant because FEMA, LRS and other national regulatory frameworks can affect transactions between onshore India and the IFSC.

Therefore, IFSCA has not made RBI irrelevant to every IFSC transaction.

What Is an IFSC Banking Unit?

An IFSC Banking Unit (IBU) is a Banking Unit licensed or permitted by IFSCA to undertake permissible banking activities within the IFSC regulatory framework.

IFSCA’s Banking Handbook uses “Banking Unit” and IFSC Banking Unit (IBU) for the regulated banking unit operating in the IFSC.

Indian banks and eligible foreign banks may establish banking presence in the IFSC subject to the IFSCA licensing framework.

Under the Banking Handbook, an IBU of a banking company operates as a branch of its parent banking company and requires the prescribed IFSCA licence.

Important Distinction

An IBU is not simply another ordinary domestic branch of the bank.

Its:

• clients;

• currency of business;

• permitted activities;

• regulatory treatment;

• prudential framework; and

• reporting requirements

are governed by the specialised IFSC framework.

Regulatory Framework for IBUs

Important components include:

• IFSCA Act, 2019;

• IFSCA (Banking) Regulations;

• IFSCA Banking Handbook;

• SEZ law and requirements;

• FEMA/RBI requirements where applicable; and

• activity-specific IFSCA regulations, directions and circulars.

The Banking Handbook has three important components:

• GEN – General Directions

• COB – Conduct of Business Directions

• PRU – Prudential Directions

General Directions

These deal with areas such as:

• licensing;

• governance;

• systems and controls;

• management responsibilities; and

• supervisory requirements.

Conduct of Business Directions

These prescribe standards concerning:

• activities;

• clients;

• market conduct;

• dealings with counterparties; and

• integrity of financial markets.

Prudential Directions

These address matters such as:

• capital;

• credit risk;

• market risk;

• liquidity; and

• other prudential requirements.

Major Permissible Activities of an IBU

Subject to applicable conditions, IBUs can undertake a broad range of international banking activities.

Important examples include:

Lending and Trade Finance

IBUs may undertake activities involving:

• loans;

• trade finance;

• acceptances;

• commitments;

• guarantees;

• credit enhancement; and

• other permitted credit activities.

Interbank Business

They can undertake:

• interbank borrowing; and

• interbank lending.

Investments

IBUs may undertake eligible investment activities, including subscribing to, acquiring, holding, underwriting or transferring permitted financial instruments.

Export Finance

The framework permits activities such as:

• post-shipment export credit in foreign currency;

• factoring; and

• forfaiting,

subject to applicable conditions.

Derivatives and Treasury Activities

Permitted activities can include:

• foreign-exchange derivatives;

• interest-rate derivatives;

• non-deliverable currency contracts;

• asset-liability management transactions; and

• other authorised treasury activities.

IFSCA’s Banking Regulations and Conduct of Business Directions provide the detailed framework for these activities.

Foreign-Currency Accounts with IBUs

IBUs may maintain accounts in specified foreign currencies for eligible:

• individuals;

• corporate customers; and

• institutional customers,

subject to IFSCA requirements.

The regulations allow foreign-currency accounts in forms such as:

• current accounts;

• savings accounts for eligible individuals; and

• term deposits,

depending on the type of customer and applicable conditions.

Resident Individuals and LRS: Important Current Development

This area has changed materially in recent years.

RBI’s circular dated 10 July 2024 expanded the use of the Liberalised Remittance Scheme for IFSCs.

Resident individuals may use LRS remittances to IFSCs for:

• availing permissible financial services or financial products within IFSC; and

• permissible current or capital account transactions in another foreign jurisdiction through a Foreign Currency Account maintained in the IFSC.

Resident individuals may therefore open Foreign Currency Accounts with IBUs for these permitted purposes.

IFSCA subsequently issued operational directions for such accounts and amended them in June 2025.

Exam Trap

Do not rely on older material stating that resident individuals can use GIFT IFSC accounts only for a narrow range of investments.

The LRS framework for IFSCs was materially expanded in July 2024.

IFSC Banking vs Ordinary Domestic Banking

This distinction is conceptual. Specific transactions may still involve both IFSCA and RBI/FEMA requirements.

Foreign Currency Settlement System

An important recent development is the Foreign Currency Settlement System (FCSS) in GIFT IFSC.

