Authored by R & D Law Chambers LLP  |  Practice led by Ravish Bhatt, Dual-qualified lawyer (India and England & Wales)  |  Bar Council of Gujarat, Enrolment G/504/2008  |  SRA (non-practising) Registration No. 492 477  |  ADIT, Chartered Institute of Taxation, London Published: 3 September 2026  |  Last reviewed: 3 September 2026

 

This is the third article in a three-part series on foreign sanctions and Indian business. The first article explained why a foreign sanction has no legal force in India yet can freeze an account; the second set out the lawful routes out. This article addresses the additional exposure of a unit in the International Financial Services Centre at GIFT City, written against the IFSCA (Finance Company) Regulations, 2021, the IFSCA guidance of 1 July 2025 on changes requiring approval, and related Indian law as at September 2026. We advise on Indian law; foreign sanctions regimes are described for context, not as advice on foreign law.

 

In short: A GIFT City unit faces the same practical sanctions exposure as any Indian business, plus a regulatory layer no ordinary company has. A foreign designation of its shareholder or its asset does not breach Indian law, but it can freeze the unit, engage the fit-and-proper assessment of its people, and require the regulator’s prior approval before the very change of control that would resolve it. The regulatory clock and the sanctions clock must be managed together.

 

Index of Topics

1. Why a GIFT City unit carries an extra layer of exposure
2. Resident outside India for exchange control, but not beyond Indian law
3. How a foreign designation reaches an IFSC unit
4. Fit and proper: when a designation touches your people
5. Change of control needs the regulator’s prior approval
6. When the asset itself is designated: ship and aircraft leasing
7. Disclosure to the regulator: timing and candour
8. The questions your board should ask now

Frequently Asked Questions

How R & D Law Chambers Works on These Matters

 

1. Why a GIFT City unit carries an extra layer of exposure

In short: A GIFT City unit is exposed to foreign sanctions in the same practical way as any Indian business, through the banking system, but it carries an additional regulatory layer. It answers to the IFSCA, holds a certificate of registration on conditions, and must meet continuing fit-and-proper and change-of-control requirements that an ordinary company does not.

The first two articles in this series established the general position for any Indian business: a foreign sanction has no legal force in India, as explained in the first article, but it can freeze an account, and there are lawful routes out, as set out in the second. A unit in the International Financial Services Centre at GIFT City inherits all of that, and then carries more.

The additional exposure is regulatory. A GIFT City finance company or finance unit is not merely a company with a bank account; it is a regulated entity holding a certificate of registration from the International Financial Services Centres Authority, granted and held on conditions. Those conditions include continuing fit-and-proper standards for its board and key persons and a requirement to obtain the regulator’s prior approval before a change of control. When a foreign designation strikes the unit’s shareholder or its asset, it therefore does not only create a banking problem; it reaches into the unit’s registration, its governance and its ability to restructure. The board of a GIFT City unit must manage two clocks at once: the sanctions clock and the regulatory clock.

 

2. Resident outside India for exchange control, but not beyond Indian law

In short: An IFSC unit is treated as a person resident outside India for exchange-control purposes. This does not place it beyond Indian law, does not make it a non-resident for income tax, and confers no tax-treaty access. The exchange-control fiction is narrow, and it does not change the sanctions analysis: Indian law still recognises only United Nations measures.

A common misunderstanding must be cleared at the outset, because it colours how boards think about sanctions exposure. An IFSC unit carrying on permitted financial services is treated, for exchange-control purposes, as a person resident outside India. That is a specific and limited fiction. It does not lift the unit out of Indian law generally, it does not make the unit a non-resident for income-tax purposes, and it confers no access to India’s tax treaties. The IFSC is not a treaty jurisdiction.

For sanctions, the consequence is that the exchange-control status changes nothing about the analysis in the first article. Indian law, including as it applies within the IFSC, gives domestic legal effect only to United Nations Security Council measures, through the United Nations (Security Council) Act, 1947, section 51A of the Unlawful Activities (Prevention) Act, 1967, and section 12A of the Weapons of Mass Destruction Act, 2005. A United States, United Kingdom or European Union designation has no more legal force against a GIFT City unit than against any other Indian entity. What differs is not the legal effect of the sanction, but the regulatory consequences that follow for a registered entity, which the rest of this article addresses.

