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On November 30, the IFSC Authority released an expert panel report on allowing variable capital companies (VCCs) at GIFT City. The nine-member panel was headed by MS Sahoo, former chairperson of the Insolvency and Bankruptcy Board of India. The report proposed introducing a draft framework to allow VCCs, which are more loosely regulated.
Businesses are typically structured as corporates or trusts. The VCC is a specialised structure intended for the asset management industry specifically.
Segregated Risk
Introduced by Singapore in 2020, it offers significant flexibility.
Unlike the company or trust structure, where asset managers assume collective responsibility, each sub-fund registered under a VCC is a distinct entity as good as a separate company. Hence, the liability of the sub-fund is ring-fenced.
This helps VCCs maintain segregated risk, which especially helps alternative investment funds (AIFs) that operate hedge and private equity funds. Under the VCC scheme, companies have been permitted to freely redeem shares and pay dividends using their assets, which is not the case for regular funds.
Market participants say India’s VCC proposal improves upon the Singapore framework.
“Recommendations of the expert committee also address the taxation issues which are associated with a Singapore VCC and, hence, a significant improvement over it,” said Suresh Swamy, partner, PwC. “The legal framework permitting VCC structure in IFSC, as and when finalised, will encourage migration of offshore financial services funds business to 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, hence, need not comply with various corporate laws. Also, the rules for VCCs are intended to be principle-based, which means the authority would have significant flexibility over regulations that govern them.
“The VCC framework provides a new legal vehicle for setting up funds and does away with the limitations of a trust, company and LLP (limited liability partnership) structure used for AIFs. This would also mean that the IFSCA would independently regulate VCCs rather than the existing bodies such as the Registrar of Companies,” said Rajesh Gandhi, partner, Deloitte India. “VCCs would also be preferred by fund managers because each sub-fund would have segregated and ring-fenced identity, assets and liabilities and voting rights.”
Easy Relocation
The proposed framework will allow a VCC registered in a foreign jurisdiction such as Singapore to relocate easily and transfer its exact fund structure to IFSC. This is meant to encourage existing funds to relocate to IFSC.
“The consideration to introduce the VCC regime in IFSC is another welcome move from IFSCA and would further augment its ‘onshoring the offshore’ concept in IFSC GIFT City,” said Paresh Kubadiya, director, Grant Thornton Bharat. “The newly proposed VCC regime is a hybrid model that encompasses advantages of the trust and corporate structures, along with the tax and regulatory efficiency.”
VCCs gained prominence in 2020, after Singapore introduced them, with dozens of asset managers switching to the structure. This has aided record growth – assets managed in the island nation rose 16% to $5.4 trillion in the year ended September 2022.
Besides, at least 16 major asset managers have shifted to Singapore from Hong Kong. Global fund management centre Luxembourg also offers its own version, known as Sicav funds, which have been instrumental in attracting various asset managers to the European nation.
