Background

On 8 April 2015, the central government allowed the establishment of Units in an International Financial Services Centre (IFSC) in Special Economic Zones (SEZs). Such Units would be approved under the SEZ Rules, 2006, and Insurance Regulatory and Development Authority of India (IRDA)
(Regulation of Insurance Business in SEZ) Rules, 2015. Further such an IFSC would be subject to the following regulations:

• IRDA IFSC Guidelines, 2015 (dated 6 April 2015)
• Foreign Exchange Management IFSC Regulations, 2015 (dated 2 March 2015)
• Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks (dated 1 April 2015)
• Securities and Exchange Board of India (SEBI) IFSC Guidelines, 2015 (dated 27 March 2015).

The IFSC would cater to customers outside the jurisdiction of India, dealing with flows of finance, financial products and services across borders. 

Additionally, during the monsoon Parliament session, the Ministry of Corporate Affairs (MCA) laid draft notifications in the Parliament, and proposed exceptions from, and modifications and adaptations of various provisions of the Companies Act, 2013 (2013 Act) for an IFSC company.

Such an IFSC company would be licensed to operate by the Reserve Bank of India or the SEBI or the IRDA from an IFSC located in an approved multi services SEZ set-up under the SEZ Act, 2005 read with the SEZ Rules, 2006 (specified IFSC company).

New development

The above notifications have been approved by the Parliament and the MCA on 4 January 2017 issued two notifications (G.S.R. 08(E) and G.S.R. 09(E)) mentioning that certain provisions of the 2013 Act should not apply to an IFSC unlisted public or private company. Further, certain provisions of the 2013 Act would apply with specified exceptions or modifications.

This issue of First Notes provides an overview of the key sections of the 2013 Act that are applicable to an IFSC company with these modifications.

Key changes for an IFSC unlisted public and private company from the 2013 Act

The following table provides an overview of the key sections that are applicable to an IFSC company (whether unlisted public or private company) with modifications.

I.          Key sections that are not applicable to an IFSC unlisted public and private company

Sections	Overview
Section 2(76)(vii), Definitions	Section 2(76)(vii) defines that a ‘related person’ includes key managerial personnel. The provision will not be applicable to an IFSC unlisted public company in respect to Section 188 of the 2013 Act.
Section 92(3), Annual Return	The requirement for attaching an extract of an annual return with Board’s Report is not applicable to an IFSC company.
Section 139(2), Appointment of Auditors	The provision relating to reappointment of auditor is not applicable to an IFSC company.
Section 152, Appointment of directors	The provision relating to retirement and filing of vacancy on retirement of directors is not applicable to an IFSC company.
Section 177, Audit committee	Formation of Audit Committee is not applicable to an IFSC public company.
Section 178	Formation of Nomination and Remuneration Committee and Stakeholders Relationship Committee is not applicable to an IFSC public company.
Section 188(1), Related party transactions	Conditions for entering contract or arrangement with a related party is not applicable to an IFSC company.
Section 196(4), Appointment of managing director, whole-time director or manager	Conditions for the appointment of managing director, whole-time director or manager under provisions of Section 197 and Schedule V is not applicable to an IFSC company.
Section 197, Overall maximum managerial remuneration and managerial remuneration in case of absence or inadequacy of profits	Conditions for overall maximum managerial remuneration and managerial remuneration in the case of absence or inadequacy of profits is not applicable to an IFSC company.

II.     Key sections applicable with certain new conditions

Sections	Provision
Section 43 – Kinds of share capital Section 47 – Voting Rights	The sections are not applicable to an IFSC public company where memorandum of association or articles of association of such a company provides such requirements.
Section 67 - Restrictions on purchase by company or giving of loans by it for purchase of its shares	The aforementioned section is not applicable to IFSC public companies in cases where: No other body corporate has invested any money in the company’s share capital The borrowings of such company from banks or financial institutions or any body corporate is less than twice of its paid up share capital or INR50 crores, whichever is lower, and Such a company is not in default in repayment of such borrowings subsisting at the time of making transactions under this section.
Sections 101 to 107 and Section 109	The mentioned sections relating to notices for meetings, quorum, voting is not applicable to an IFSC company unless otherwise specified in the articles of the company.
Section 135, Corporate social responsibility	This section is not applicable for a period of five years from the commencement of the business of an IFSC company.
Section 138, Internal audit	The section is applicable to an IFSC company if articles of the company provide for such requirements.

III.      Key sections modified

Sections	Provision
Section 2(41), Definition of financial year	An IFSC company which is the subsidiary of a foreign company can follow a financial year same as its holding company without the approval of the National Company Law Tribunal.
Section 3(2), Formation of Company	An IFSC company should be formed only as a company limited by shares.
Section 186, Loan and Investment by company	The provision relating to the restriction on more than two layers of investment companies is not applicable to an IFSC company. The provision relating to the restriction on a loan or guarantee or providing security in connection with a loan to any other body corporate or person should not be applicable if the company passes a resolution to this effect. The board of an IFSC company can approve the investment or loan made or security given under this section by means of resolutions passed at the meetings of the Board of Directors or through resolutions passed by circulation.

Our Comments

The relaxation provided by MCA to IFSC companies is expected to help the set-up of new IFSCs and assist in paving the way for a new corporate structure in the Indian financial sector.

To access the text of the MCA notifications, please refer to the following:

• IFSC unlisted public company, please click here.
• IFSC private company, please click here.