SEZ & the IFSC Bill

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Context: The Lok Sabha passed the International Financial Services Centres Authority Bill recently. The Bill provides for the establishment of an authority to develop and regulate the financial services market in the International Financial Services Centres set up in Special Economic Zones in India.

Relevance:
Mains: GS III-

  • Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
  • Infrastructure: Energy, Ports, Roads, Airports, Railways etc.
  • Investment models.

What is a Special Economic Zone?

  • A special economic zone (SEZ) is an area in which the business and trade laws are different from the rest of the country.
  • SEZs are located within a country's national borders, and their aims include increased trade balance, employment, increased investment, job creation, and effective administration.
  • To encourage businesses to set up in the zone, financial policies are introduced.
  • These policies typically encompass investing, taxation, trading, quotas, customs and labour regulations.
  • Additionally, companies may be offered tax holidays, where upon establishing themselves in a zone, they are granted a period of lower taxation.
  • The category 'SEZ' covers a broad range of more specific zone types, including:
    1. free-trade zones (FTZ),
    2. export processing zones (EPZ),
    3. free zones (FZ),
    4. industrial estates (IE),
    5. free ports,
    6. urban enterprise zones and others.
  • SEZs have been established in several countries, including China, India, Jordan, Poland, Kazakhstan, the Philippines, and Russia.

SEZs in India:

India was one of the first in Asia to recognize the effectiveness of the Export Processing Zone (EPZ) model in promoting exports, with Asia's first EPZ set up in Kandla in 1965.

With a view to overcoming the shortcomings experienced on account of the multiplicity of controls and clearances; absence of world-class infrastructure, and an unstable fiscal regime and with a view to attracting larger foreign investments in India, the Special Economic Zones (SEZs) Policy was announced in April 2000.

  • This policy intended to make SEZs an engine for economic growth supported by quality infrastructure complemented by an attractive fiscal package, both at the Centre and the State level, with the minimum possible regulations.
  • The Special Economic Zones Act, 2005, supported by SEZ Rules, came into effect in 2006, providing for drastic simplification of procedures and for single window clearance on matters relating to central as well as state governments.
  • The main objectives of the SEZ Act are:
    1. generation of additional economic activity
    2. promotion of exports of goods and services
    3. promotion of investment from domestic and foreign sources
    4. creation of employment opportunities
    5. development of infrastructure facilities
  • The SEZ Rules provide for a different minimum land requirement for a different class of SEZs.
  • Every SEZ is divided into a processing area where alone the SEZ units would come up and the non-processing area where the supporting infrastructure is to be created.
  • The SEZ Rules provide for:
    1. Simplified procedures for development, operation, and maintenance of the Special Economic Zones and for setting up units and conducting business in SEZs;
    2. Single window clearance for setting up of an SEZ;
    3. Single window clearance for setting up a unit in a Special Economic Zone;
    4. Single Window clearance on matters relating to Central as well as State Governments;
    5. Simplified compliance procedures and documentation with an emphasis on self-certification.
  • The Ministry of Commerce and Industry data show that 230 out of the 373 Special Economic Zones (SEZs) in India are operational.

Importance of SEZs for India's Economy:

