1.
Offshore Banking Units and International
Financial Services Centres: FEMA Perspective
CA Divakar Vijayasarathy

2.
Credits and Acknowledgments
V Thirumal
CA Jugal Gala

3.
Legends used in the Presentation
AOP Association of Person
BOI Body of Individuals
FEMA Foreign Exchange Management Act, 1999
FEM Foreign Exchange Management
IFSC International Financial Services Centre
INX India International Exchange
IRDA Insurance Regulatory and Development Authority
NBFC Non-Banking Financial Company
OBU Offshore Banking Unit
PFRDA Pension Fund Regulatory and Development Authority
RBI Reserve Bank of India
SEBI Securities Exchange Board of India
SEZ Special Economic Zone

4.
Presentation Schema
International
Financial Services
Centre
Offshore Banking
Units
FEM (International
Financial Services
Centre)
Regulations, 2015
Definitions
Provisions
FEM ( Offshore
Banking Unit )
Regulations, 2002
Meaning of OBU Applicability
Permitted
Transactions
Income-tax
Provisions
India’s First IFSC –
GIFT City

5.
International Financial Services Centre
Such centers deal with the flow of finance, financial products
and services across borders
An IFSC caters to customers outside the jurisdiction of the
domestic economy.
An International Financial Services Centre is set-up to
provide financial services which are provided by Foreign
Financial Institutions and Foreign Branches/Subsidiaries of
Indian Financial Institutions

6.
Offshore Banking Units
An offshore banking unit
(OBU) is a financial
service unit (normally a
branch or subsidiary of a
non-resident bank),
which plays an
intermediary role
between non-resident
borrowers and lenders
Generally an offshore
banking unit is located in
an International financial
centre. In India OBUs can
be established in Special
Economic Zones
The advantage of an OBU
against a regular bank is
that the offshore banking
unit is free of regulations
and restrictions normally
imposed on domestic
financial establishments

7.
Benefits of OBUs and IFSCs
Benefits
Lesser
Regulations
and
Restrictions
Ease of
Transacting
in Foreign
Exchange
Attracts
Foreign
Clientele for
Indian Banks
Flexible
International
Financial
Trade
Options
Tax Benefits
and
Incentives
Increases
cross-border
flow of funds
and
resources

8.
Regulations under FEMA
Foreign Exchange Management Act, 1999 has the authority to govern the Capital Account Transactions
and Provision of Services between Non-Residents and Realisation and Repatriation of Foreign Exchange.
FEMA empowers the RBI to prescribe Regulations in order to govern such transactions
Regulations governing OBUs and IFSCs
FEM (International Financial Services
Centre) Regulations, 2015
FEM (Offshore Banking Unit)
Regulations, 2002

9.
FEM (International Financial Services Centre)
Regulations, 2015

10.
Definitions – Financial Institution
Financial Institution includes
Company Firm AOP or BOI
Any Artificial Judicial Person not falling within any of
the preceding categories engaged in rendering financial
services or carrying out financial transactions
Without any loss of generality of above, the expression ‘financial institution’ shall include
Banks NBFCs
Insurance
companies
Brokerage
firms
Merchant
banks
Investment
banks
Pension funds Mutual funds Trusts Exchanges
Clearing
houses
Any other
Specified
entity

11.
Financial Service & Financial Transaction
Financial service
Activities a financial institution is allowed to carry out as specified in
the respective act or as allowed by the respective regulating authority
Financial
transaction
Making any payment to, or for the credit of any person, or
Receiving any payment for, by order or on behalf of any person, or
Drawing, issuing or negotiating any bill of exchange or promissory note, or
Transferring any security or
Acknowledging any debt
means

12.
Regulatory Authority & IFSC
Regulatory Authority shall include
RBI SEBI IRDA
Pension Fund Regulatory
and Development
Authority (PFRDA)
or any other statutory
authority empowered to
regulate a financial
institution
International Financial
Services Centre
Means an International Financial Services Centre which has been
approved by the Central Government under Sec 18 of the SEZ Act
Sec 18 of the SEZ Act –
Central Government shall approve the setting up of an IFSC in an SEZ,
provided it shall approve only one IFSC in a SEZ

