Alerts & Updates 29th Jul 2024

Foreign Currency Accounts for Indian Residents in GIFT City

Authors

Vinod Joseph Partner | Mumbai

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  • On July 10, 2024, the Reserve Bank of India issued a circular (RBI July 10 Circular) regarding “Remittances to International Financial Services Centres (IFSC) under the Liberalised Remittance Scheme (LRS)”. Prior to the RBI July 10 Circular) remittances under LRS to IFSCs by resident individuals to open Foreign Currency Account (FCA) could be made only for:

    • making investments in securities in IFSCs [except those issued by entities/ companies resident in India (outside IFSC)]; and
    • payment of fees for education to foreign universities or foreign institutions in IFSCs for pursuing courses mentioned in the gazette notification (no. SO 2374(E) dated May 23, 2022) issued by the Central Government.

    The RBI July 10 Circular states that, pursuant to a review, it has been decided that resident individuals can open an FCA in an IFSC and make remittances to such FCA under LRS for:

    • Availing financial services or financial products as per the International Financial Services Centres Authority Act, 2019 within IFSCs; and
    • All current or capital account transactions, in any foreign jurisdiction, other than an IFSC. Though an IFSC is technically a foreign jurisdiction, the foreign exchange parked in an FCA in an IFSC cannot be used for a current or capital account transaction in an IFSC.

    Since any remittance by an Indian resident individual to his/her FCA in GIFT City will be under the LRS, it is subject to the stipulation contained in the Master Direction on LRS dated January 1, 2016 (“LRS Master Direction”) that “the received/realized/unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorized person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India, as the case may be.

  • ELP Comments
    • An International Financial Service Centre (“IFSC”) set up under the International Financial Services Centres Authority Act, 2019 (“IFSCA Act”) is deemed to be outside India for the purpose of the Foreign Exchange Management Act, 1999 (“FEMA”). This is primarily because of Section 57A which has been inserted by the IFSCA Act into the Reserve Bank of India Act, 1934 (“RBI Act”). Section 57A of the RBI Act states as follows:

    57A. Notwithstanding anything contained in any other law for the time being in force, the powers exercisable by the Bank under this Act,— (a) shall not extend to an International Financial Services Centre set up under sub-section (1) of section 18 of the Special Economic Zones Act, 2005; (b) shall be exercisable by the International Financial Services Centres Authority established under sub-section (1) of section 4 of the International Financial Services Centres Authority Act, 2019, in so far as regulation of financial products, financial services and financial institutions that are permitted in the International Financial Services Centres are concerned.

    As a corollary to Section 57A of the RBI Act, Section 20 of the IFSCA Act states that “Every transaction of financial services in an International Financial Services Centre shall be in such foreign currency as may be specified by regulations in consultation with the Central Government.”

    The First Schedule to the International Financial Services Centres Authority (Banking) Regulations, 2020 lists out fifteen foreign currencies, which include prominent currencies such as the US Dollar, the Euro, the Japanese Yen, the British Pound and the Russian Rouble, which are permitted to be used in an IFSC.

    Even though GIFT City is deemed to be outside India for the purpose of FEMA, until now, authorized dealers have not permitted Indian resident individuals to set up any FCA in GIFT City and make remittances to such FCA under LRS, though, they could have arguably done so. The RBI July 10 Circular, in our view, merely spells out the obvious and removes any hesitation that authorized dealers may have had in opening an FCA for Indian resident individuals.

    • All regulated entities operating in GIFT City carry out all transactions in US Dollars. This includes payments to vendors who may be based in India. Thus, when a law firm set up in GIFT City as an ancillary service provider, invoices a client in GIFT City, the invoice would be in USD or any other permitted foreign currency and the fees paid to the law firm by its client would be in such foreign currency. However, as of now, regulated entities operating in GIFT City do not pay their employees in any foreign currency specified under the First Schedule to the International Financial Services Centres Authority (Banking) Regulations, 2020. However, if an employee of a regulated entity operating in GIFT City opens a FCA pursuant to the RBI July 10 Circular and seeks to receive his/her salary in a foreign currency, it is unclear if authorized dealers will allow such a remittance, even if the employer is willing to do so.
    • The stipulation contained in the LRS Master Direction that any unspent/unused foreign exchange, unless reinvested, shall be repatriated and surrendered to an authorized person within a period of 180 days from the date of such receipt/ realisation/ purchase/ acquisition or date of return to India is derived from Regulation 7 of the Foreign Exchange Management (Realisation, repatriation and surrender of foreign exchange) Regulations, 2015. The aforementioned Regulation 7 states as follows: “A person being an individual resident in India shall surrender the received/realised/unspent/unused foreign exchange whether in the form of currency notes, coins and travellers cheques, etc. to an authorised person within a period of 180 days from the date of such receipt/realisation/purchase/acquisition or date of his return to India, as the case may be.

    As would be evident, the aforementioned Regulation 7 is meant for an era where Indian residents collected foreign currency notes from authorized dealers in India before travelling overseas or received foreign exchange in anticipation of an overseas investment and they were expected to return to the authorized dealer any unused foreign currency within 180 days. However, the requirement to return any unused forex within 180 days has found its way to the LRS Master Directions and any FCA opened in GIFT City will also be subject to this rule.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein

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