The Reserve Bank of India (“RBI”) vide its circular no. ‘A.P. (DIR Series) Circular No. 06’, dated June 22, 2023 (“Circular”), has provided information regarding remittances to International Financial Services Centres (“IFSCs”) under the Liberalised Remittance Scheme (“LRS”). Through this Circular, RBI has expanded the scope of facilitating remittances to IFSCs through LRS. This legal update aims to explain the concept of IFSCs and LRS, as well as the changes made by RBI through the Circular.
IFSCs – IFSCs are established in accordance with the Special Economic Zones Act of 2005 (“SEZ Act”). Section 18 of the SEZ Act grants the Central Government the authority to approve the establishment of IFSCs within Special Economic Zones (“SEZs”) and define the requirements for their setup and operation. Essentially, an IFSC caters to customers outside the jurisdiction of the domestic economy, facilitating the flow of finance, financial products, and services across borders. It serves as a jurisdiction that offers world-class financial services to both residents and non-residents, subject to current regulations, in a currency other than the domestic currency. Recognizing the need for a high level of inter-regulatory coordination due to the dynamic nature of business in IFSCs, the Central Government enacted the International Financial Services Centres Authority Act, 2019 (“IFSC Act”) to regulate the IFSC’s in more organized way.
LRS – LRS was introduced by RBI in 2014 to enable resident individuals, including minors, to freely remit a specific amount (which is subject to revision from time to time) during a financial year (April – March). This amount can be utilized for any permissible current or capital account transaction or a combination of both. Currently, the limit for remittances under LRS is set at USD 250,000 (United States Dollars Two Hundred Fifty Thousand Only).
Prior to this Circular, remittances to IFSCs under LRS were permitted only for investments in securities, as per circular no. ‘A.P. (DIR Series) Circular No. 11’, dated February 16, 2021. However, the Government of India, through its gazette notification No. SO 2374(E) dated May 23, 2022 (“Gazette Notification“), classified courses offered in Financial Management, FinTech, Science, Technology, Engineering, and Mathematics by foreign universities or institutions in the International Financial Services Centre as financial services under the Section 3(1)(e) of the IFSC Act.
Consequently, following the Gazette Notification, RBI, through its Circular, instructed authorized persons to facilitate remittances by resident individuals for the purpose of “studies abroad” as mentioned in Schedule III of the Foreign Exchange Management (Current Account Transactions) Rules, 2000. These remittances are intended for payment of fees to foreign universities or institutions located in IFSCs, specifically for pursuing the courses mentioned in the Gazette Notification.
Furthermore, RBI has directed authorized persons to inform their constituents and customers about the contents of this Circular.