I. Introduction
The Ministry of Finance has released the draft International Financial Services Centres Authority (Amendment) Bill, 2026 (the “Bill“) for public consultation. The Bill proposes to introduce the Variable Capital Company (“VCC“) as a dedicated legal vehicle for fund management activities within the International Financial Services Centres (“IFSC“), specifically GIFT City.
This development marks a long-awaited structural reform. For years, fund managers operating out of the IFSC have been constrained by the limitations of trust, limited liability partnership and company structures — none of which were purpose-built for investment fund activity. The VCC remedies this by offering a single, integrated legal framework with features that sophisticated global fund structures have long taken for granted: segregated sub-fund liability, flexible capital alteration, a clear governance matrix, and built-in confidentiality. If enacted in its current form, the Bill has the potential to reposition GIFT City as a genuinely competitive domicile for pooled investment vehicles alongside Singapore, Luxembourg and Mauritius.
II. Background
Fund management in the IFSC has to date relied primarily on trust structures, with limited liability partnerships and companies used sparingly. Each of these structures has been adapted — through bespoke regulations or contractual mechanisms — to approximate features that fund vehicles in other jurisdictions possess natively. The result is a framework that functions, but inefficiently.
The central shortcomings of the existing position are well documented. Trust structures lack corporate personality and present challenges for counterparty contracting and cross-border investor participation. Companies under the Companies Act, 2013, are ill-suited to the dynamic capital requirements of investment funds: share capital can only be reduced through Court or Tribunal processes, dividends can only be paid from distributable profits, and there is no statutory mechanism for asset segregation between notional sub-portfolios. None of these structures permits the routine alteration of investor capital — subscriptions and redemptions — without cumbersome corporate approvals.
The gap was first formally acknowledged by the Expert Committee chaired by Dr. KP Krishnan (report: May 2021) and subsequently addressed by the Expert Committee chaired by Dr. MS Sahoo (report: October 2022), which drafted a conceptual legal framework for VCCs. The Finance Minister’s Budget announcement for FY 2024-25 provided political impetus, and the present Bill is the legislative output of that commitment.
As of 31 December 2025, fund management entities in the IFSC had mobilised cumulative commitments of USD 32.13 billion and cumulative funds raised of USD 17.34 billion — figures that underscore the commercial urgency of a fit-for-purpose vehicle.
III. Analysis of Key Provisions
A. Structure and Legal Character (Sections 13B and 13C)
The VCC is constituted as a body corporate with perpetual succession, separate legal personality and limited liability for its members — features familiar from corporate law. What sets it apart is its mandatory two-tier architecture. A VCC must operate through one or more sub-funds, and all investor capital is pooled at the sub-fund level; the VCC itself holds no assets or liabilities in its own right.
Crucially, sub-funds are not separate legal persons — the VCC contracts on their behalf — but they benefit from statutory asset segregation. The assets of sub-fund A cannot be used to discharge the liabilities of sub-fund B, whether in the ordinary course or in a winding-up. Each sub-fund is also treated as a separate person for taxation purposes. These provisions represent a significant statutory departure from existing corporate law, where similar protections have had to be engineered contractually.
Open question: The treatment of sub-funds as fiscally separate persons will require alignment with the Income Tax Act, 1961 and applicable tax treaties. The Bill does not address this directly and the position will need to be worked through in delegated legislation and CBDT guidance.
B. Capital Structure (Section 13O)
The Bill introduces a two-class capital model that is genuinely novel for Indian law. Management shares are issued at the VCC level, carry voting rights only, and may not be redeemed. They are intended for the sponsor, management entity or controlling persons. Participating shares are issued at the sub-fund level to investors, carry economic rights (including dividends payable from profits or paid-up capital — a departure from the Companies Act), and have limited voting rights confined to variations of their own class rights or winding-up resolutions.