 

3. How a foreign designation reaches an IFSC unit

In short: It reaches the unit the same way it reaches any Indian business, through its bank. An IFSC Banking Unit clears foreign currency and screens against the OFAC and other lists to protect its correspondent relationships, so it will freeze an exposed unit even though the IFSCA has issued no order and Indian law imposes no sanction.

The mechanism is the banking system, exactly as in the first article, and it is worth being precise about it in the IFSC setting. A GIFT City unit banks with an IFSC Banking Unit, which operates in foreign currency and depends on correspondent relationships with banks in the United States and elsewhere to clear those currencies. To protect those relationships, the banking unit screens its customers against the OFAC list and the other foreign lists, and freezes an exposed account on its own initiative. The freeze is a commercial act of the bank, not a regulatory act of the IFSCA. The IFSCA does not administer or enforce OFAC, and it issues no freezing order; the unit’s difficulty arrives through its banker.

The practical result is stark for an IFSC unit, because such a unit typically has no domestic rupee retail business to fall back on. Its operations are foreign-currency by design. When the banking channel freezes, the unit can be solvent, lawful in India and holding a valid certificate of registration, and yet unable to fund its office, pay its people or operate its assets. That paralysis, and not any Indian legal disqualification, is what then draws the regulator’s attention to whether the unit is being run at all.

 

4. Fit and proper: when a designation touches your people

In short: Fit-and-proper is a continuing requirement for a GIFT City unit’s board, assessed on integrity and track record. A foreign designation of the shareholder does not, by itself, make the board unfit, because it is not an Indian-law finding. A designation of a sitting director is more serious, and the answer is to reconstitute the board, not to conceal it.

The IFSCA (Finance Company) Regulations, 2021 make fit-and-proper a condition of registration, and the corporate-governance guidelines require the unit to satisfy itself, at appointment and at reasonable intervals during their term, that its board members meet fit-and-proper criteria, assessed on qualification, expertise, track record and integrity. This is a continuing obligation, not a one-time entry test, and it is directed at the unit’s people, principally its directors.

Whether a foreign designation engages fit-and-proper depends on whom it touches. A designation of the unit’s shareholder does not, of itself, make the board unfit: the test is directed at the individuals on the board, and a unilateral foreign measure with no legal effect in India is not an Indian-law finding against a person’s integrity. The unit remains, on the framework’s own touchstone, one whose promoter must be from a jurisdiction compliant with the Financial Action Task Force. A designation of a sitting director is a different matter, because it goes directly to a person the regulator assesses. The lawful and effective response is to reconstitute the board and bring in a clean, screened director, and to do so openly. Concealing that a director is affected is the one course that converts a manageable governance issue into a fit-and-proper failure.

 

5. Change of control needs the regulator’s prior approval

In short: The change of control that resolves a shareholder sanction is, for a GIFT City finance company, itself subject to the IFSCA’s prior approval. Under Regulation 8(2), a change in control of at least twenty per cent of share capital requires prior approval, on the documents specified in the IFSCA guidance of 1 July 2025. The regulatory clock and the sanctions clock must be run together.

Here the regulatory layer bites hardest, and it is the point most easily missed. The second article explained that the fastest lawful exit from an ownership-based blocking is a genuine change of control that removes the sanctioned shareholder. For a GIFT City finance company, that very step is regulated. Under Regulation 8(2) of the IFSCA (Finance Company) Regulations, 2021, any merger, acquisition, takeover or change in management that results in a change in control of at least twenty per cent of total share capital, or of business decisions under an agreement, is subject to the prior approval of the Authority. A finance unit, set up as a branch, intimates a change in its parent within fifteen days, but a finance company must obtain prior approval before the change takes effect.

The IFSCA’s guidance of 1 July 2025 on changes requiring approval or intimation sets out what such an application must contain, including a formal request letter, the board resolution, the post-change shareholding pattern and group structure to ultimate beneficial owner level, and promoter details, with the processing fee. The consequence for sequencing is important: the change of control that unblocks the unit cannot simply be executed; it must be approved first, which takes time. The board must therefore run the regulatory application and the sanctions response together, not in sequence, and must present to the regulator a clean, screened incoming shareholder. This is a matter we handle through our GIFT City transaction and regulatory practice.

