International Financial Services Centre Authority (IFSCA) has published a consultation paper on the review of the IFSCA (Fund Management) Regulations, 2022, to enhance the regulatory framework for fund management activities in GIFT-IFSC. Initially, AIFs in IFSCs were governed by SEBI regulations until IFSCA introduced its regulations in 2022. An expert committee led by Nilesh Shah provided recommendations, resulting in a unified approach to fund management regulations. IFSCA has introduced various measures, including exemptions for Sovereign Wealth Funds, a framework for distributors, guidelines for Family Investment Funds, Venture Capital Schemes, Angel Schemes, Accredited Investors, and ESG schemes. A total of 116 FMEs have registered, launching 143 schemes with a corpus of $38.42 billion. The consultation paper proposes amendments to the regulations aimed at enhancing ease of doing business (EoDB), introducing additional safeguards, and providing clarifications. Public comments are invited by August 26, 2024, to ensure the regulations are future-ready and aligned with global practices. Comments can be emailed to IFSCA officials Aditya Sarda and Pavan Shah. The consultation paper aims to position GIFT-IFSC as a preferred jurisdiction for fund management by addressing operational issues, reducing compliance burdens, and ensuring investor protection.
INTERNATIONAL FINANCIAL SERVICES CENTRE AUTHORITY
CONSULTATION PAPER ON REVIEW OF IFSCA (FUND MANAGEMENT) REGULATIONS, 2022
Published on: August 05, 2024
A. Background
1. Prior to institution of IFSCA as the unified regulator for IFSCs in India, laws notified by the domestic regulators were in force in IFSC for regulating different activities. After IFSCA was vested with the powers to develop and regulate IFSCs in India, it has notified various regulations under the IFSCA Act, 2019 and, thereby, repealed the corresponding regulations which were drawn from the domestic regulators so far as their applicability in IFSCs is concerned.
2. The Alternative Investment Funds (AIFs) in IFSCs were previously governed under the provisions of SEBI (AIF) Regulations, 2012. Over a period of time, certain changes with regard to regulatory regime for AIFs in IFSC were made to benchmark with a few key practices in line with various global financial centres. Further, regulatory frameworks for Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) and Portfolio Management Services (PMS) were separately issued by IFSCA. However, in line with the practices prevalent in developed financial centres, there was a need to have a unified regulatory approach concerning the various activities related to fund management.
3. In this backdrop, an Expert Committee on Investment Funds was constituted to recommend the road map for the funds industry in IFSCs. The Committee was constituted under the Chairmanship of Mr. Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd. and Member, Economic Advisory Council to the Prime Minister. The Committee comprised of leaders from the Fund Management ecosystem including from areas such as technology, distribution, legal, and compliance. The Committee, after extensive deliberations and drawing on the wealth of the collective experience of its members, submitted its recommendations, which were, thereafter, made available for public consultations. Upon review and deliberations by the Board of IFSCA, the IFSCA (Fund Management) Regulations, 2022 (“FM Regulations”) were notified in April 2022 and came into effect in May 2022.
4. Further, in its endeavour to position GIFT-IFSC as the preferred jurisdiction for fund management activities, several other measures have been taken by IFSCA, as demonstrated below:
a. In recognition of the unique stature of the Sovereign Wealth Funds and their need for certain regulatory enablers, IFSCA has carved out exemptions from certain regulatory requirements, as the regulatory intent of these requirements is not found relevant for the Fund Management Entities (FMEs) and schemes which are set up by Sovereign Wealth Funds. These exemptions were provided under IFSCA Circulars dated March 01, 20231 and March 11, 20242.
b. In recognition of the crucial role that Distributors play in the fund management ecosystem by acting as the bridge between the FMEs and the investors, a comprehensive framework governing their operations, scope of activities, regulatory expectations and a detailed code of conduct has been prescribed by IFSCA vide Circular dated December 21, 20223 under IFSCA (Capital Market Intermediaries) Regulations, 2021.
c. In order to facilitate setting up of Family Investment Funds in IFSC, certain clarifications have been provided by IFSCA vide Circular dated March 01, 20234.
d. The FM Regulations provide a specific type of scheme, called Venture Capital Scheme, for investments into startups, for which the eligibility criteria as well as the ongoing requirements for the FME have been prescribed to be lighter touch. Further, considering the crucial role that startup ecosystem plays in a nation’s economy, in order to boost angel investing in startups, a dedicated regulatory framework for Angel Schemes was instituted by IFSCA vide Circular dated July 01, 20225.
e. In order to provide ease of investing to sophisticated investors, a detailed framework for Accredited Investors in IFSC was instituted vide Circular dated January 25, 20246. The FM Regulations already provide significant ease of doing fund management business to such FMEs which deal with Accredited Investors.
f. In order to promote consistency, comparability and reliability in disclosures by ESG schemes and ensure that they are true to their label, IFSCA instituted certain initial and periodic disclosures requirements vide a Circular dated January 18, 20237. The Circular, which is principle-based and largely aligned with international best practices, also provides norms for ongoing monitoring and performance evaluation of ESG schemes.
g. A framework8,9 for offsite supervision of the FMEs has been put in place which provides periodic updates to the IFSCA from the industry participants, enables IFSCA to keep a close track of the trajectory of the business activities in IFSC and practice risk-based supervision.
h. In order to enhance ease of doing fund management activities in IFSC, vide Circular dated April 05, 202410, for all schemes launched under Chapter III (except Part C: Retail Schemes) of the FM Regulations, the FMEs have been permitted to launch the schemes after filing the fund documents ensuring minimum disclosures with the IFSCA.
