Fintech goes mainstream through new incentive scheme

The fintech sector in India has become a global leader. It has built the largest ecosystem and enjoyed the fastest growth. By 2025, its valuation will hit USD150 billion-USD160 billion, making the country a major financial innovation hub. To further boost India’s fintech sector and financial innovation, the International Financial Services Centres Authority (IFSCA) established under the International Financial Services Centres Act, 2019, has launched the FinTech Incentive Scheme, 2022.

The scheme aims to build a world-class fintech hub in the Gujarat International Finance Tec-City (GIFT City), offering support and incentives to local and foreign fintech entities (FE) looking for international markets, IFSC stock exchange listings and IFSC market access. It enables domestic FEs to list globally and get IFSC access with a sandbox option. Foreign FEs can be regulated and gain domestic access through the Inter-Operable Regulatory Sandbox framework.

Indian FEs can operate as companies, LLPs, or branches within the IFSC. They must register as fintech startups with the Department for Promotion of Industry and Internal Trade (DPIIT) and have prior experience in a designated regulatory ecosystem. They must also be FATF-compliant. For FEs incorporated abroad, non-resident individuals must hold more than 51% ownership. Both domestic and foreign FEs must have technology as their core offerings or operations and grants are available for new projects only. Separate applications have to be submitted for each project or innovation.

This programme offers a range of grants from INR1 million (USD12,000) to support accelerators at the IFSC level to INR7.5 million for providing solutions in sustainable or sustainability-linked finance. This includes ESG investments. Domestic FEs looking to list on recognised stock exchanges are also within the scheme as are startups with innovative concepts aiming to turn ideas into minimum viable products. Payment of the grants will be made in stages, dependent on the nature of the applications. For some, they will have to prove viability through the use of the IFSCA sandbox but others will have to show finished products or listing on an IFSCA stock exchange. Grants will be for a maximum of three years.

The scheme requires applicants to comply with its terms and to operate within the IFSC during their sandbox or accelerator stages. Applicants are encouraged to incorporate under IFSC and comply with Indian rules and regulations. Non-compliance means the return of grants with interest. The minimum duration of individual progammes is four weeks and priority will be given to FEs collaborating with financial institutions. FEs own the intellectual property of sandbox projects, but the IFSCA has a lien in a case of a breach except for listing support.

Applicants will have to enter into an agreement with the IFSCA and will be monitored by an internal committee. They must implement robust corporate governance, appoint compliance officers, provide accurate data to stakeholders, comply with know your consumer and anti-money laundering regulations, and adhere to reporting requirements.

The focused approach of the scheme will attract foreign investors seeking opportunities in India’s burgeoning fintech ecosystem. The grants, regulatory support, market access, and collaboration offered by the scheme will encourage knowledge sharing, joint ventures and growth, all vital for foreign fintech investment.

FEs in the IFSC will look to expand internationally, spurred by favourable tax regimes and operating costs. The IFSCA can build on this by facilitating cross-border business; promoting international partnerships, and creating targeted incentives. By proactively supporting overseas expansion, the IFSCA can transform GIFT City into a hub for Indian financial services exports, attracting FDI, promoting economic growth, and enhancing global competitiveness. The IFSCA’s fintech regulatory sandboxes offer unique advantages compared to the frameworks of individual domestic regulators. Being outside domestic regulations allows the sandboxes to nurture innovative solutions. Such flexibility attracts FDI by enabling experimentation The fintech scheme shows promise as it facilitates cross-border ventures and international partnerships, and offering targeted FDI incentives will unlock its potential, solidifying India’s global fintech leadership.

Rohit Jain is the managing partner and Kunal Sharma is a partner at Singhania & Co.