 

6. When the asset itself is designated: ship and aircraft leasing

In short: Asset-owning IFSC units, such as ship and aircraft leasing companies, face a sharper version of the exposure, because the asset itself can be designated by its identifying number, independently of the owner. A designated vessel or aircraft becomes commercially unusable, and flag or registry consequences follow, so due diligence on an asset before acquisition is critical.

Ship leasing and aircraft leasing are among the activities the IFSC regime was built to attract, and they carry a distinct sanctions risk that a purely financial unit does not. A physical asset can itself be designated, by its own identifying number, a vessel by its IMO number or an aircraft by its registration and serial number, independently of who owns it. This means a unit can acquire a clean-looking asset that is, or becomes, sanctioned in its own right, and the designation attaches to the asset and follows it regardless of a change of owner or flag.

The consequences are practical and severe. A designated vessel becomes commercially unemployable: charterers, insurers, protection-and-indemnity clubs, classification societies and ports withdraw or refuse service to protect their own compliance, and flag registries may deregister it. An asset-owning IFSC unit can therefore hold a valid registration and a lawfully acquired asset that no counterparty will touch. The lesson is that due diligence before acquisition must screen the asset itself, by its identifying number and its ownership and trading history, and not only the counterparty. Acquiring an asset shortly before or around the time of its designation, as can occur with vessels transferred out of a sanctioned trade, is precisely the fact pattern that leaves a unit holding an unusable asset.

 

7. Disclosure to the regulator: timing and candour

In short: Because a foreign designation has practical and regulatory consequences for a registered unit, it will surface, through the frozen account, the audited accounts and the change-of-control application. Candour to the regulator, on the unit’s own timing and framed accurately, protects it; concealment that later emerges is far more damaging than the underlying fact.

A GIFT City unit affected by a foreign designation faces a disclosure question that an unregulated company does not, because it is answerable to a regulator on a continuing basis. The fact will not stay private: it surfaces through the frozen account, through the audited financial statements the unit must file, and through the very change-of-control application that resolves it, which requires disclosure of the shareholding to ultimate beneficial owner level. The realistic question is therefore one of timing and manner, not whether the position becomes known.

The considered course is candour on the unit’s own terms, framed accurately. The accurate frame is the one this series has set out: the foreign designation has no legal force in India and breaches no condition of registration; the unit’s difficulty is the practical freeze; and the unit is resolving its position through the regulated change of control and, where relevant, a delisting application. Disclosed this way, voluntarily, the position reads as good-faith remediation. Concealed, and later discovered by the regulator, the same facts read as a governance failure, and the concealment becomes a worse problem than the designation. The unit should also keep firmly in view that it discloses to explain and to remediate, not to concede that a foreign measure disqualifies it under Indian law, which it does not.

 

8. The questions your board should ask now

In short: A board should ask: are any of our shareholders, directors or assets exposed to a foreign designation; does our banking depend on a currency that carries that exposure; is our fit-and-proper position secure; and, if a change of control becomes necessary, have we planned the IFSCA approval alongside it? Asking these before a freeze is far cheaper than answering them after.

The value of this analysis is preventive, and it reduces to a short list of questions a board should put to itself before a problem arises. First, exposure: are any of our shareholders, up to ultimate beneficial owner, any of our directors, or any of our assets, designated or at risk of designation under any foreign regime? Second, banking: does our operating channel depend on a foreign currency and correspondent relationships that would transmit such a designation to us, and do we have any lawful alternative? Third, governance: is our board fit-and-proper position secure, and would it survive a designation touching a shareholder or a director? Fourth, restructuring readiness: if a change of control became necessary to exit a designated shareholder, have we understood that it requires the IFSCA’s prior approval under Regulation 8(2), and have we planned the regulatory application so it can run alongside the sanctions response rather than after it?

For asset-owning units there is a fifth question: does our acquisition due diligence screen the asset itself, by its identifying number and history, and not merely the counterparty? A board that can answer these questions has converted an unmanaged risk into a managed one. The recurring theme across this series holds here in its most acute form: the exposure is practical and regulatory rather than a matter of Indian-law prohibition, and the response is lawful navigation, planned in advance and conducted with candour, never concealment.

