On November 30, the IFSC Authority published the report of an expert panel on the authorization of variable capital companies (VCC) in GIFT City. The nine-member panel was led by MS Sahoo, former chairman of the Insolvency and Bankruptcy Board of India. The report proposed to introduce a draft framework to license CCVs, which are more loosely regulated.
Businesses are usually structured as corporations or trusts. The VCC is a specialized structure intended specifically for the asset management industry.
Introduced by Singapore in 2020, it offers significant flexibility.
Unlike the corporate or trust structure, where the asset managers bear collective responsibility, each fund registered under a VCC is a separate entity as well as a separate company. Consequently, the compartment’s liability is limited.
This helps VCCs maintain risk segregation, which particularly helps alternative investment funds (AIFs) that operate hedge funds and private equity. Under the VCC scheme, companies were allowed to freely buy back shares and pay dividends using their assets, which is not the case for regular funds.
Market participants claim that India’s VCC proposal improves Singapore’s framework.
“The Expert Panel’s recommendations also address the tax issues associated with a Singapore VCC and, therefore, a significant improvement over it,” said Suresh Swamy, Partner at PwC. “The legal framework enabling the structure of VCCs in the IFSC, as it is finalized, will encourage the migration of offshore financial services fund business to the IFSC.”
Unlike trusts and companies, which are registered with the Ministry of Corporate Affairs, the proposed VCCs will be registered with the IFSC authority and, therefore, do not need to comply with the various company laws. Further, the rules for VCCs are meant to be principles-based, which means the authority would have significant flexibility over the regulations that govern them.
“The VCC framework provides a new legal vehicle for fund creation and removes the limitations of a trust, company and LLP (limited liability company) structure used for AIFs. It would also mean that the IFSCA would independently regulate VCCs rather than existing bodies such as the Registrar of Companies,” said Rajesh Gandhi, Partner, Deloitte India. “VCCs would also be preferred by fund managers because each compartment would have an identity, assets and liabilities and separate and isolated voting rights.”
The proposed framework will allow a VCC registered in a foreign jurisdiction such as Singapore to easily relocate and transfer its exact fund structure to the IFSC. This is to encourage existing funds to be transferred to the IFSC.
“The idea of introducing the VCC scheme in the IFSC is another welcome initiative of the IFSCA and would further strengthen its concept of ‘offshore relocation’ in the IFSC GIFT City,” said Paresh Kubadiya, Director by Grant Thornton Bharat. “The proposed new VCC regime is a hybrid model that encompasses the benefits of trust and corporate structures, as well as tax and regulatory efficiency.”
VCCs rose to prominence in 2020, after their introduction by Singapore, with dozens of asset managers switching to the structure. This has contributed to record growth – assets under management in the island nation grew 16% to $5.4 trillion in the fiscal year ending September 2022.
Additionally, at least 16 major asset managers have moved to Singapore from Hong Kong. The global fund management center Luxembourg also offers its own version, known as Sicav funds, which have helped attract various asset managers to the European nation.