  • FDI: SEZs in India has proved to be crucial in enhancing foreign investment, especially to attract foreign direct investment (FDI), thereby increasing forex reserves and GDP.
    • Over the years, the increasing attractiveness of the Indian market has lured investors from across the world.
    • Consequently, the country is among the top five preferred destinations for FDI from Asian, European and North American investors.
    • The five states – Gujarat, Maharashtra, Karnataka, Andhra Pradesh, and Tamil Nadu are among the top investment destinations in India.
  • Exports: SEZs help in increasing shares in Global Export (international Business).
    • In India, SEZs have played an important role in facilitating exports, thereby enabling the country to be a part of globalization.
    • During 2017-18 exports from SEZs stood at $41.44 billion, with an increase of 13.39% from the previous financial year. 
    • A major part of exports includes manufactured goods which is helpful in fulfilling the objectives under the Make in India programme.
  • Experiment: SEZs can be used as experimental laboratories for the application of new policies and approaches- China’s large-scale SEZs are classic examples.
  • Employment Generation: SEZs are vital for the creation of employment opportunities and to serve as “pressure valves” to alleviate large-scale unemployment.
    • SEZ programs of Tunisia and the Dominican Republic are frequently cited as examples of programs that have remained enclaves and have not catalyzed dramatic structural economic change, but remained robust job-creating programs. 
    • 230 operational SEZs in India have provided employment to as many as 20 lakh people.
  • Infrastructure Development: SEZs are an effective solution for infrastructure bottlenecks in India Better infrastructure is one of the most important benefits offered by SEZs to manufacturing units.
    • Infrastructure facilities in SEZs can be commonly used by members, thereby reducing the requirement of setting up individual facilities.
    • Infrastructure related to SEZs is of two types:
      1. Facilitating internal functioning of SEZs (power generation plants and distribution network, internal water supply, sanitation and sewerage, and internal roads) with direct implications on productivity; and
      2. Linking SEZs with non-SEZs through a supply chain (railway tracks, roads and bridges, airport facilities, telephone lines, and telecom network).
  • Technology: SEZs can be very effective in providing exposure to new technology.

In this view, SEZs are a simple tool permitting a country to develop and diversify exports.

The Special Economic Zones Act, 2005, provides that the Central Government may approve the setting up of an International Financial Services Centre in an SEZ and prescribe the requirements for setting up and operate such a center. 

The government has introduced an Act providing for establishing a unified authority for regulating and developing the financial services market in the International Financial Services Centre.


International Financial Services Centres Authority Act, 2019:

Key features of the Act include:

  • Coverage: The Act will apply to all International Financial Services Centres (IFSC) set up under the Special Economic Zones Act, 2005.
  • Constitution of the International Financial Services Centres Authority: The Bill provides for the establishment of the International Financial Services Centres Authority. 
    • The Authority will consist of nine members, appointed by the central government. 
    • These posts will have a term of three years, subject to reappointment. 
    • Members of the Authority will include:
      1. the Chairperson, 
      2. four members to be nominated from the Reserve Bank of India, the Securities Exchange Board of India, the Insurance Regulatory and Development Authority of India, and the Pension Fund Regulatory and Development Authority, 
      3. two members from amongst officials of the Ministry of Finance, and 
      4. two members to be appointed on the recommendation of a Selection Committee.
    • Functions of the Authority include:
      1. Regulating financial products, financial services, and financial institutions in an IFSC which have been approved by any regulator (such as the RBI or SEBI), before the enactment of the Bill,
      2. Regulating any other financial products, services, or institutions in an IFSC, which may be notified by the central government, and
      3. Recommending to the central government, any other financial services, products, or institutions that may be permitted in an IFSC.
      4. Further, all powers relating to the regulation of financial products, services, and institutions in IFSCs, which were previously exercised by the respective regulators will be exercised by the Authority.
        All processes and procedures to be followed by the Authority in respect of such regulation (such as procedures for the investigation of offences) will be identical to the provisions for these processes under the respective laws of the regulators.
    • Performance Review Committee: Under the Bill, the Authority will constitute a Performance Review Committee to review the functioning of the Authority. 
      • The Committee will consist of at least two members of the Authority.  The Committee will review whether:
        1. the Authority has complied with the provisions of the applicable laws while exercising powers or performing functions, 
        2. the regulations made by the Authority to promote transparency and best practices of governance, and
        3. the Authority is managing risks to its functioning in a reasonable manner. 
    • Transaction in foreign currency: As per the Bill, all transactions of financial services in IFSCs will be in such foreign currency as specified by the Authority, in consultation with the central government.
    • International Financial Services Centres Authority Fund: The Bill sets up the International Financial Services Centres Authority Fund. 
      • The following amounts will be credited to the Fund:
        1. all grants, fees, and charges received by the Authority;
        2. all sums received by the Authority from various sources, as decided by the central government. 



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