The International Financial Services Centres Authority, which oversees the GIFT City in Gujarat, is likely to come out with a regulatory framework for variable capital companies, or VCC, by the end of this financial year, according to a person aware of the discussions on the matter.
The regulations will pave the way for the introduction of the much-awaited pooled investment structure for fund management entities (FMEs) operating from the GIFT City, said Siddharth Shah, partner at law firm Khaitan & Co and an advisor to the IFSCA.
Shah made the comments during a conversation with Rohit Agarwal, CEO of the funds business at consulting and advisory firm Dovetail Capital, on a webinar on the GIFT IFSC Platform Play on Tuesday.
If the regulations are indeed announced, this would be around five years after the setting up of the first expert committee to draft a framework to regulate VCCs.
VCCs are essentially a pooled structure, which can house a single or multiple pools of capital and their corresponding investments, and which can issue and redeem shares. Each of these pools, which comprises the funds and investments, will function like an island in terms of liability or rights. This means that investors in Pool 1 will not be liable or have any rights on the funds or investments in Pool 2 held by the same VCC.
The holdings of each of these sub-funds or smaller pools will also be separated from the liability of the larger VCC entity.
Discussions so far
Finance Minister Nirmala Sitharaman had announced the government's intent to allow this particular pooled structure during her speech at the time of introducing the interim budget for 2024-25 last year.
Regulations for VCCs have been in discussion for a few years. An expert committee under Dr KP Krishnan, formed in December 2020, submitted its suggestions in May 2021, and another under MS Sahoo submitted a draft legal framework in 2022 after referring to similar structures operating in various international jurisdictions such as Mauritius and Singapore.
The Krishnan Committee had recommended regulating VCCs under the IFSCA, allowing these entities to operate first in IFSCs before considering a template to introduce them in the domestic market. This graded approach was suggested because international players familiar with such structures in other jurisdictions may want to deploy them in IFSC as well.
Why VCCs?
Usually, alternative investment funds (AIFs) are set up as trusts or limited liability partnerships (LLPs), though they could also choose a body corporate structure. Funds prefer the first two for easier compliance.
However, these two structures have their limitations, too. For instance, these structures are unable to access the benefits of tax treaties and are limited in isolating the assets and liabilities of the entity from that of the investors. A VCC structure can overcome these disadvantages.
The flip side
Even with such policy support, it may take a few years before the first VCC is registered, according to Hemen Asher, partner at Bhuta Shah & Co. Asher advises funds on tax-related matters and has worked with regulatory authorities on tax reforms.
Asher said that, to enable the introduction of VCCs in GIFT City, one would either require amendment to the Companies Act to allow formation of VCCs and their operation or a standalone VCC Act to regulate this new segment.
“Also, necessary amendments would be required in tax laws, to provide the requisite pass-through benefits to ensure a single level of taxation, no tax on dividends distributed, and permission for each sub-fund to file separate returns, with non-pooling of income and each sub-fund having a separate PAN to file returns and maintain separate demat account to hold their respective securities,” he said.
