The International Financial Services Centres Authority (“IFSC Authority”) released a consultation paper on August 5, 2024 (“Consultation Paper”), proposing a host of amendments to the IFSCA (Fund Management) Regulations, 2022 (“FM Regulations”).
The IFSC Authority has clarified that to bolster GIFT City’s evolution into a more accessible global fund management jurisdiction, the latest set of proposals for amendment will concentrate on three main aspects: (i) ensuring additional safeguards for investors; (ii) promoting ease of doing business into GIFT IFSC; and (iii) providing technical clarifications wherever ambiguity arises in the FM Regulations.
Following is a summary of the key proposals highlighted in the Consultation Paper and a discussion on the rationale behind them.
Widening of Green Channel Route for FMEs
The proposal aims to do away with the requirement of filing the placement memorandum with the IFSC Authority 21 days before launching a scheme. Currently, this ‘green channel’ benefit regarding filing of placement memorandums is available only to venture capital funds and to funds raising capital solely from Accredited Investors.
The amendment aims to bring in an enhanced ease of doing business for the FMEs and align the provisions of the FM Regulations with that of the IFSC circular dated April 05, 2024, which relaxed the mechanism for scheme filing.
Relaxing Qualifications for POs and KMPs
The Consultation Paper has made the following proposals with the intent of expanding the available talent pool in IFSC for appointment as Principal Officer (“PO”) or Key Managerial Persons (“KMP”) of FMEs:
- Include in the education qualifications a diploma in specific fields for 1 year (instead of current requirement of 2 years) and in the professional qualification membership of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost Accountants of India or any equivalent institution in a foreign jurisdiction.
- Add to the list of eligible academic courses, ‘CFA or a FRM from Global Association of Risk Professionals’.
- For the fulfilment of the 5-year experience requirement for KMPs, include experience in ‘investment banking’ and ‘credit rating’.
- Change the 5-year experience criterion for KMP appointed as the compliance and risk officer to a 3-year experience criterion for members of the Institute of Company Secretaries of India or any equivalent institution in a foreign jurisdiction where the person concerned has experience in compliance or risk management in an entity regulated by a financial sector regulator or a listed company; also, consider an LL.B. degree from certain Indian and foreign institutions for the KMP to be appointed as the compliance and risk officer.
The FMEs employees in IFSC are proposed to be required to undergo such certification(s) from such institution(s) as may be specified by the IFSC Authority.
Providing Declaration Confirming Base of Principal Officer and KMP in IFSC
The Consultation Paper has proposed that an entity applying for FME registration certificate from the IFSC Authority make a declaration during the application process, stating that the principal officer and other KMPs as provided under sub-regulation (2) and (3) of Regulation 7 of FM Regulations be based out of IFSC.
The proposed amendment aims to ensure compliance with Regulation 7(4) of FM Regulations, which stipulates the requirement for the principal officer and other KMPs to be based out of IFSC.
Reduced Minimum Corpus of Schemes
The Consultation Paper has proposed reducing the minimum corpus requirement for venture capital schemes, restricted schemes (non-retail) and retail schemes to USD 3 million from the current requirement of USD 5 million.
Increased Validity Period of Placement Memorandum
The Consultation Paper has proposed increasing the validity of the placement memorandum of a venture capital scheme, restricted scheme (non-retail), or special situation fund to 12 months from the date of filing with the IFSC Authority instead of the current 6-month threshold. It also proposes that the FME declare the first close of the scheme by achieving at least the minimum size of corpus during these 12 months, failing which it shall file the placement memorandum again with the IFSC Authority by paying the full fee as applicable for a fresh scheme.
This proposal aims to extend operational flexibility to FMEs as the current validity period has been highlighted by market participants to be inadequate as FMEs generally require more time for operational set-up (PAN/GST registration, roadshows and investor outreach, KYC/Customer Due Diligence, etc.) before it can accept contributions from investors.
Relaxation of 10 per cent upper limit on FME’s Contribution:
Under the present regime, the FME of a venture capital scheme or restricted scheme must itself invest minimum 2.5 per cent and up to 10 per cent in the targeted corpus of such scheme, subject to a cap of USD 750,000. The Consultation Paper has proposed that this fixed upper limit of 10 per cent for FME’s investment not be applicable when (i) the FME and its associate, wherever applicable, are not Indian residents and do not have any Indian residents as their ultimate beneficial owners; and (ii) not more than 33 per cent of the corpus shall be invested in an investee company and associates of such company.
In certain situations where apprehensions surrounding the round-tripping of funds are reduced, it has proposed permitting enhanced contribution from the FME and its associates to allow operational flexibility to captive funds managed by offshore managers.
Requirement of Additional KMP for FMEs with AUM of USD 1 Billion or More
The proposal has suggested that akin to Registered FME (Retail), all FMEs managing an AUM of at least USD 1 billion at the close of a financial year will need to appoint an additional KMP (in addition to the current requirement to appoint 1 PO for Authorized FMEs, and the requirement to appoint 1 PO and 1 KMP for FME – Registered (Non-retail)) within three months from the close of the financial year.
