The year 2021 has brought about various changes in the Indian insurance industry leading to its development. The economy opened up further for foreign investment and foreign players can now invest in Indian insurance companies till 74% as increased from the previous permissible limit of 49%. Recently, the regulatory framework governing insurance in India’s first International Financial Services Centre (IFSC) – Gujarat International Finance Tec-City (GIFT City) was revised.
What is GIFT City?
GIFT City was created and operationalized in April 2015 as a global financial hub for centralized availability of financial services. GIFT City caters to customers outside the jurisdictional contours of the domestic economy and allows financial interactions between service providers and customers across borders.
GIFT City is an emerging global financial services hub, a first of its kind in India, designed to be at or above par with globally benchmarked business districts. It is supported by state-of-the-art infrastructure encompassing all basic urban infrastructure elements along with an excellent external connectivity.
The Indian government has looked at promoting businesses under GIFT City through various initiatives. The IFSC in the GIFT City seeks to offer a collaborative environment for investors and seeks to onshore the fund management industry in India. Notably, the IFSC in GIFT City provides numerous benefits to the entities setting up operations there, some of the benefits include: a state-of-the-art infrastructure at par with other leading global financial centres, a liberal tax regime and a strong regulatory and legal environment
International Financial Services Centre Authority (IFSCA)
The need for a coherent regulatory framework for India’s first IFSC was recognized in the Union Budget 2018, when the Finance Minister of India proposed the idea of a unified regulator to play the key role of a catalyst and provide an integrated and undivided approach to the ease of doing business with a single window clearance. It was also advocated that one of the most important roles of a unified regulator would be to act as an enabler by creating a conducive regulatory framework that is benchmarked globally. It would not be helmed around domestic rules and regulations, and instead would try to create a level playing field for the IFSC to compete globally. The IFSCA was established in April 2020 under the International Financial Services Centres Authority Act, 2019.
Taxation Structure
On 01 February 2021, Union Finance Minister Nirmala Sitharaman said that the government will facilitate setting up of a world class fintech hub in Gujarat International Finance Tec (GIFT) city. To facilitate this, an MoU has been signed between startup incubator International Centre for Technology and Entrepreneurship (iCreate) and GIFT SEZ, to create an enabling platform for collaboration in the field of fintech.
To further bolster the IFSC operations, the Finance Minister, in the recent budget also has proposed a tax incentive for relocating foreign funds in the IFSC; and allowing tax exemption to the investment division of foreign banks located in the IFSC.
An IFSC Entity is granted 100% tax exemptions for certain specified periods, exemptions on minimal alternate tax and service tax are also provided.
Revised insurance regulatory framework by IFSCA
The IFSCA notified the International Financial Services Centres Authority (Registration of Insurance Business) Regulations, 2021 dated 18 October 2021 (“Regulations”) to govern the setting up of insurance and reinsurance entities in GIFT City. Under the Regulations, Indian insurers, foreign insurers and reinsurers, society of Lloyd’s and a managing general agent amongst others are permitted to set up offices in GIFT City. A Managing General Agent would be required to have a valid binding agreement with a Foreign Insurer or Foreign Reinsurer.
The Regulations have provided the procedure for setting up an insurance office in IFSC (“IIO”), the documents required to be submitted to the IFSCA, and has inter alia laid down the criteria for capital, net owned funds and solvency.
An IIO once registered may undertake life insurance business, general insurance business, health insurance business or re-insurance business as permitted.
The Regulations further permit an IIO to undertake direct insurance and reinsurance business within IFSC, with other special economic zones in India and outside India. Subject to order of preference conditions laid down by the domestic insurance regulator, IIOs may undertake reinsurance business in the domestic tariff area.
Further, the Regulations provide the operational requirements for commencing of business in IFSC including the requirements to appoint a Principal Officer, Officer in charge of underwriting risk, Officer in Charge of finance and accounts and other key managerial persons. These requirements differ on the basis of the entity and business that is being set up as an IIO.
The IFSCA has further notified the International Financial Services Centres Authority (Insurance Intermediaries) Regulations, 2021 (“Intermediary Regulations”) to govern the setting up of insurance intermediaries (including insurance broker, corporate agent, insurance surveyor and loss assessor, third party administrator) in GIFT City. Under the Intermediary Regulations, domestic and foreign intermediaries, Indian incorporated entities can directly apply to the IFSCA and establish an office in GIFT City in accordance with the requirements under the Intermediary Regulations.
An entity registered as direct insurance broker is permitted to perform the activities of direct insurance business from and within the IFSC, from other SEZs in India and from outside India. An entity registered as composite broker or reinsurance broker is permitted to perform the activities of reinsurance broker or composite broker within the IFSC, in other SEZs in India, DTA and outside India. The TPAs, Surveyors and Loss Assessors registered are not permitted to render services for the policies other than those issued by an IIO, and an insurer domiciled outside India. A TPA is
permitted to service foreign travel policies and health policies issued by Indian insurers covering medical treatment or hospitalization outside India.
KLA analysis and view:
In our view, the Regulations and Intermediary Regulations have opened a host of opportunities to prospective foreign partners in a liberalised regulatory framework. In a remarkable move, the Indian market has opened itself to MGAs for the first time. The new facilities will help India develop a global reinsurance hub in the country, competing with offshore financial centres like Singapore, Dubai and Hong Kong, which currently dominate the insurance business in Asia.
These norms come alongside a slew of tax incentives including zero tax for 10 years.
It will also be interesting to see how the IFSCA now interacts with the domestic regulators including the IRDAI (insurance regulator) and to what extent inter-regulatory coordination will affect the efficiency of the new liberalised regime.
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Sakate Khaitan
Senior Partner
