Understanding SEBI's New SBU Framework for Broker-Dealers in GIFT-IFSC

Background and Regulatory Context:

The Securities and Exchange Board of India (SEBI) has issued a circular (Circular No. SEBI/HO/MIRSD/MIRSD-PoD/P/CIR/2025/61 dated May 2, 2025) aimed at easing the process for SEBI-registered stock brokers to conduct operations in the Gujarat International Finance Tec-City – International Financial Services Centre (GIFT-IFSC). GIFT-IFSC is India’s flagship international financial center, governed by the International Financial Services Centres Authority (IFSCA). Previously, SEBI-registered brokers wishing to offer securities market services in GIFT-IFSC were required to obtain a specific SEBI no-objection certificate (NOC) and often had to establish a separate subsidiary or joint venture for this purpose. Under the new framework, SEBI has done away with that requirement. Brokers can now undertake approved securities market activities in GIFT-IFSC through a Separate Business Unit (SBU) of the broker-dealer itself or by designating an existing branch as an SBU. This change is part of SEBI’s broader initiative to promote ease of doing business and to encourage greater participation in GIFT-IFSC’s markets.

Key Changes in the SEBI Circular: 

The circular’s principal reform is the removal of the mandatory NOC requirement from SEBI for operating in GIFT-IFSC. Instead, SEBI now permits SEBI-registered stock brokers to establish a Separate Business Unit under their existing registration to carry out IFSC-based activities. Importantly, the circular clarifies that the option to continue using an Indian broker’s subsidiary or joint venture (formed with SEBI approval) remains available for those firms already operating in GIFT-IFSC. In practice, this means a broker-dealer can choose to either (a) create an SBU within the existing broker entity to serve IFSC clients, or (b) maintain a previously approved subsidiary/JV. This flexibility allows firms to optimize their structure based on business needs and scale. The branch of a broker may also qualify as the SBU if it meets the conditions, further simplifying arrangements for those with existing infrastructure in GIFT City.

Advantages and Strategic Implications for Broker-Dealers: 

By streamlining entry into GIFT-IFSC, the SEBI circular opens up several strategic benefits for stock brokers:

• Faster Market Entry: Brokers can commence IFSC operations more quickly without awaiting SEBI’s prior permission, reducing administrative delays.

• Cost Efficiency: Operating through an SBU within the existing entity may lower setup costs compared to establishing a separate legal entity or joint venture.

• Unified Management: The SBU approach allows leveraging the broker’s current corporate framework, compliance systems, and brand, while still segregating IFSC activities.

• Business Expansion: Easier access to GIFT-IFSC can help broker-dealers tap into new clientele, including foreign investors and Indian entities seeking offshore exposure, thereby broadening revenue streams.

• Regulatory Coordination: Aligning IFSC operations under the broker’s umbrella simplifies coordination between domestic and IFSC compliance teams, as all GIFT-IFSC activities are conducted under one registered entity (the SBU).

These advantages contribute to the overall goal of enhancing ease of doing business at GIFT-IFSC, making it more attractive for broker-dealers to participate in cross-border securities markets.

Regulatory Safeguards and IFSCA Oversight: 

While SEBI has relaxed the entry norms, the circular emphasizes robust safeguards to protect market integrity and clarify jurisdiction. Under the new framework, the International Financial Services Centres Authority (IFSCA) will oversee policy, eligibility, risk management, investor grievance redressal, inspection, enforcement, and claims concerning all SBU activities in GIFT-IFSC. To ensure clear separation between domestic and IFSC operations, broker-dealers must strictly segregate and ring-fence SBU activities. Key requirements include:

• SBUs may only engage in securities market-related activities permitted by IFSCA; no unauthorized or Indian-market activities can be undertaken.

• An arm’s-length relationship must be maintained between the SBU and the broker’s domestic operations, with no commingling of transactions or client accounts.

• Brokers must keep separate accounts and records for the SBU. This includes maintaining distinct ledgers and financial statements for IFSC business, separate from the domestic books.

• The net worth of the SBU must be segregated from the broker’s Indian-market net worth. In practice, the broker-dealer must satisfy SEBI’s minimum net-worth requirement for its domestic operations excluding the SBU’s funds. The SBU’s capital must comply with IFSCA’s regulatory framework.

These safeguards ensure that risks are isolated and that regulators can clearly identify which rules apply to which part of the business. By ring-fencing the SBU, SEBI and IFSCA aim to avoid cross-contamination of liabilities and to protect both domestic and IFSC clients. Operationally, broker-dealers will need to update their compliance manuals and IT systems to enforce this segregation. They should also coordinate closely with IFSCA to understand reporting standards and regulatory compliance within the IFSC jurisdiction.

Implications for Investor Grievance Redressal: 

A significant implication of the new structure is that clients of the SBU in GIFT-IFSC will not be covered by the normal SEBI or stock exchange investor protection mechanisms. Specifically, the circular states that the SEBI-regulated exchanges’ Investor Protection Fund (IPF) and SEBI’s online grievance system (SCORES) will not apply to services provided through the SBU. Instead, investors must rely on the grievance redressal framework under IFSCA and GIFT-IFSC rules. For broker-dealers, this means clearly communicating to IFSC clients that any disputes or complaints will be handled via the IFSC’s designated channels (such as the IFSCA’s ombudsman scheme or court process). Compliance teams should prepare for this by informing their client support and legal departments about the change in jurisdiction for disputes, and ensuring that client agreements and disclosures are updated accordingly. Brokers should also familiarize themselves with IFSCA’s procedures for investor complaints and consider any additional professional indemnity coverage needed for IFSC activities. Overall, while the new SBU framework eases entry, it shifts the responsibility for client protection in IFSC operations from SEBI to the IFSCA system, which broker-dealers must manage proactively.

Looking Forward: 

SEBI’s circular reflects a move toward greater flexibility and international integration for Indian broker-dealers. By simplifying the process to operate in GIFT-IFSC, regulators hope to stimulate cross-border investment flows and position GIFT City as a competitive global financial hub. Broker-dealers will likely find the new norms advantageous for expanding their business reach, provided they diligently implement the required safeguards. Firms should promptly assess whether to restructure existing IFSC entities into SBUs or continue with their subsidiaries, weighing tax, legal, and operational factors. They should also engage with regulators for any clarifications and update internal processes to comply with both SEBI and IFSCA requirements. Overall, the change signals a supportive regulatory stance, balancing ease of business expansion with clear risk management and compliance obligations.

This article is for informational purposes only and does not constitute legal or regulatory advice. Readers should consult their advisors or refer to official regulatory documents for guidance tailored to their business.