The Dollar Goes In and the Rupee Comes Out: Enforcement Blind Spot in India’s IFSC

The treatment of foreign currency arises in several contexts across Indian commercial law, which may include the position on IFSC capital structures under India’s enforcement statutes, an issue that this piece explores. However, a threshold point is whether Indian recovery jurisdiction is displaced merely because a transaction is foreign currency denominated or involves an overseas branch. The Delhi High Court in Spentex Industries Ltd. v. State Bank of India (AIR 2018 Del 160) held that a Debt Recovery Tribunal (DRT) has full jurisdiction to entertain recovery proceedings under Sec. 19(1) of the Recovery of Debts and Bankruptcy Act, 1993 (RDBA, 1993) irrespective of the underlying loan agreement involving an overseas branch of an Indian bank. While the transaction was a foreign currency term loan extended by the Tokyo branch of SBI to a borrower based in Uzbekistan; the jurisdictional nexus was established under Sec. 19(1)(a) of RDBA, 1993 as the petitioner was ‘working for gain’ in Delhi. In other words, considering the special nature of RDBA, 1993 even in presence of contractual clauses on concurrent jurisdiction; the special law shall prevail where the jurisdiction is not dependent upon the currency of the debt or the domicile of the borrower.

Although a 2018 order, it is worth a discussion in the present day when India is actively working towards building a financial ecosystem designed around a typical Spentex like situation viz. involving foreign currency capital and offshore participants technically situated within Indian territory. Interestingly, there has not been sustained attention both in scholarship as well as legislative reforms regarding the possibility of prospective defaults of such transactions which may bring with them enforcement or recovery hurdles. This issue becomes pertinent in the light of the Corporate Laws (Amendment) Bill, 2026 (2026 Bill) which has recently been approved with some suggestions by the Joint Parliamentary Committee (JPC). One of the key amendments is insertion of Sec. 43A in the Companies Act, 2013 (CA, 2013) to permit companies situated in International Financial Services Centre (IFSC) to issue and maintain share capital in permitted foreign currency. In this context, this piece raises a structural question: What is the consequence of a company located in IFSC facing recovery or insolvency proceedings governed by statutes that remain entirely rupee denominated?

This piece proceeds in four parts: Part I traces the origins of proposed Sec. 43A in the 2026 Bill; Part II examines the eligibility of IFSC entities for invoking India’s recovery and insolvency statutes; Part III identifies specific points at which a currency mismatch may generate practical difficulty in recovery proceedings; and Part IV highlights the same to be a design question, while responding to JPC’s approach to the issue.

Proposed Sec. 43A and the currency mandate

Transactions of financial services within IFSCs are mandatorily required to be conducted in foreign currency [Sec. 20, IFSC Act, 2019]. Despite this, companies are required to maintain share capital in rupees; resulting into a statutory tension of compliance between these two regimes [Sec. 4(1)(e) read with Schedule I (entry 5), CA, 2013]. The issue was formally raised by International Financial Services Centres Authority (IFSCA) before the Ministry of Corporate Affairs (MCA) in 2021 leading to constitution of a joint working group. The resultant Report on Financial Reporting and Capital Structure of IFSC Companies in Freely Convertible Foreign Currency, 2022 which captures the substance of the proposed Sec. 43A of 2026 Bill, apprises us of the fact that Sec.f 43A is not merely speculative liberalisation but a considered and institutionally vetted step to resolve a statutory gap. A notable asymmetry built in this design is also that while share capital and books can now be maintained in foreign currency; the penalties/fines under CA, 2013 remain payable in rupees. This in a way is an acknowledgement of the reality that not every functional aspect of IFSCs can be conveniently migrated to foreign currency. It is critical given that in the five years to December 2025, IFSCA has granted over 1,200 registrations across more than 30 business segments. The banking assets have grown from USD 14 billion to USD 106 billion, and there have been 202 Fund Management Entities launching 327 AIFs targeting a USD 77 billion corpus. The turnover of the stock exchange reached USD 96 billion monthly, with 170+ bonds raising nearly USD 68 billion, alongside strong growth in aircraft (34 lessors, 370 assets) and ship leasing (29+ firms). As is apparent, this financial architecture has compounded rapidly and the proposed Sec. 43A is likely to accelerate exactly the kind of foreign currency capital structuring that drives this growth further.