The two layers of exposure for a GIFT City unit

Question	Any Indian business	A GIFT City unit, in addition
Does the foreign sanction bind you in Indian law?	No; only UN measures do	No; the IFSC status does not change this
Can your account be frozen?	Yes, by a bank protecting dollar clearing	Yes, by the IFSC Banking Unit, with no rupee fallback
Does a designation affect your governance?	Not as a regulatory matter	Yes; continuing fit-and-proper applies to the board
Is a change of control regulated?	Ordinary company-law process	Yes; IFSCA prior approval under Regulation 8(2)
Does an asset designation matter?	Rarely relevant	Central for ship and aircraft leasing units

 

Frequently Asked Questions

• Does an IFSC unit’s resident-outside-India status affect sanctions?

No. That status is a limited exchange-control fiction. It does not lift the unit out of Indian law, does not make it a non-resident for income tax, and confers no treaty access. For sanctions, Indian law within the IFSC still recognises only United Nations measures, so a US, UK or EU designation has no more legal force against a GIFT City unit than against any other Indian entity.

 

• Can the IFSCA cancel a unit’s registration because of a foreign sanction?

A foreign designation is not, by itself, a breach of any condition of registration, and Indian law recognises only United Nations measures. The regulator’s legitimate concern is practical: whether the unit, once its account is frozen, is still being run, funded and staffed. That is answered by remediation and a change of control, not by treating the foreign designation as an Indian-law disqualification.

 

• Does a sanctioned shareholder make our board fail fit-and-proper?

Not by itself. Fit-and-proper is assessed on the individuals on the board, on integrity and track record, and a unilateral foreign measure with no legal effect in India is not an Indian-law finding against a person. A designation of a sitting director is more serious and is addressed by reconstituting the board with a clean, screened director, done openly rather than concealed.

 

• Why does exiting the sanctioned shareholder need IFSCA approval?

Because for a GIFT City finance company a change in control of at least twenty per cent of share capital requires the IFSCA’s prior approval under Regulation 8(2) of the Finance Company Regulations, 2021. The change that resolves the sanction is itself regulated, so it must be planned and applied for, with a clean incoming shareholder, alongside the sanctions response rather than after it.

 

• Our leasing unit’s vessel is sanctioned though we are not. What now?

A physical asset can be designated in its own right, by its identifying number, independently of its owner, and it then becomes commercially unusable as charterers, insurers, classification societies and ports withdraw. The unit can hold a valid registration and a lawfully acquired but unusable asset. The response combines a delisting application for the asset with the wider lawful routes covered in the second article of this series.

 

• Should we disclose a foreign designation to the IFSCA?

The position will surface through the frozen account, the audited accounts and any change-of-control application, so the question is timing, not whether it becomes known. Candour on the unit’s own terms, framed accurately as a practical difficulty with no Indian-law effect that is being remediated, protects the unit. Concealment that is later discovered reads as a governance failure and is far more damaging.

 

How R & D Law Chambers Works on These Matters

A GIFT City unit hit by a foreign designation is usually advised on the sanctions problem and the regulatory problem by different people, and the two responses collide: a change of control is arranged without regard to the IFSCA’s prior-approval requirement, or the regulator is engaged without a credible remediation plan. We treat them as one problem with two clocks, sequencing the regulatory application and the sanctions response so that each supports the other.

Because we act on these matters within the IFSC and not only write about them, we advise on the whole of it: the fit-and-proper position and board reconstitution, the Regulation 8(2) change-of-control application to the IFSCA with a clean incoming shareholder, asset-level due diligence for ship and aircraft leasing units, disclosure strategy to the regulator, and representation before the IFSCA where a designation has consequences for registration. The line we hold is the one this series has held throughout: lawful navigation and candour, never concealment or circumvention.

Related services:

• GIFT City transaction and regulatory support
• GIFT City regulatory compliance
• Part 1: how foreign sanctions reach an Indian business
• Part 2: the lawful routes out of a frozen account

 

This article is for general information on Indian law and IFSC regulation and does not constitute legal advice. Foreign sanctions regimes are described for context and are not analysed as advice on foreign law. Regulatory and sanctions positions change frequently; verify the current position and take specific advice, including foreign counsel where a foreign regime applies, before acting. No lawyer-client relationship arises from reading this article.