GIFT-IFSC AND SEBI’S PARADIGM SHIFT: UNLOCKING INDIA’S GLOBAL FINANCIAL POTENTIAL

This post is authored by Utkarsh Gupta and Sumangala Bhargava, 4th-year students at Damodaram Sanjivayya National Law University, Visakhapatnam

INTRODUCTION

India's vision to become a global financial giant has culminated in the form of the Gujarat International Finance Tec-City – International Financial Services Centre (GIFT-IFSC). As a greenfield project, GIFT-IFSC has been envisioned to operate as a financially competitive financial services hub. To balance the need of a responsive and easy regulatory mechanism, on 2nd May, 2025, the Securities and Exchange Board of India (SEBI) released a circular "Measure for Ease of Doing Business – Facilitation to SEBI registered Stock Brokers to undertake securities market related activities in Gujarat International Finance Tech-city – International Financial Services Centre (GIFT-IFSC) under a Separate Business Unit" ('SEBI Circular').

This circular is a noteworthy deviation from the previous approach of SEBI, which required prior regulatory permission to start business in GIFT-IFSC. Instead, the Circular introduces a regime of self-operation in a Separate Business Unit (SBU) within the existing broker’s structure. This article analyses the significance of this circular from regulatory, legal, and operational perspectives, and concludes its impact on India's strategic direction of international financial integration.

REGULATORY ARCHITECTURE AND KEY CHANGES INTRODUCED

The SEBI Circular represents a paradigm shift from the earlier approval-based regime of access to a facilitative regime of regulatory self-declaration. Hitherto, brokers used to seek SEBI approval for initiating operations in GIFT-IFSC. Under the new framework, registered brokers may initiate an SBU under their business structure to conduct activities in GIFT-IFSC without pre-approval. The SBU may be a separate branch or division. The framework grants the brokers the freedom of choice on how they want to organize their overseas operations. This is not to prevent the establishment or re-establishment of subsidiaries or joint ventures within GIFT-IFSC by brokers. Units that already exist through such setups might be allowed to transition into SBUs, if strategically advantageous.

One of the key reforms brought about by the Circular is the demarcation of the regulatory jurisdictions. While the domestic business will be regulated by SEBI, the International Financial Services Centers Authority (IFSCA), as per the IFSCA Act, 2019, will have jurisdiction over SBUs carrying out operations within GIFT-IFSC. The operations of the SBU will remain operationally and legally separate from domestic operations. SEBI Circular requires such operations to be conducted at an arm's length, with separate accounting and governance frameworks.

Additionally, the Circular stipulates that the net worth of the SBU shall be computed independently from the broker’s Indian operations. The capital adequacy norms prescribed by IFSCA must be met separately by the SBU ensuring clear demarcation of risk and compliance responsibilities. Importantly, investors interacting with the SBU will not have access to SEBI’s investor protection platforms, including SCORES and the Investor Protection Fund (IPF). Instead, all matters pertaining to grievance redressal, risk management, enforcement, and policy for the SBU will fall under the jurisdiction of IFSCA, reflecting a shift towards greater regulatory autonomy and institutional transparency.

OBJECTIVES AND RATIONALE OF THE SEBI CIRCULAR

The objectives of the SEBI Circular are to enhance the efficacy of the regulations and to increase the ability of the Indian stock brokers to compete in the global market. By doing away with the requirement of advance approval, SEBI intends to reduce procedural delays and enable speedy entry into the market. This is in accordance with the vision of creating GIFT-IFSC as a global financial hub on par with Singapore, Dubai, and London.

Operational segregation through the SBU model ensures a clear distinction between domestic and foreign business. This dual-structure framework removes the possibility of overlapping regulations, minimizes conflicts of interest, and strengthens transparency. Within this arrangement, distinct regulatory powers are granted to SEBI and IFSCA, with each exercising exclusive authority in its own jurisdiction in a clear, single-point manner. As a result, domestic securities market activities continue under SEBI’s oversight, while all IFSC-related activities are comprehensively regulated by IFSCA, thereby preventing any overlap or conflict.

The separation of accounts of the SBU, for example, calculating net worth separately, enhances risk containment and institutional integrity limits contagion risks in home country and foreign country segments of a broker’s business. The autonomy of SBUs ensures that each unit  is regulated in accordance with its specific risk profile and business strategy.

Additionally, the investor protection facility under IFSCA provides jurisdictional autonomy. SEBI’s decision to explicitly remove SCORES and IPF protections from SBU highlights the importance of maintaining regulatory clarity. IFSCA’s framework will now have to ensure that investor confidence is not compromised in the process of regulatory decentralization.

