The IFSCA (International Financial Services Centres Authority) has issued final Fund Management Regulations (Regulations) which have come into effect from the 30th day from the date of passing notification in the official gazette i.e., 19 April 2022. The Regulations thus, inter alia, supersede the existing framework for set up of funds in IFSC i.e., SEBI (Alternative Investment Funds) Regulations, 2012 and the circulars issued by SEBI and the IFSCA in this regard.
The key features are as follows-
Unified registration- A unified registration for multiple fund activities by regulating the fund manager instead of the existing approach of regulating the Funds. A Fund Management Entity (FME) will be registered with IFSCA and will be able to manage different types of funds and schemes subject to meeting the eligibility criteria.
Green channel route- A green channel route to launch Venture Capital Schemes or non-retail schemes soliciting money from accredited investors.
Family investment fund-Recognition of a family investment fund has been seen to be done.
Liberal co-investment regime- Liberal co-investment regime through a special purpose vehicle (SPV) or through a segregated portfolio by issuing a separate class of units.
Special Situation Funds (SSFs)- Introduction of Special Situation Funds (SSFs) to invest in special situation asset to incentivize funds with a distressed strategy.
Innovation to fund activities- Innovation to fund activities (Fund Lab) by giving power to the IFSCA to provide relaxations from the applicability of all or any of the requirements of the Regulations.
Investments in Physical assets- Permission to funds to invest up to 20% of corpus in physical assets such as real estate, bullion, art, or any other physical asset.
Focus on Environmental, Social and Governance (ESG)- Funds with focus on ESG sectors/strategies permitted to be launched. Relatedly, the Regulations also specify disclosure and reporting on matter relating to sustainability.
Launching of retail schemes such as mutual funds opening avenues for cross-border investments. They can also launch Exchange Traded Funds (ETFs), which can be either equity, debt, commodity, hybrid, actively managed, etc. Gold and Silver ETF fund managers can invest in Bullion Depository Receipts.
Categories of Fund Management Entities-
Particulars | Authorized FME | Registered FME (Non-retail) | Registered FME (Retail) |
Permissible Activities | - Managing Schemes investing in start-ups or early-stage ventures through Venture Capital Scheme - Managing Family Investment Fund investing in securities, financial products, and such other permitted asset classes | - Managing Venture Capital and Restricted Schemes investing in securities, financial products, and such other permitted asset classes - Portfolio Management Services (including for multi-family office) - Investment Manager of Investment Trust (REITs and InvITs) offered under private placement - All activities as permitted to Authorized FMEs | - Managing Retail Schemes investing in securities, financial products, and such other permitted asset classes through retail or restricted schemes - Investment Manager of Investment Trust (REITs and InvITs) offered to public
- Launch and manage ETFs
- All activities as permitted to Authorized FMEs and Registered FMEs (for non-retail Funds) |
Types of investors possible | - Accredited investors - Investors investing at least USD 250,000 (USD 60,000 for employees/ directors/ designated partners of FME) | - Accredited investors - Investors investing at least USD 150,000 (USD 40,000 for employees/ directors/ designated partners of FME) | Retail as well as non-retail investors |
Legal Structure of the FME | Company, LLP, Branch | Company, LLP, Branch | Company or Branch of a Company already registered or regulated by financial sector regulator in India or foreign jurisdictions for conducting similar activities subject to certain additional conditions such as ring fencing of activities, minimum net worth/ capital requirements |
Minimum net worth | USD 75,000 | USD 500,000 | USD 1,000,000 |
Minimum no of directors | N/A | N/A | At least 4 (at least 50% to be independent directors) |
Minimum experience of FME | Employ such employees who have relevant experience | Employ such employees who have relevant experience | - FME or its holding company has at least 5 years of experience in managing AUM of at least USD 200 million with more than 25,000 investors; or - One person in control of FME holding more than 25% shareholding/ share in profits carrying on business in financial services for a period of not less than 5 years |
Minimum Qualification of key managerial personnel | Professional qualification or post-graduate degree or post graduate diploma (minimum 2 years) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central or State Government or a recognized foreign university or institution or association; or a certification from any organization or institution or association or stock exchange which is recognized/ accredited by Authority or a regulator in India or Foreign Jurisdiction | Professional qualification or post-graduate degree or post graduate diploma (minimum 2 years) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central or State Government or a recognized foreign university or institution or association; or a certification from any organization or institution or association or stock exchange which is recognized/ accredited by Authority or a regulator in India or Foreign Jurisdiction | Professional qualification or post-graduate degree or post graduate diploma (minimum 2 years) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central or State Government or a recognized foreign university or institution or association; or a certification from any organization or institution or association or stock exchange which is recognized/ accredited by Authority or a regulator in India or Foreign Jurisdiction |