Participating share capital may be altered freely — issued, redeemed, bought back, or converted — in line with the investment strategy of each sub-fund, without shareholder approval for each transaction. This feature, absent from Indian company law, is fundamental to the operation of open-ended and hybrid fund structures.
Multiple classes and sub-classes of participating shares may be issued under a single sub-fund, enabling the creation of different fee, currency, or distribution tranches within the same portfolio — a standard feature of Luxembourg SICAVs and Singapore VCCs that has previously been unavailable in Indian fund structures.
C. Governance (Section 13W)
The Bill establishes a governance matrix comprising a board of directors (appointed by management shareholders), a fund management entity (appointed by the board and registered with IFSCA), a fund manager (an officer of the fund management entity, designated as key managerial personnel of the VCC), and a compliance officer. The board is common to all sub-funds of the VCC.
The fund management entity and fund manager act in a fiduciary capacity towards all members and are accountable to the board. To minimise administrative costs, the Bill permits the same individual to serve as compliance officer and fund manager, provided they meet IFSCA’s criteria — a pragmatic concession for smaller structures.
Open question: The extent to which existing IFSCA fund management entity registrations will carry over to the VCC framework — and whether re-registration or migration processes will be required — is not addressed in the Bill and will need to be clarified in subordinate legislation.
D. Confidentiality (Section 13W(16))
Confidentiality of information relating to the VCC, its sub-funds, shareholders, investments and financial statements is given statutory grounding. Disclosure is permitted only in prescribed circumstances and to prescribed persons. Memorandum and articles are specifically excluded from public inspection. This is a material departure from the Companies Act regime and aligns the IFSC VCC framework with comparable provisions in Singapore and Mauritius.
E. Compromise, Merger and Winding-Up (Sections 13ZB and 13ZC)
Compromises and arrangements with creditors or members remain subject to NCLT oversight. However, mergers between sub-funds inter se, or between a holding VCC and its wholly-owned subsidiary, are governed by the fast-track merger provisions of Section 233 of the Companies Act, 2013, with IFSCA substituted for the Central Government — a procedurally lighter path than full NCLT sanction.
Winding-up is bifurcated: sub-fund winding-up in non-insolvency situations is within IFSCA’s remit (tenure expiry, member resolution, article event, or direction in shareholder interest), preserving speed and operational flexibility. Judicial oversight via the NCLT is reserved for fraud, public interest concerns, sovereignty risks, or multi-year filing defaults — a sensible calibration.
F. Insolvency (Section 13ZD)
Where a VCC or sub-fund defaults on a debt obligation within the meaning of the Insolvency and Bankruptcy Code, 2016 (“IBC“), the IBC will apply. The VCC and each sub-fund are to be notified as financial service providers under the IBC, and each sub-fund is treated as a separate legal person for IBC purposes. This is a pragmatic deeming provision, though the interaction of sub-fund asset segregation with IBC insolvency mechanics will require careful working through in practice.
IV. Conclusion
The Bill is a serious and well-considered piece of legislation. It draws thoughtfully on Singapore, Luxembourg, Mauritius and Irish models while adapting them to Indian constitutional and regulatory architecture. If enacted and operationalised efficiently, the VCC framework should meaningfully reduce the friction currently associated with structuring pooled vehicles in the IFSC — particularly for private equity, venture capital, real estate, and multi-strategy funds that need flexible capital accounts and ring-fenced liability pools.
The flexibility to pay dividends from paid-up capital (not just distributable profits), to redeem and issue participating shares freely, and to create multi-class, multi-tranche sub-funds within a single vehicle are individually significant. Collectively, they bring the IFSC into practical parity with the structuring toolkit available in Singapore and Luxembourg — jurisdictions that have attracted substantial India-dedicated fund capital that currently cannot access the IFSC.
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This Investment Funds update is intended for general guidance only and does not constitute legal advice. For more information, please reach out to Shubham Sharma at 2636@cnlu.ac.in.
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