13.
Provisions
Shall be treated as a person resident outside India
And permitted/recognised as such by the Government of India or a Regulatory Authority
Any financial institution or branch of a financial institution set up in the IFSC
A financial institution or branch of a financial institution shall conduct such business in such foreign currency
and with such persons, whether resident or otherwise, as the concerned Regulatory Authority may determine
Subject to regulations governing entities controlled by Indian Residents, unless specified otherwise, other
FEMA regulations shall not apply to a financial institution or branch of a financial institution set up in an IFSC

14.
FEM (Offshore Banking Unit) Regulations, 2002

15.
Meaning of Offshore Banking Unit
Offshore Banking Unit (OBU)
And holds approval of RBI for opening a new place of business
Located in the Special Economic Zone (SEZ)
Means a branch of a bank in India

16.
Applicability of FEMA
Unless otherwise
provided, other
FEMA Regulations do
not apply to an OBU
Despite an OBU
being an Authorised
Dealer of the bank
setting up the OBU, it
shall not be regarded
as an AD for the
purposes of FEMA
Other than the permitted transactions or
without the prior permission of RBI,
an OBU shall not conduct any activity or undertake
any transactions with residents in India

17.
Permitted Transactions
An OBU may undertake foreign exchange transactions with any authorised dealer in India only on
principal-to-principal basis
An OBU may undertake transaction in foreign exchange with a unit located in SEZ to the extent the unit
is eligible to enter into or undertake such transaction subject to ceilings and conditions prescribed
under FEMA
An OBU may engage in any of the forms of business allowed under the Banking Regulation Act, 1949
subject to regulations and satisfaction of conditions for acquiring license, however, only in Foreign
Exchange

18.
Income-Tax Provisions

19.
Sec 80LA of the Income-tax Act, 1962 -Deductions in Respect
of Certain Incomes of OBUs and IFSC
• Income from an OBU in SEZ
• Income from eligible forms of business for banks from any
undertakings in SEZ or which develops or operates and SEZ
• Income of Unit in IFSC from its approved business
Eligible Income
100% of eligible income for 10
consecutive years out of first 15
years at the option of assessee
• 100% of eligible income for 5 AYs
from obtaining permit
• 50% of eligible income for next 5 AYs
Unit of an IFSC
A Scheduled Bank or a Foreign
Bank having an OBU in a SEZ
Assessee
Deduction
Conditions
• Report of Accountant in Form 10CCF must be filed
• Copy of RBI Approval for Banks to set up new place of business to be filed

20.
Other Income-tax Incentives
Sec 10 (15) (viii)
Any income by way of interest received by a non-resident or a person
who is not ordinarily resident, in India on a deposit made in an OBU
Sec 10 (15) (ix)
Any income by way of interest payable to a non-resident by a unit
located in an IFSC in respect of monies borrowed by it
Sec 197A
An OBU shall not deduct taxes on interest paid on deposits and
borrowings of Non-residents or Not ordinarily residents

21.
Contd.
Sec 115JB The Minimum Alternate Tax rate in case of IFSC shall be 9%
Sec 47(viiab)
Transfer of Bonds, GDRs, RDBs, Derivatives by a non-resident in a stock-
exchange located in any IFSC and where the consideration is in foreign
currency shall be exempt from Capital Gains
Sec 115-O
Dividend Distribution Tax shall not be applicable to a company being an unit
of IFSC deriving income solely from convertible foreign exchange

22.
India’s First IFSC – GIFT City
Gujarat International Finance Tech-city (GIFT) SEZ is India’s first International Financial Services
Centre (IFSC) under SEZ Act. It is being developed as a global financial services hub.
GIFT IFSC is a Multi Services SEZ with 105 hectors of land and commenced its business in April 2015
• The India International Exchange (INX) is India's
first international stock exchange, commenced
operations on Jan 16, 2017
• It is located at the IFSC, GIFT City in Gujarat
• It is a WOS of the Bombay Stock Exchange (BSE)
• NSE International Exchange commenced
operations on June 5th 2017
• It is established in GIFT IFSC
• It is a WOS of the National Stock Exchange
of India Ltd (NSE)

23.
Thank You
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