Relaxation of Diversification Thresholds and Valuation Obligations for Fund of Fund Schemes
Currently, open-ended schemes can only invest up to 25 per cent of their corpus into securities of unlisted companies due to liquidity concerns. The proposal has suggested granting open-ended fund of fund schemes an exemption from this requirement.
Given how an open-ended restricted scheme may also be a fund of fund in nature, an exemption from fixing upper limit of investments in unlisted securities should be justifiably provided as long as the underlying scheme adheres to the 25 per cent investment threshold itself.
Furthermore, the present regime mandates all FMEs to carry out valuation of the assets of the scheme by an independent third-party service provider as per the valuation norms laid down in the FM Regulations. The Consultation Paper has proposed that the mandatory requirement of carrying out such valuation of assets shall not apply to a fund of fund scheme investing in regulated scheme(s) already valued by any independent third-party service provider.
Funds of fund schemes usually rely on the valuation of assets undertaken by the master fund. If the valuation at the master fund level is carried out by an independent third-party service provider adhering to the valuation norms laid down in the FM Regulations, this negates the FME’s requirement to mandatorily carry out valuation for the fund of a fund scheme.
Permission for Joint Investors
The Consultation Paper has proposed that FMEs begin accepting investments into a venture capital scheme or restricted scheme from multiple investors acting together as joint investors, wherein each such investor shall invest at least the minimum applicable investment amount as per FM Regulations. The proposal has further clarified that joint investors include an investor along with his/her spouse, parent, or son/daughter.
Reduction in Ticket Size for Portfolio Management Services
The proposal has suggested reducing the minimum investment requirement for an FME to carry out portfolio management services from USD 150,000 to USD 75,000.
The minimum investment requirement under portfolio management services in IFSC currently stands at almost 2.5 times of that for SEBI-registered portfolio managers. As market participants criticized this disparity, a need was felt to propose the harmonization of FM Regulations with SEBI PMS Regulations by lowering the minimum investment threshold to attract more investors.
Permission for FIFs to have FMEs and Set Up Additional Investment Vehicles
Currently, family investment funds (“FIF”) are eligible to seek registration in IFSC as Authorized FMEs, and do not require a separate FME. The amendment proposes to enable single families to separately set up FMEs and investment vehicles and grant additional flexibility for single families to keep their FME and the investing vehicle in IFSC separate.
It also aims to allow FIFs to set up additional investment vehicles, subject to prior filing with the IFSC Authority and payment of requisite fees. These additional vehicles, structured in the form of companies, limited liability partnerships, trusts, or any other form as may be specified by the IFSC Authority, to also be considered as part of the FIF for purpose of meeting the conditions applicable to FIFs.
This amendment would allow FIFs to pursue diverse investment strategies under different investment vehicles or even segregate its investments under different legal entities.
Waiver from Requirement of Appointing Local Custodian
Currently, custodians appointed as per FM Regulations are to be based in an IFSC for retail, open-ended and any other schemes with AUM above USD 70 million. It has now been proposed that the custodian appointed under this regulation be based in an IFSC, unless the local laws of the jurisdiction where the securities have been issued do not permit the same, in which case, the FME may appoint a custodian based in India or a foreign jurisdiction and is regulated by the financial sector regulator of that jurisdiction.
Investor Approval for Certain Conflicted Transactions
The Consultation Paper has proposed that venture capital schemes and restricted schemes not buy or sell securities from associates,[1] other schemes of the FME or its associates, or an investor who has committed to invest at least 50 per cent of the corpus of the scheme, unless prior approval has been obtained from 75 per cent of investors in the scheme by value. Notably, while obtaining this 75 per cent approval of investors, the investor who has committed to invest at least 50 per cent of the corpus of the scheme shall be excluded from the voting process.
Conclusion
This Consultation Paper is a clear indication that as GIFT IFSC enters a new era of scaling up relevance as a globally attractive fund management jurisdiction, the IFSC Authority has taken cognizance of the concerns and suggestions of market participants. The proposals, though numerous, are holistic in nature and attempt to solidify GIFT IFSC’s commitment to upholding investor safety and promoting ease of doing business. Further, a number of proposals in the Consultation Paper, such as the increased validity period of the placement memorandum and introduction of joint investors as a concept, are inspired from the provisions of SEBI AIF Regulations. A regulatory shift towards incorporating some of the strengths of India’s domestic funds regime into GIFT IFSC could benefit GIFT IFSC investors in the long run.
[1] As per the IFSCA (Fund Management) Regulations, 2022: ‘Associate’ means:
- a company or a limited liability partnership (LLP) or a body corporate in which a director or trustee or partner of the FME or the FME or any fiduciaries as defined in regulation 17 of the FM regulations, either individually or collectively, hold twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be;
- a company or a limited liability partnership or a body corporate, either individually or collectively, hold twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be in the FME; or
- Any other company or a limited liability partnership or a body corporate, in which the entity referred in clause (b) above holds twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be;
