WTIA Occasional Papers: The #tradeinservices series

Banking in GIFT City: The new IFSC v. traditional Foreign Bank Regulations in India

India is pushing back against the loss of talent and capital, not least in financial services. The recent International Financial Services Centre (IFSC) initiative is a tool to “onshore the offshore,” offering interesting flexibilities for foreign financial service providers – but with certain limitations. It’s been five years since the operation of the first IFSC – time for a closer look.

Indian startups are increasingly setting up their headquarters in foreign countries for better tax incentives, business and regulatory regimes, easier access to capital and the ease of doing business. This “flipping” or “externalisation” is driving the much-decried “flight of innovation” from India, even when the founders and the team are Indian nationals. The Indian government’s International Financial Services Centre (IFSC) initiative is designed to reverse this trend. Its policy objectives, described as efforts to “onshore the offshore”, aim to attract international capital, retain high-value financial and technological activity within India, and position itself as a “gateway for foreign capital”.

The international financial services centre in India’s GIFT City (Gujarat International Finance Tec-City) is the country’s first operational IFSC. The International Financial Services Centres Authority Act, 2019 established the International Financial Services Centres Authority (IFSCA), the unified regulator for all financial services within the IFSC. The Act creates a distinct regulatory zone, separate from India’s domestic financial system, with its own licensing and supervisory architecture.

Domestic vs. IFSC: The Regulatory Differences

So what’s so special about IFSCs? Especially for foreign banks that aim to provide their services in India by establishing a commercial presence in the country, how do conditions in IFSCs compare to the (regular) regulatory requirements for service providers providing banking services in India? What are the (potential) gaps in intentions and regulations?

Banks in India operate under the Banking Regulation Act, 1949 (BRA), and are regulated by the Reserve Bank of India (RBI). Under the standard “on-tap” licensing framework, a bank must be incorporated as a public company with a minimum paid-up capital of INR 500 crores (approx. USD 56 million). At least 26% of this capital must be held by Indian residents when applying for an on-tap universal bank licence.

(Purely) foreign banks can operate in India through two commercial-presence routes: Branch and Wholly Owned Subsidiary (WOS).

A foreign bank branch must maintain assigned capital of USD 25 million and comply with domestic prudential norms, including capital adequacy and RBI operational guidelines. A WOS, by contrast, is treated like a domestic banking company and must meet the same minimum capital requirement as an Indian bank, albeit without the need for a percentage to be held by local residents. Establishing a WOS requires approval from both the RBI and the regulator in the home jurisdiction.

Foreign bank branches are allowed limited activity under close scrutiny, while WOS structures provide greater regulatory control and risk ring-fencing.

So what is different for those coming in under the new IFSC regime?

A foreign bank can establish a banking unit (BU) as a subsidiary company (IFSC banking company) or as a branch office (IFSC banking unit) on obtaining a license from the IFSCA. The parent bank of the IFSC banking company or the IFSC banking unit must maintain a capital of at least USD 50 million or USD 20 million. The capital requirements are relatively lower in the IFSC than under the traditional foreign bank regulations.

Additionally, a foreign bank that does not have a local presence in India can set up a BU in the IFSC, provided additional requirements are satisfied. Public guidance on these additional requirements remains limited.

Tax Incentives and Regulatory Advantages in the IFSC

One of the primary reasons for "externalisation" is tax. In response to this challenge, the IFSC offers significant advantages over domestic setups. Banking units in the IFSC benefit from: 100% corporate tax exemption for 10 out of 15 years, no Goods and Services Tax (GST) on the export of financial services, and a 9% cap on the minimum alternative tax (MAT) on book profits.

By contrast, a foreign bank branch in India pays 40% corporate tax on profits. A WOS, like domestic banks, pays a standard corporate tax rate of 30%, but the WOS may avail the base rate of 22% if it chooses to forego certain deductions and exemptions.

These asymmetries are designed to make the IFSC internationally competitive, but they also create a dual-regulatory landscape where operating from GIFT City is now financially far more attractive than operating in the domestic economy.

That comes at the price of market segmentation: All IFSC entities are treated as non-residents under the Foreign Exchange Management Act, 2015 (FEMA), meaning they cannot deal in INR with domestic residents.

Regulatory Gaps

While the IFSC framework advances India’s goal of attracting foreign capital, it also presents structural gaps that matter to foreign banks.

The IFSC does not yet have a dedicated dispute-resolution mechanism. Disputes must be handled through Indian courts, which somewhat undermines the IFSC’s “offshore” appeal. In 2024, the IFSCA proposed establishing an international arbitration centre aligned with global best practices, but until a fully operational mechanism is in place, uncertainty remains.

Although the IFSC seeks to “onshore the offshore,” the FEMA non-resident classification and INR-transaction restrictions limit the range of activities that banks can perform for domestic clients.

In short

The first IFSC reflects India’s ambitions to build a globally competitive financial hub. Its tax incentives, flexible capital requirements and unified regulator give it an edge over the domestic banking framework for foreign entrants. The long-term impact of the IFSCs will depend on addressing gaps in dispute resolution, deepening market access, and enabling smoother interaction with India’s domestic financial system.

Market access information for service providers

The European Commission’s Access2Markets platform consolidates services and investment-related content, providing service providers with sector-specific information on regulatory and market access conditions for entry into foreign markets.

For example, Access2Markets offers detailed information on India’s regulatory framework for deposit-taking and banking services under Mode 3, commercial presence.

WTIA Advisors has contributed to the development of services and investment-related market access information reflected in the Access2Markets database.