A regulatory or a jurisdictional carve-out?

A foreign currency ring fenced financial centre often leads to an incorrect assumption that IFSC entities would typically escape the domestic recovery and insolvency statutes, viz. the RDBA, 1993, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI, 2002) and the Insolvency and Bankruptcy Code, 2016 (IBC, 2016). However, an examination of the statutory eligibility criteria for invoking these enforcement mechanisms reveals a more nuanced position. Banking Units in the IFSC can either be set up as branches (IFSC Banking Unit) or separately incorporated subsidiaries (IFSC Banking Company) of their parent Indian or foreign bank [Reg. 2(ec) and 2(eb), IFSCA (Banking Regulations, 2020]. Parallelly, Finance Companies (FCs) and Finance Units (FUs) can also be set up in the IFSC as separately incorporated entity [2(e) and Regulation 3(2), IFSCA (Finance Company) Regulations, 2021] or as a branch [Regulation 2(f), IFSCA (Finance Company) Regulations, 2021] of an entity incorporated in its home jurisdiction respectively.

Under the RDBA, 1993, tribunals are empowered to entertain applications specifically by “banks” and “financial institutions” for recovery of debts due to them. The statute defines a “bank” to include a “banking company” which is subsequently defined as “any company which transacts the business of banking in India” in the Banking Regulation Act, 1949, wherein “company” is expressly defined to include “a foreign company” as well.  Thus, there is credible basis to argue that IFSC Banking Units, irrespective of whether they are branches of Indian or foreign banks, qualify as “banks” for the purpose of RDBA, 1993, precisely because they possess no separate legal identity in themselves and operate merely as a branch [Para 1(iii), Module No. 1, IFCA Banking Handbook Prudential Directions-v.5.0]. Additionally, even an IFSC Banking Company which is separately incorporated satisfies the definition of “banks” on account of being incorporated as a company that undertakes banking. Thus, conceivably, Banking Units in the IFSC can invoke RDBA, 1993. SARFAESI, 2002 follows a similar logic as only “secured creditors,” defined subsequently as a “bank” or “financial institution,” are permitted to enforce security interests, and “bank” is defined in the same manner as in the RDBA, 1993.

Spentex is instructive in this context. The decision demonstrated that foreign currency denomination of a debt, location of the lending branch being outside India, and borrower being a foreign incorporated entity are not factors that, in themselves, displace the application of domestic recovery framework in situations where the statutory jurisdictional requirements are otherwise satisfied. However, it is important to distinguish Spentex and a particular IFSC entity’s eligibility to invoke a given enforcement mechanism, as both are separate questions. The continued application of domestic recovery laws to an IFSC entity does not, by itself, establish that every remedy under that framework can be availed by every such entity.

For instance, the position of FUs in the IFSC is much less straightforward than the Banking Units. As per the IFSCA (Finance Company) Regulations, 2021 they are specifically not licensed as Banking Units [Reg. 2(e) and 2(f)]. Thus, their eligibility to invoke the above discussed statutory mechanisms depends on whether they can qualify as “financial institution” under the RDBA, 1993 and the SARAFESI, 2002 respectively or not. The definition under both the statutes is such that IFSC FCs or FUs would need to be specifically notified through the Central Government to be covered by it.

The approach to creditor eligibility in IBC, 2016 is materially broader than the RDBA, 1993 and the SARFAESI, 2002. IBC, 2016 allows any person to whom a financial debt is owed to qualify as a financial creditor, and the definition of “person” is broad enough to include a “person resident outside India.” Consequently, the lender being an IFSC entity does not, in itself, preclude it from initiating insolvency proceedings, as long as the requirements for initiation of an insolvency resolution process are otherwise satisfied.