IFSCA authorised CCIL IFSC Limited to operate the system, and it was launched in October 2025.

The system enables eligible foreign-currency transactions between IBUs to be settled locally within GIFT IFSC instead of always depending on the traditional overseas correspondent-banking route.

The system initially settles USD transactions, with scope for additional currencies.

Why Is This Important?

Traditional cross-border settlement often requires:

IBU → Correspondent/Nostro Bank Overseas → Receiving Bank

FCSS can simplify eligible inter-IBU USD settlement within the IFSC ecosystem.

This can support:

• faster settlement;

• reduced dependence on overseas correspondent chains;

• improved settlement efficiency; and

• stronger financial-market infrastructure in GIFT IFSC.

Practical Banking Application

Suppose an Indian corporate needs foreign-currency finance for its overseas business.

Instead of looking only at an overseas bank branch, the corporate may explore financing from an IBU in GIFT IFSC.

The banker must determine:

1. Is the proposed financial service permitted in IFSC?

2. Is the customer eligible?

3. In which currency can the transaction be undertaken?

4. What IFSCA banking rules apply?

5. Does the transaction involve onshore India and therefore require FEMA/RBI compliance?

6. What AML/KYC and prudential requirements apply?

Similarly, a resident individual wishing to invest internationally may, subject to LRS, maintain an eligible foreign-currency account with an IBU and use it for permitted purposes.

The practical lesson is that:

IFSC regulation and onshore FEMA requirements can interact in the same transaction.

CAIIB Exam Focus

Remember these high-value concepts:

• IIBF specifically includes IFSC, GIFT City, IFSCA and IBUs in BFM Module A.

• IFSC is established under Section 18 of the SEZ Act, 2005.

• GIFT City stands for Gujarat International Finance Tec-City.

• GIFT City has a DTA and an SEZ.

• GIFT IFSC operates within the SEZ.

• GIFT IFSC is India’s maiden IFSC.

• IFSCA was established on 27 April 2020 under the IFSCA Act, 2019.

• IFSCA is a unified regulator with both regulatory and developmental roles.

• RBI and IFSCA are not interchangeable.

• IBU means IFSC Banking Unit/Banking Unit operating under the IFSCA banking framework.

• IBUs can undertake lending, trade finance, interbank business, investments, guarantees, export finance and permitted derivative activities.

• The IFSCA Banking Handbook contains General, Conduct of Business and Prudential Directions.

• Eligible resident individuals can maintain Foreign Currency Accounts with IBUs for permitted LRS purposes under the expanded RBI framework.

• FCSS enables local settlement of eligible foreign-currency transactions between IBUs, initially in USD.

Common Exam Traps

Trap 1: “GIFT City and GIFT IFSC Are the Same”

Incorrect.

GIFT City includes both DTA and SEZ areas. GIFT IFSC is situated within the SEZ.

Trap 2: “IFSCA Is India’s Central Bank”

Incorrect.

RBI is India’s central bank. IFSCA is the unified regulator for financial activities in IFSCs.

Trap 3: “IFSCA Regulates Only IFSC Banks”

Incorrect.

Its jurisdiction extends to multiple financial sectors in IFSC, including capital markets, funds, insurance, leasing and other financial services.

Trap 4: “An IBU Is an Ordinary Domestic Branch”

Incorrect.

It operates under the specialised IFSC regulatory framework for international financial services.

Trap 5: “IBUs Can Conduct Only Lending Business”

Incorrect.

Their permitted activities can include trade finance, investments, guarantees, derivatives, factoring, forfaiting and other authorised financial services.

Trap 6: “RBI Has No Role Once a Transaction Goes through GIFT IFSC”

Incorrect.

FEMA, LRS and other onshore regulatory requirements can remain relevant.

Trap 7: “Resident Individuals Cannot Hold Foreign-Currency Accounts with IBUs”

Outdated as a blanket statement.

Resident individuals may maintain such accounts for permissible purposes under the applicable LRS and IFSCA framework.

Memory Technique

Remember C-R-B:

• C – Centre: IFSC is the international financial-services centre.

• R – Regulator: IFSCA regulates and develops the IFSC.

• B – Banking Unit: IBU conducts permitted international banking business.

And remember:

GIFT City = Place GIFT IFSC = Financial jurisdiction IFSCA = Regulator IBU = Bank unit