LEGAL AND COMPLIANCE IMPLICATIONS FOR MARKET PARTICIPANTS

The Circular creates a dual regulatory system. Stock brokers based in India remain regulated by SEBI, while those operating through SBUs in the GIFT-IFSC fall under the IFSCA’s supervision. This setup redefines oversight responsibilities and emphasizes the need for clear operational structures, effective governance, and strict compliance practices to maintain a distinct separation between domestic and international activities reflecting a jurisdictional reallocation.

Within this framework, ring-fencing assumes critical importance. Financial ring-fencing requires SBUs to maintain separate books of accounts and independently determine their net worth. Operational ring-fencing, on the other hand, calls for distinct management frameworks to avoid overlap or dependency between domestic and international operations. These principles align with global regulatory practices, such as those followed by the Dubai International Financial Centre (DIFC) and the Monetary Authority of Singapore (MAS).

To give full effect to this twin structure, stock brokers must ensure that it is consistently reflected in their legal documentation. Their charter documents, board resolutions, and in-house policies should clearly differentiate Indian operations from those of the GIFT-IFSC unit. Likewise, contracts, risk disclosures, and investor agreements must explicitly state that the protections available under SEBI regulations do not extend to SBU activities, which instead fall under the purview of IFSCA. In addition to this, the brokers must also examine the taxation of transactions made under an SBU. While GIFT-IFSC provides a number of tax incentives under Section 80LA of the Income-tax Act, 1961 and the Special Economic Zones Act, 2005, the incentives must use under the scheme of ring-fenced operations and in line with the guidelines of the Central Board of Direct Taxes (CBDT). Operationalization of the SBU model also necessitates modifications in reporting and audit processes. Brokers must furnish SEBI and IFSCA with individual compliance reports, have two internal audit systems, and design IT systems tailored to the requirements of each unit to ensure traceability and non-interference.

OPPORTUNITIES AND FORWARD-LOOKING CHALLENGES

The regulatory overhaul presents enormous opportunities for Indian stock brokers. It facilitates quicker access to the GIFT-IFSC market, which will likely attract international investors and capital. Brokers can access cross-border business, GDRs, international bonds, and derivatives products without the hassle of multiple regulatory clearances. The framework also allows brokers to shape their international strategy while remaining regulator-compliant. The freedom to choose between SBUs’ subsidiaries, or joint ventures gives independence in operations and encourages innovation in financial packaging and product delivery.

However, this autonomy comes with a greater compliance burden. Brokers will have to navigate two different regulatory regimes and maintain in-house mechanisms to manage them simultaneously. The shift of regulatory oversight of SBUs from SEBI to IFSCA simplifies entry for brokers but leaves investors without access to SEBI’s grievance redressal mechanisms, such as SCORES or Investor Protection Funds. This gap raises concerns for cross-border investors, as ineffective or unclear redressal may be viewed in arbitration as a denial of “effective means” to assert claims, potentially implicating India’s obligations under international investment law and discouraging foreign participation in SBUs. Under such an arrangement, clear communication with investors about the applicable jurisdiction, rules of governance, and available redressal options becomes a necessity. Strong risk disclosure and informed consent will therefore be central to investor protection.

Effective coordination between IFSCA and SEBI will be required to align regulatory expectations. Inter-agency procedures for information sharing, inspections, and resolution of disputes could help improve uniformity and reduce uncertainty. Clarification on any potential regulatory overlaps in practice shall help in ease of operations. Overtime, SEBI might publish illustrative supplementary guidelines or FAQs to clarify matters relating to operationalization, taxation, and monitoring of compliance. IFSCA, on its part, needs to enhance its investor protection regime to meet the needs of sophisticated market participants.

CONCLUSION

SEBI’s 2025 Circular is a decisive step towards facilitating ease of business and advancing India’s financial globalization goals. By enabling stock brokers to operate in GIFT-IFSC without prior approval, the Circular marks a transition towards a more autonomous, risk-based, and market-friendly regulatory framework. While it empowers brokers to participate in international financial markets with greater ease, it also places a premium on legal segregation, compliance diligence, and operational discipline.

The dual jurisdiction of SEBI and IFSCA presents both challenges and opportunities. In the coming years as stock brokers will need to invest in regulatory expertise, legal structuring, and effective investor communication. SEBI and IFSCA will also need to collaborate with each other to inject regulatory balance, boost investor confidence, and turn GIFT-IFSC into a sizeable global financial center. With institutional readiness and effective safeguards, this reform can re-balance India's access to global capital markets.