The above analysis reflects that the freely convertible currency regime under the IFSC Act, 2019 creates a foreign exchange regulatory carve out, and not an automatic jurisdictional carve-out. This position is further reinforced by the Special Economic Zones Act, 2005 (SEZ Act, 2005) which provides that the applicability of other statutes would be displaced only to the extent of inconsistency with SEZ Act, 2005 [S. 51(1), SEZ Act, 2005]. Since the SEZ Act, 2005 is silent on substantive provisions on debt recovery, secured creditor enforcement or corporate insolvency; there exists no inconsistency between SEZ Act, 2005 on one hand and statutes such as IBC, 2016; SARFAESI, 2002 and RDBA, 1993 on the other. Additionally, SEZ Act, 2005 also empowers the Central Government to, by notification, restrict the application, either in entirety or with modifications, of any other central legislations to SEZs or certain class of SEZs [S. 49, SEZ Act, 2005]. There is an interpretative significance to the said provision viz. the Parliament arguably envisaged that generally the central legislations would be otherwise applicable to SEZ, and resultantly IFSCs As it appears, the default legislative stance is that of inclusion and not exclusion, as any contrary reading would render Section 49 of SEZ Act, 2005 otiose. There has also been no notification in this regard restricting/ excluding the application of the abovementioned recovery and insolvency laws to GIFT IFSC entities. It can hence be argued that the proposed Section 43A does not operate in a jurisdictional vacuum and there is no general jurisdictional exclusion merely because an entity operates within IFSC. In other words, IFSC status does not by itself, exempt an entity from India’s recovery and insolvency statutes, though eligibility to invoke them varies depending on the entity’s specific legal form.

Points of Friction

The foregoing establishes the applicability of the domestic enforcement framework for certain IFSC entities, but such applicability must also survive at the procedural junctures where a foreign currency capital structure must translate into the rupee denominated vocabulary that the present insolvency and recovery laws use.

One such situation may arise at the juncture of SARFAESI, 2002 enforcement where a IFSC company whose capital and books are foreign currency denominated are pledged as collateral for a financial facility extended by an onshore secured creditor. The consequent enforcement action under Sec. 13 and 14 of the SARFAESI Act, 2002, proceeds through a valuation and sale process. Security Interest (Enforcement) Rules, 2002 provide for fixing the reserve price [Rule 8(5)] and for the sale certificate [Rule 9(6)]. The prescribed statutory forms [Appendix III, Appendix V] are drafted exclusively in rupee terms, with no provision made for recording a reserve price, sale consideration, or amount due in any other currency. Important questions arise in this context, for instance, which exchange rate is to govern valuation, and as of which date i.e. the date of default, the date of the demand notice, or the date of eventual sale; each of which may yield a materially different rupee figure in a period of currency volatility. The same difficulty recurs where a secured creditor elects to proceed under RDBA, 1993 where a recovery certificate issued by DRT is drawn up, and subsequently executed, with no methodology for computing the underlying debt where the obligation itself is foreign currency denominated; leaving the questions of applicable exchange rate and valuation date unresolved. Yet, the niceties of the process are not detailed either in CA, 2013, RDBA, 1993 or SARFAESI Act, 2002; left to be worked out in practise with no statutory anchor to constrain or guide that choice.

A similar issue appears with IBC, 2016 especially at the stage of formulation and approval of resolution plan during a corporate insolvency resolution process (CIRP). The process of resolution includes evaluation of the prospective resolution plan by the committee of creditors, voting on the resolution plan, ascertaining the provision of liquidation value to dissenting financial creditors and operational creditors [S. 30, IBC, 2016] and in case the corporate debtor is to be liquidated, the waterfall as provided under Sec. 53 must be honoured. While it can be argued that not necessarily all these steps will have to be undergone in rupee denominated terms; in case a corporate debtor’s capital by virtue of the proposed Section 43A is genuinely foreign currency denominated; the resolution professional would be burdened with the task of bringing it into the surrounding rupee denominated calculus with no guiding methodology provided under IBC, 2016. One may refer to it as merely an administrative inconvenience which can be solved via professional discretion; however, currency volatility occurring between the date of admission of CIRP and the eventual date of resolution can materially shift the apparent value of the debtor’s capital base, and the distributive stakes for creditors.

