The IFSC Banking Unit in Gift City: How It Differs Legally from an Indian Bank Branch

An IFSC Banking Unit in GIFT City may look like a conventional bank branch, but its regulatory framework is different. Governed by the International Financial Services Centres Authority (IFSCA), it operates under distinct rules for capital, liquidity, foreign currency accounts and depositor protection. Understanding these differences is essential for banks establishing an IFSC presence and businesses or individuals choosing to bank with an IFSC Banking Unit.

Two Legal Forms, Not One

The IFSCA (Banking) Regulations, 2020 use “Banking Unit” as the umbrella term, and since the 2023 amendments distinguish two forms:

• an IFSC Banking Unit (IBU): a Banking Unit licensed or permitted to operate as a branch of the Parent Bank; and
• an IFSC Banking Company (IBC): a Banking Unit licensed or permitted to operate as a subsidiary company of the Parent Bank.

A Parent Bank that has already set up an IBU may, with IFSCA’s prior approval, convert it into an IBC. The regulations also permit a Parent Bank to establish a Representative Office (marketing of financial products, data collection, outreach) or a Global Administrative Office (managing, administering or coordinating the Parent Bank’s or group entities’ operations, and providing support services), under a mechanism specified by IFSCA. Activities of a GAO relating to a jurisdiction outside the IFSC remain subject to the directions of that jurisdiction’s regulator.

A “Parent Bank” may be an Indian bank or a foreign bank. The unit’s licensing therefore begins with an existing bank, not with a new banking licence.

Entry Conditions for IFSC Banking Units in GIFT City

A foreign bank without a presence in India must comply with such additional requirements as IFSCA specifies. If IFSCA is minded to refuse, it must give thirty days for written submissions, and must communicate a rejection in writing with reasons.

The Prudential Perimeter

An IFSC Banking Unit in GIFT City differs from a domestic branch in its reserve, liquidity and depositor protection requirements.

Reserve requirements. Under regulation 8, the liabilities of an IBU, other than deposits raised from individuals resident in India or outside India, are exempt from the cash reserve ratio or such other requirements as IFSCA may specify. Deposits raised from individuals are subject to such reserve ratios as IFSCA specifies. An IBC, by contrast, must maintain reserves as mandated under the Banking Regulation Act, 1949 and the RBI Act, 1934.

Liquidity ratios at parent level. A Banking Unit must maintain the liquidity coverage ratio as specified; for an IBU, the ratio may be maintained by the Parent Bank with IFSCA’s prior approval. The same approach applies to the net stable funding ratio when made applicable. Leverage ratio and exposure ceiling norms are as specified by IFSCA from time to time.

Dual compliance for branches. Regulation 4(2) requires Banking Units, whether IBU or IBC, to follow IFSCA’s norms, and requires an IBU additionally to comply with the directions and instructions of its Parent Bank’s Home Regulator, unless IFSCA specifies otherwise. A branch in GIFT IFSC therefore answers to two rulebooks by design.

No lender of last resort. Regulation 9 states plainly that lender of last resort support is not available to a Banking Unit. Deposit insurance is available only to the extent provided under the Deposit Insurance and Credit Guarantee Corporation Act, 1961 and the rules or regulations under it. A depositor’s protections are therefore materially different from those attaching to a domestic branch deposit.

What a Banking Unit May Do

Regulation 13, as substituted in 2023, is drafted widely. A Banking Unit may undertake any or all of the activities mentioned in section 3(1)(e) of the IFSCA Act and section 6 of the Banking Regulation Act, 1949, except those expressly prohibited either by the Home Regulator of the Parent Bank or by IFSCA, subject to IFSCA’s terms, conditions and guidelines, including on design, execution and risk management. Providing “referral services”, as defined, is expressly declared a permitted activity.

This is a shift in drafting technique. The pre-2021 version enumerated activities: lending and trade finance, inter-bank borrowing and lending, investments, post-shipment export credit, factoring and forfaiting, equipment and aircraft leasing, a detailed list of derivative transactions including non-deliverable INR contracts, operating as a foreign portfolio investor, and acting as a trading or professional clearing member. The current text replaces the list with a general permission bounded by prohibitions. For an operating bank, the compliance question is therefore not “is this activity on the list?” but “has this activity been prohibited by IFSCA or by the home regulator, and what conditions has IFSCA specified for it?”

Currency and Accounts

Business must be conducted in the specified foreign currencies listed in the First Schedule. As amended in July 2024, the list comprises the US dollar, euro, Japanese yen, pound sterling, Canadian dollar, Australian dollar, Swiss franc, Hong Kong dollar, Singapore dollar, UAE dirham, Russian rouble, Norwegian krone and New Zealand dollar. Business in INR may be permitted with specified persons, subject to settlement in the specified foreign currencies.

On accounts:

• Banking Units may open accounts in specified foreign currencies for individuals and corporate or institutional entities, resident in India or outside India, subject to conditions.
• Resident individuals may open, hold and maintain accounts with a Banking Unit for transactions connected with permissible current or capital account transactions under the RBI’s Liberalised Remittance Scheme (see Article 12).
• Cash transactions in foreign currency accounts are not permitted.
• Individuals may hold current, savings or term deposits; other account holders may hold current or term deposits.
• An INR account is permitted, funded out of specified foreign currencies, to defray administrative and statutory expenses.
• A Banking Unit must maintain separate nostro accounts with correspondent banks, distinct from those of other branches of the same Parent Bank in India.

Books, records and reporting are in the specified foreign currencies, with reports to IFSCA in US dollars unless otherwise specified.

Supervision and Enforcement

AML, CFT and KYC obligations follow IFSCA’s guidelines rather than the RBI’s (Article 35). If a Parent Bank or Banking Unit fails to fulfil licence conditions, IFSCA may withdraw the licence after giving thirty days to make submissions, without prejudice to other action under the IFSCA Act.

The regulations also record their own transition: from their commencement, the RBI’s 2015 circular on IFSC Banking Units ceased to apply, while actions taken under it are preserved.

Why the Distinctions Matter Commercially

For a corporate customer, the practical consequences are that deposits sit outside the domestic deposit-protection expectations, that the account is denominated in a specified foreign currency, and that the counterparty’s prudential support may rest with a parent abroad.

For a bank, the choice between an IBU and an IBC is not merely tax or capital efficiency. It determines whether the unit is a branch subject to dual supervision with parent-level liquidity, or a separately capitalised company holding reserves under Indian banking legislation.

For both, regulatory authority now sits with IFSCA. Section 51A of the Banking Regulation Act, inserted by the IFSCA Act, withdraws the RBI’s powers under that Act in the IFSC to the extent of permitted financial products, services and institutions (Article 1). Questions that a domestic branch would put to the RBI are, in the IFSC, questions for IFSCA.

Frequently Asked Questions

1. What is an IFSC Banking Unit in GIFT City?

It is a banking establishment in GIFT IFSC regulated by IFSCA, operating as a branch or subsidiary of a Parent Bank.

2. What is the minimum capital requirement?

An IFSC Banking Unit requires USD 20 million, while an IFSC Banking Company requires USD 50 million, subject to IFSCA requirements.

3. Who regulates IFSC Banking Units?

The International Financial Services Centres Authority (IFSCA) regulates IFSC Banking Units.

4. Can resident Indians open accounts with IFSC Banking Units?

Yes, subject to applicable conditions under the RBI’s Liberalised Remittance Scheme (LRS).

5. Are IFSC Banking Unit deposits insured?

Deposit insurance applies only to the extent provided under applicable deposit insurance laws and regulations.