I. Introduction
A robust asset management industry along with a well-developed regulatory ecosystem is pivotal to the growth of capital markets, which are in turn critical to a developing economy such as India. The Government of India is taking considerable efforts for ‘onshoring the offshore’ financial services activities to enable India to compete with some of the more established jurisdictions in the world such as Singapore, Mauritius and Hong Kong.
Against the above backdrop, the International Financial Services Centre (“IFSC”) was envisaged as a centre to undertake financial services transactions that are currently carried out outside India by overseas financial institutions and overseas branches/subsidiaries of Indian financial institutions. As part of the overall endeavour to facilitate growth of financial services intermediaries in IFSC, remarkable regulatory reforms have been introduced in the regime governing funds in IFSC.
Recently, the International Financial Services Centres Authority (“Authority”) had constituted an Expert Committee on Investment Funds to assess the regulatory landscape for investment funds and fund managers operating in IFSC and to suggest structural changes to support the growing aspirations of the industry and align them with global best practices. The Authority published its report on January 31, 2022 (“Report”). The recommendations of the Report resulted in the publication of the draft IFSCA (Fund Management) Regulations, 2022, which envisaged sweeping changes to fund management laws in IFSC.
After receipt of comments, the Authority has notified the International Financial Services Centres Authority (Fund Management) Regulations, 2022 (“Regulations”). The said Regulations came into force on May 19, 2022.
The Regulations have incorporated a key shift in focus compared to the historic approach followed by Indian regulators such as SEBI – now, the IFSC regime regulates the ‘fund manager’ instead of the ‘fund’, or the various investment products offered by the asset manager. This would help in speedy fund set up by avoiding multiple application processes by the same fund manager, thereby facilitating quicker launch, promoting ease of doing business and having a ‘single window’ registration for multiple activities.
II. Funds Regime – Background
The below chart depicts the key characteristics witnessed through the evolution of the fund management regime in India over the years – starting from the SEBI (Venture Capital Funds) Regulations, 1996, to the largely successful SEBI (AIF) Regulations, 2012, and the inception of the IFSC funds regime, with the most recent Regulations bringing a streamlined global approach to fund management in IFSC.
III. Snapshot of fund regime in IFSC
The Regulations provide for a comprehensive framework governing a host of fund management activities in IFSC, ranging from various types of private investment funds, special situations funds, mutual funds, hedge funds, portfolio management services, ETFs, family offices, REITS and InvITs.
IV. Changes to the current regime governing alternative investment funds through the Regulations
The erstwhile regime for funds in IFSC included the regulations, circulars and guidelines by Indian regulators (as would be applicable in India), with additional circulars and guidelines by the IFSCA to provide for deviations/ special exemptions for IFSCA entities. The following key changes to erstwhile regime have been introduced by the Regulations:
(i) Single registration for multiple fund management activities: The Regulations aim to provide an umbrella framework which shall enable fund managers to set up, inter alia, retail schemes (including Exchange Traded Funds), non-retail schemes (alternative investment funds), venture capital schemes, portfolio management services, investment trusts (REIT and InvIT), etc. in IFSC. Depending on the type of fund management activities proposed to be undertaken in IFSC, an entity must obtain prior authorisation from the Authority to act as a Fund Management Entity (“FME”).
It is important to note that in order to fulfil substance requirements in IFSC, the personnel exercising influence or control over the management of the investment portfolio and who initiates the proposal on the portfolio composition shall be based in office of the FME in the IFSC, and all decision making shall flow from IFSC.
Following are the categories under which registration may be sought to establish an FME:
| Authorised FME | Registered FME (Non-Retail) | Registered FME (Retail) |
| (i) Authorised FMEs pool money from accredited investors or investors investing above the specified threshold by way of private placement. They invest in start-ups or early-stage ventures through venture capital schemes.ii. Venture capital schemes invest primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings and also include angel funds. | i. Registered FMEs (Non-Retail) pool money from accredited investors or investors investing above a specified threshold by way of private placement for investing in securities, financial products and such other permitted asset classes through restricted schemes.ii. Such FMEs shall also be able to undertake portfolio management services (including for multi-family office) and act as investment manager for private placement of investment trust (REITs and InvITs).iii. FMEs registered as non-retail shall also be able to undertake all activities as permitted to Authorised FMEs. | i. Registered FMEs (Retail) pool money from all investors or a section of the investors under one or more schemes for investing in securities, financial products and such other permitted asset classes through retail or restricted schemes.ii. Such FMEs may act as investment manager for public offer of investment trusts (REITs and InvITs) and be able to launch Exchange Traded Funds.iii. FMEs registered as retail shall also be able to undertake all activities as permitted to Authorised FMEs and Registered FMEs (Non-retail). For instance, large financial services groups would prefer obtaining registration under this category as it permits a wider range of fund management activities. |
For ease of reference, given below is a snapshot of the various schemes which may be launched by FMEs in IFSC that correspond with the three categories of AIFs which could be launched under the erstwhile regime:
(ii) Green Channel: Venture Capital Schemes and Restricted Schemes which would solicit funds only from accredited investors under the Regulations qualify for Green Channel, i.e. the schemes filed can open for subscription by investors immediately upon filing scheme documents with the Authority.
This will significantly reduce lead time, considering that the erstwhile regime did not provide for automatic approval for launch of schemes due to which the fund documents were required to be vetted by the Authority before the launch of each scheme.
Conditions specified for Venture Capital Schemes:
- Venture Capital schemes shall have less than 50 investors.
- Accredited Investors or investors investing above USD 250,000 shall be permitted to invest in such schemes.
- The minimum size of the corpus in case of Venture Capital Schemes shall be USD 5 Million. The total corpus of Venture Capital Schemes shall not exceed USD 200 Million.