Minimum experience of KMPs | At least five years in related activities in the securities market or financial products including in a portfolio manager, broker dealer, investment advisor, Wealth Manager, research analyst or fund management | At least five years in related activities in the securities market or financial products including in a portfolio manager, broker dealer, investment advisor, Wealth Manager, research analyst or fund management | At least five years in related activities in the securities market or financial products including in a portfolio manager, broker dealer, investment advisor, Wealth Manager, research analyst or fund management |
Minimum number of KMPs | 1 | 2 | 3 |
Infrastructure requirements | Necessary to effectively discharge its activities and commensurate to the size of operations in IFSC | Necessary to effectively discharge its activities and commensurate to the size of operations in IFSC | Necessary to effectively discharge its activities and commensurate to the size of operations in IFSC |
Categories of Funds and schemes:
Particulars | Venture Capital Schemes | Restricted schemes (Non-retail schemes) | Retail schemes |
Permissible investments | - Listed or unlisted securities (in India or foreign jurisdiction), money market instruments, debt securities, securitized debt instruments, other venture capital schemes, units of mutual funds and alternate investment funds (AIFs), investment in LLPs and such other assets as may be specified | - All investments permitted to Venture Capital Schemes plus, derivatives (including commodity derivatives) - Close ended scheme may invest up to 20% of the corpus in other physical assets such as real estate, bullion, art or any other physical asset as may be specified | - All investments permitted to Venture Capital Schemes plus derivatives (including commodity derivatives) |
Investment restrictions | At least 80% of the asset under management (AUM) in investee companies incorporated for less than 10 years or other venture capital schemes | N/A | - Maximum investment in a single investee company: 10% of AUM (15% with prior approval of fiduciaries), no restriction for Index schemes
- Maximum investment in a sector: 25% of AUM (50% in case of financial services sector), no restriction for sectoral, thematic or index scheme |
Investments in the associates of the FME | Permissible, subject to prior approval of 75% investors in the scheme by value | Permissible, subject to prior approval of 75% investors in the scheme by value | 25% of the AUM |
Investments in unlisted entities | No restriction | - Open-ended schemes: Maximum 25% of the corpus.
- Close-ended schemes: No restriction | - Open-ended schemes: Maximum 15% of the AUM of the scheme - Close-ended schemes: Maximum 50% of the AUM of the scheme |
Corpus of the scheme | - Minimum: USD 5 million - Maximum: USD 200 million | - Minimum: USD 5 million - Maximum: N/A | - Minimum: USD 5 million - Maximum: N/A |
Tenure | - Minimum 3 years - Extension up to 2 years permissible with 2/3rd investor’s consent | - Minimum 1 year for close ended scheme - Extension up to 2 years permissible with 2/3rd investor’s consent | - Minimum 3 years for close ended scheme - Extension up to 2 years permissible with 2/3rd investor’s consent |
Minimum number of investors in the scheme | N/A | N/A | Minimum 20 investors, with no single investor investing more than 25% |
Maximum number of investors in the scheme | 50 investors | 100 investors | No restrictions |
Minimum contribution/ commitment from the investor in the scheme | Accredited investors - Investors investing at least USD 250,000 (USD 60,000 for employees/director/ designated partners of FME) For Venture Capital Funds launched by Registered FME, the condition of Restricted schemes would apply. | Accredited investors - Investors investing at least USD 150,000 (USD 40,000 for employees/directors/ designated partners of FME) | - Open ended scheme: Nil - Close ended scheme: Nil (USD 10,000 in case investment in unlisted exceeds 15% of the AUM) |
‘Skin-in-the-game’ contribution by FME | - Minimum 2.5% for targeted corpus less than USD 30 million and USD 750,000 for target corpus more than 30 million - Maximum 10% of corpus | Open ended scheme: - Minimum 5% for targeted corpus < USD 30 million and USD 1.5 million for target corpus > USD 30 million - Maximum 10% of corpus - Close ended scheme: - Minimum 2.5% or USD 750,000 (in case of targeted corpus more than USD 30million) - Maximum 10% of corpus | Lower of 1% of the AUM of the scheme or USD 200,000 (for both open and close ended scheme) |
Leverage | Permissible, subject to disclosure in the private placement memorandum (PPM) | Permissible (except in case of Special Situation Fund), subject to disclosure in the PPM and consent of investors | Not permissible except to meet temporary liquidity needs for the purpose of redemption or payment of interest |
Thus, the Regulations, which are developed taking into account international best practices, aim to update the Securities and Exchange Board of India's (SEBI) existing rules and the way fund activities are currently governed. The overall risk-based strategy and regulating the management rather than the funds afford fund managers better operational flexibility to establish different funds/schemes without committing significant resources. Given the short deal timescales, this may be one of the main reasons for the establishment of Fund structures in Gujarat International Finance Tec-City (GIFT city).
The relaxations in compliance would make deal structuring simpler, give investors and Funds based in IFSC flexibility to allocate more capital to lucrative opportunities, and ensure that the Funds based in the International Financial Services Centre (IFSC) are competitive with other offshore fund vehicles. These relaxations in compliance include co-investment opportunities and permission to take leverage for Funds (non-retail). Despite this, the precise justification for the introduction of the 10% investment cap on sponsor contributions to venture capital or restricted schemes is unclear, and the Fund managers/their associates intending to participate in the Funds to the extent of more than 10% would need to keep this aspect in mind while setting up the Fund platform in the IFSC/GIFT city.