The uniting thread in the above situations is not merely the procedural inconvenience rather a structural issue concerning recovery and insolvency cases; which are the most heavily contested litigations more often than not on the ground of valuation itself, even within a single currency (rupee). To extend it to situations of a completely undefined currency conversion atop pre-existing contestability over valuation, would lead to multiplication of tangents upon which valuation determination may be challenged. This is critical as in the lifecycle of a corporate body, predictability of outcomes during insolvency and recovery proceedings matters most acutely to the corporate debtor, secured creditors, resolution applicants and other stakeholders alike. The regulatory ease with which foreign currency capital may now enter an IFSC company under proposed Sec. 43A is not matched by a corresponding framework for its treatment upon default or insolvency; where if the company experiences corporate distress, that same capital is be valued, enforced against, or distributed through various statutes which were drafted without contemplating foreign currency denominated capital, and which continue to operate entirely in rupee terms. This unaddressed currency conversion gap plummets credibility especially at a time when the reforms targeting ‘easy entry’ continue to draw growing volumes of business into an ecosystem where uncertainty remains on the side of ‘exit’.

Before the JPC a proposition was made to insert provisos to Sec. Sec. 43A(1) which would require any conversion to be preceded by an independent registered valuer’s determination which would in turn be subject to a shareholder’s right to dissent before the tribunal. It was also suggested that a rupee-conversion mechanism must be prescribed for the purposes of any recovery, enforcement, or insolvency proceeding under other statutes. MCA’s response, was that Section 43A “is intended to provide an enabling framework” for foreign-currency capital, that the manner and timeline of conversion would be specified by the IFSCA, and that matters of recovery, enforcement, and insolvency “are governed under their respective statutory frameworks” [p. 204, JPC Report, 2026]. However, the same merely re-instates the concern in place of resolving it as it is not in dispute that recovery and insolvency are “governed under their respective statutory frameworks”. The question raised was about the absence of the required methodology in the recovery laws; which provides a fertile ground for furthering inconsistent and forum-specific conversion practices developing in an ad hoc manner. JPC’s response simply leaves the earlier raised structural question formally unresolved irrespective of the underlying capital structuring activity continuing to scale.

A ‘coordinated’ solution

This work does not make a case against insertion of Sec. 43A in the CA, 2013 as such insertion resolves a long-standing conflict between IFSCA Act and CA, 2013 in context of currency mandate. It rather makes a more narrow and structural argument viz. rather than permitting the question of ‘currency treatment at the point of enforcement’ to remain a matter of ex-post improvisation to be resolved only once an IFSC company has, in fact, defaulted; it ought to be confronted as a first order ‘design question’ inherent to the architecture of India’s IFSC framework itself.

This can be effectively ensured by way of a coordinated notification or a set of harmonised regulations; if not issued jointly then at least consistently, by the MCA, RBI, IBBI and IFSCA. The result would aid in fixing a common methodology for valuing and converting foreign currency capital and collateral/ security value in context of recovery and insolvency proceedings. An unresolved statutory gap does not remain neutral in practice; especially in a high-stakes enforcement context. The reason being such ambiguity tends to be resolved through litigation with outcomes shaped disproportionately by the resources and incentives of the party best positioned to contest the point; an unpredictability that sits uneasily with the confidence a financial centre seeks to offer institutional capital operating across borders.

* Dr. Garima Gupta is an Assistant Professor of Law and Affiliate Faculty to the ICICI Professorial Chair on Business Laws at National Law School of India University, Bangalore.
** Ritu Ranjan is a fifth-year BA. LL. B student at the National Law School of India University, Bangalore.