In case of Restricted Schemes not qualifying for green channel, the Authority may endeavour to communicate its comments, if any, to the FME within 21 working days of receipt of satisfactory response and the FME shall ensure that the comments are duly incorporated in the placement memorandum prior to launch of the scheme.
(iii) Skin in the game contribution by FME: The requirement of the FME to have a minimum continuing interest (‘Skin In The Game’) in venture capital scheme or restricted scheme (non-retail scheme) shall be exempt provided that:
(a) two third majority of investors (by value) in that scheme waive the same,
(b) two third majority of investors in that scheme are accredited investors or if the scheme is a fund of fund scheme, investing in a scheme having similar requirements.
Further, in case of retail schemes, the requirement of Skin in the Game shall be exempted if the scheme is a fund of fund scheme, investing in a scheme having similar requirements.
The above relaxation is expected to remove many challenges for Indian parties emanating from Regulation 7 of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2004 (“ODI Regulations”)[1] particularly on the requirement to procure regulatory NOCs from the relevant financial services regulator in India and overseas.
(iv) Family Investment Fund: Recognising the need to have a formal structure for managing and preserving the wealth of HNIs and UHNIs and their families, the Regulations envisage the concept of a family investment fund. Notably, the requirements pertaining to minimum net-worth requirements otherwise applicable to FMEs do not apply to family investment funds. They are also allowed to borrow funds or engage in leveraging activities as per their risk management policy.
(v) Environmental, Social and Governance (“ESG”) related disclosures to investors: Given the increased interest and focus on investments in the ESG space globally, an FME with Assets Under Management (“AUM”) exceeding USD 3 billion as at the close of a financial year (or any other AUM threshold as may be specified by the Authority) shall comply with sustainability related requirements as specified by the Authority and ensure that sustainability related risks are incorporated in the investment decision making.
An FME that launches a scheme related to ESG, shall make full disclosure regarding investment objective, investment policy, strategy, material risk, benchmark, etc., in the manner as may be specified by the Authority.
V. Key aspects of the Regulations for regulating Fund Managers
Given below are some of the key regulatory aspects with respect to Authorised FME and Registered FME as provided under the Regulations:
| Particulars | Categories of FME | ||
| Authorised FME | Registered FME | ||
| Non-Retail | Retail | ||
| Regulatory oversight by the Authority | Low | High | |
| Types of Schemes managed | Venture capital schemes | Restricted Schemes (Non-Retail) offered on a private placement basis and Venture capital schemes | Restricted Schemes (Retail as well as Non-Retail) and Venture capital schemes |
| Legal structure | Company, LLP or branch thereof or any other form as may be permitted by the Authority | Company, LLP or branch thereof or any other form as may be permitted by the Authority | Company or branch |
| The branch structure is permitted only for an FME which is already registered and/or regulated by a financial sector regulator in India or a foreign jurisdiction for conducting similar activities. | |||
| Minimum net worth | USD 75,000 | USD 5,00,000 | USD 10,00,000 |
| Track record | It shall employ such employees who shall have relevant experience as specified in the Regulations. | FME or its holding company to have not less than five years of experience in managing AUM of at least USD 200 million with more than 25,000 investors; or At least one person in control of the FME holding more than 25% shareholding in the FME be carrying on business in financial services for a period of not less than 5 years. | |
| Principal Officers and Key Managerial Personnel (“KMP”) | One principal officer who shall be responsible for overall activities of the FME including but not limited to fund management, risk management and compliance. | One principal officer, and one additional KMP shall be designated as Compliance and Risk Manager and shall be responsible for compliance with these Regulations and ensure suitable risk management policies and practices at the FME. | In addition to one principal officer and one KMP, the FME shall appoint an additional KMP who shall be designated with the responsibility of fund management. |
| Fit and proper criteria | Applicable | ||
| Requirement to have office in the IFSC | Yes |
VI. Pros & cons of IFSCA Fund Management Regulations
| Pros | Cons |
| Faster approval timelines and Green Channel for VCFsNo PAN required for foreign LPsEnvironment, Social and Governance (ESG) considerationExemption of Skin in the Game requirement in accordance with prescribed conditions for feeder funds, or with 2/3 investor approvalSingle registration for multiple fund management activities | Ring fencing of operations in IFSC is requiredUntested regime; tax and GAAR uncertaintiesUpcoming ecosystem and infrastructureRequirement of physical presence (office) in IFSC, local experienced personnel requirement and other substance requirements |
VII. Concluding remarks
The attempt of IFSCA in introducing a unified fund regime in IFSC is applauded by all. The Regulations are a nudge in the right direction, which simplify the regulatory landscape for asset management in IFSC and give a much needed fillip to the Government of India’s efforts to develop the IFSC as a global financial centre.
These Regulations are instrumental in the smooth setup and expansion of fund management in IFSC. Lastly, the Regulations are also aligned with global best practices by regulating the managers and not the products. However, the IFSC regime is still in its nascent stages of development and with more encouragement from Indian regulators, has the potential to truly compete with other global financial services hubs.
[1] As per Regulation 7 of the ODI Regulations, read with Paragraph B.6 of RBI’s ‘Master Direction – Direct Investment by Residents in Joint Venture (JV) / Wholly Owned Subsidiary (WOS) Abroad’ (“Master Direction”) issued by the RBI, an investment by an Indian Party into an entity outside India that is engaged in the financial services sector, should fulfil the following conditions:
- be registered with the regulatory authority in India for conducting the financial sector activities;
- has earned net profit during the preceding three financial years from the financial services activities;
- has obtained approval from the regulatory authorities concerned both in India and abroad for venturing into such financial sector activity; and
- has fulfilled the prudential norms relating to capital adequacy as prescribed by the concerned regulatory authority in India.
