Investment Funds In GIFT IFSC: New Investment Pooling Avenue
The FME Framework is likely to act as a catalyst in framing a robust investment management industry in India and may accelerate the larger objective of the Indian Government of bringing ‘onshore the offshore’ financial services.
The International Financial Services Centres Authority (IFSCA) has notified a new framework for operating Investment funds in the International Financial Services Centre (IFSC) (located in GIFT City, Gujrat)(“FME Framework”), which came into effect from May 19, 2022.
The IFSC is considered as a foreign jurisdiction from an exchange control perspective, though situated within Indian land borders. This unique categorization along with the multiple tax benefits, corporate exemptions and other numerous relaxations provide a competitive edge to the FME Framework when compared with the Alternative Investment Fund framework of the mainland India (“AIF Framework”), as well as with the funds set up in other preferred offshore jurisdictions such as Mauritius, Singapore, Luxembourg and Cayman Islands.
As per the IFSCA Bulletin for the period Oct-Dec 20231, in a short span of 2 (two) years, around 95 schemes have been registered under the IFSC Framework with a total commitment of around USD 7076 million. This is testimonial to the growth and potential of the FME Framework. This article discusses the broad contours of the FME Framework and deciphers some of the key advantages which contribute to the increased popularity of the FME Framework.
Registration of Fund Manager: The FME Framework, in line with the global practices, require the fund manager to be registered, as opposed to fund. Once the fund manager is registered, it can launch different funds/schemes within 21 days of filing of the Private Placement Memorandum with IFSCA, subject to incorporating the IFSCA observations. Besides, venture capital scheme or non-retail schemes with only accredit or investors as subscribers, can be launched immediately without waiting for IFSCA approval under the green channel route.
This marks a landmark shift from the AIF Framework where approval of the capital market regulator is required for launch of each fund. This will enable the fund managers to quickly roll-out the scheme and invest, as per the changing market conditions and the investors’ expectations.
Registration categories and types of schemes: The fund manager can be registered under three categories, namely:
(a) Authorized FME: which can manage venture capital schemes investing in start-ups or early age ventures; and where accredited investors or investors investing at least USD 0.25 million are eligible to participate.
(b) Registered FME (non-retail): which can manage venture capital scheme or restricted schemes, where accredited investors or investors investing at least USD 0.15 million are eligible to participate.
(c) Registered FME (retail): which can manage both retail schemes (akin to mutual funds) and non-retail schemes. Interestingly, taking cognizance of the growing interest of retail investors in private markets, the FME Framework allows retail schemes to invest in unlisted securities as well, subject to conditions.
The IFSCA vide a separate circular2, also provided terms for issuance of angel funds, enabling fund managers registered under the FME Framework to launch angel funds under the green channel, accepting funds only from accredited investors or investors willing to commit at least USD 0.04 million over a 5 years period. Additionally, the fund manager registered under the FME Framework can (depending upon the type of registration obtained) launch various contemporary funds such as exchange traded funds, special situation funds, family investment funds, ESG funds and can carry out activities of portfolio management, without the need to obtain a separate registration for such activities.
A wide range of securities have been prescribed where investment can be made under the respective schemes. In case of restricted non-retail close ended schemes, up to 20% of the corpus can also be invested in physical assets such as real estate, bullion, art, etc. In terms of structure, an authorized FME and a registered FME (non-retail) can be set up either as a Company, LLP or Branch, whereas a registered FME can be set up as a Company or as a Branch.
Key relaxations: Unlike AIF norms, in case of venture capital and non-retail schemes, borrowing and leveraging is permissible subject to obtaining 2/3rd of the investors consent. Further, the diversification related restriction which limits maximum investment in single investee entity do not apply for such schemes. Besides, for these schemes, co-investment is permissible subject to certain conditions; and there is a flexibility to waive the skin-in-game contribution by the mangers with the consent of 2/3rd of the investors.
Regulatory edge: Given that the IFSC is considered as offshore jurisdiction from an exchange control perspective, it allows complete flexibility to the fund manager to both collect money from overseas investors as well as invest in overseas jurisdictions, as opposed to AIF funds which are required to limit their overseas investment to 25% of the investible funds of AIF. Further, the new [Indian] Overseas Investment Framework3 notified in August 2022 (i.e. hardly 4 months away from notification of FME Framework) offers a much liberal regime for IFSC Funds to collect money from Indian investors. The restriction on individual Indian residents to make investment in only operating foreign entity or not make investment in overseas entity engaged in financial services does not apply for investment in IFSC. Similarly, while unlisted Indian companies are restricted from making investment in offshore funds, they are allowed to invest in IFSC Fund. This may enable Indian resident individuals to invest in IFSC funds through unlisted companies under their control, thereby, freeing up their individual remittance limit of USD 0.25 million under the LRS scheme for other purposes of travel, medical treatment etc.
Other relaxations and concluding thoughts: The introduction of ‘sandbox and fund lab’ aspect within FME framework which offers flexibility to approach IFSCA for seeking exemption from regulatory requirement for testing new products, services, business model, use of technology etc. is a welcome step and would pave way for innovative ideas to germinate. Further, with the recent delegation of the SEZ’s powers to the IFSCA, vide notification no. S.O. 940 (E) dated Feb 28, 2024, the application for SEZ approval shall be heard by the IFCSA nominated officer itself, avoiding the need to separately reach out to the SEZ officer, further making the approval process quick and smooth. With all of these steps, the FME Framework is likely to act as a catalyst in framing a robust investment management industry in India and may accelerate the larger objective of the Indian Government of bringing ‘onshore the offshore’ financial services.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.
1. IFSCA Bulletin Oct-Dec 2023 dated February 06, 2024
2. IFSCA Circular no.645/IFSCA/Angel Schemes/2022-23 dated July 1, 2022
3. (i) Foreign Exchange Management (Overseas Investment) Rules, 2022 (ii) Foreign Exchange Management (Overseas Investment) Regulations, 2022; and (iii) Foreign Exchange Management (Overseas Investment) Directions, 2022, are collectively referred to as “[Indian] Overseas Investment Framework”