5. Since the notification of the FM Regulations and other policy measures as detailed above, the fund management industry in GIFT-IFSC has been growing at a healthy pace and attracted several domestic and foreign FMEs to set up their fund management business in IFSC. As on June 30, 2024, there are 116 FMEs registered with IFSCA which have collectively launched 143 schemes targeting a corpus of ~ USD 38.42 Billion, raised ~ USD 5.3 Billion and invested USD 4.5 Billion. The largest share (~95%) of these investments has been channeled to India, a testimony of IFSCA’s commitment to ‘onshore the offshore’, while also creating a seamless conduit for the foreign investors, Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs), looking to invest into and participate in the growing Indian economy. Out of the 143 schemes, there are 11 Venture Capital Schemes (including Angel Schemes), 49 Category I & Category II Restricted Schemes and 83 Category III Restricted Schemes. Further, 19 FMEs have also taken permission to provide portfolio management services.
6. The FM Regulations allow FMEs to launch a wide variety of schemes depending on their investment strategies. So far, schemes with different strategies as mentioned above, have been launched to cater largely to non-retail investors. However, with the recent budget announcement in July 2024, which accorded a taxation regime to retail funds and ETFs in IFSC, it is expected that FMEs will also aim to launch retail-oriented schemes, which will lead to further expansion of the fund management industry in IFSC and add another dimension to its growth. Further, the recent amendments to SEBI (Foreign Portfolio Investors) Regulations, 201911, SEBI Circular dated June 27, 202412 and IFSCA Circular dated May 02, 202413 have dispensed with the ceiling on the contribution by NRI / OCI investors to IFSC funds investing into listed Indian securities and provided an avenue for IFSC funds to channel NRI/OCI investments into India in a seamless manner, as opposed to funds in other foreign jurisdictions which are not permitted to accept NRI/OCI contribution in excess of 50% of their corpus.
7. A vast majority of schemes in IFSC are set up in the form of trust, while a small number of schemes (~9%) are in the form of LLP. With the announcement in the recent budget in July 2024 by the Hon’ble Finance Minister regarding the ‘Variable Capital Company’ (VCC) structure for, inter alia, pooled funds, it is expected that the FMEs in IFSC will have a wider array of options of legal forms for setting up of their schemes.
8. Further, analysis of the fund management activities in GIFT-IFSC is presented in Annexure 1.
B. Agenda of the Consultation Paper
1. In continuation to IFSCA’s efforts to create a globally benchmarked regulatory framework, a public consultation exercise was undertaken in October 202314, inviting suggestions from public and regulated entities. Further, in course of interactions with market participants during several round-table discussions, industry conclaves, series of discussions organized with industry leaders by IFSCA as ‘Chintan Shivir’ and other meetings, several suggestions have been received by IFSCA which have provided valuable inputs for IFSCA’s internal assessment.
2. With a view to implement the key suggestions received as above, to further IFSCA’s commitment to the development of GIFT IFSC as a preferred global jurisdiction for fund management activities and to make the FM Regulations future-ready for the next phase of growth of the fund management activities in IFSC, the instant Consultation Paper encapsulates a series of proposals for amendments to the FM Regulations. These proposals have been broadly categorized under the following 3 categories (or a combination of these):
a. Proposals aimed at enhancing Ease of Doing Business (EoDB): In IFSCA’s interactions with the industry participants as well as the comments received as a response to the Press Release dated October 10, 2023, some of the areas have been identified where the FMEs in IFSC are likely to experience operational hassles or where there is a potential to reduce the regulatory thresholds in line with the practices prevalent in other jurisdictions. Such proposals have been categorized as ‘EoDB’. Substantial proposals in the consultation paper are EoDB oriented and aimed towards bringing in efficiency by streamlining processes/timelines, reducing operational issues and the compliance burden.
b. Proposals aimed at introducing additional Safeguards: Given the notable pace of growth of fund management activities in IFSC, it is imperative that a healthy culture of compliance is nurtured amongst the FMEs by, inter alia, ensuring adequate regulatory safeguards. These proposals are expected to lead to better protection of the investors in IFSC funds and orderly growth of business activities in IFSC. Such proposals have been categorized as ‘Safeguard’. A few EoDB proposal may have certain conditions attached towards Safeguards so as to minimize or avoid the potential misuse.
c. Proposals aimed to provide Clarifications: The last set of the proposals are aimed to address drafting related issues, enhance readability of the FM Regulations or provide clarity of the regulatory intent. Such proposals have been categorized as ‘Clarification’.
3. The list of the provisions of the FM Regulations which are proposed to be amended and the rationale for the same, along with the proposed text of amendment, is placed at Annexure 2. Each of these proposals are specifically tagged under the categories – “EoDB”, “Safeguard” and “Clarification” or a combination of these categories, to adequately represent the intent behind the proposal.
C. Public Comments
1. Comments and suggestions from public are invited on the amendments proposed to IFSCA (Fund Management) Regulations, 2022 as listed in Annexure 2.
2. Comments may be sent by email to Aditya Sarda, Deputy General Manager, IFSCA at [email protected] with a copy to Mr. Pavan Shah, General Manager, IFSCA at [email protected] latest by August 26, 2024.
3. The comments may be provided in the following format (MS Word or MS Excel only):
| Name and Details of the Person / Entity [Organisation name (if applicable), Contact No., Email address] |
|||||
| S. No. | Paragraph No. (as per Annexure 2) | Regulation No. | Comments / Suggestion / Proposed amendment | Detailed Rationale | Other
supporting information* |
* such as relevant practices prevalent in other financial centres, practices in others business areas, potential impact of the suggestion, etc. Consultation Paper on Review of IFSCA (Fund Management) Regulations, 2022
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Consultation Paper on Review of IFSCA (Fund Management) Regulations, 2022
