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Impact of failure by an FME to maintain the net worth specified by the IFSCA

Feb 21, 2024
  • Author(s) : Vinod Joseph

    • Regulation 8 of the IFSCA (Fund Management) Regulations, 2022 (“IFSCA FM Regulations”) requires the fund management entity (FME) of each AIF to maintain the net worth specified[1] in the Second Schedule of the IFSCA FM Regulations at all times. The IFSCA has issued a circular dated February 16, 2024 (“IFSCA Feb Circular”) regarding the obligation of FMEs to maintain the specified net worth at all times.

    The IFSCA Feb Circular states that:

    “Without prejudice to IFSCA’s power to take action for non-compliance with the aforesaid regulation, in case the net worth of any FME falls below the specified net worth, such FME shall not:

    i. launch new schemes in IFSC;

    ii. onboard new clients towards any of the activities or undertake new business activities permitted under the Fund Management Regulations, till the time the net-worth is restored.”

    ELP Comments
    • Regulation 143 of the IFSCA FM Regulations empowers the IFSCA to impose various types of penalties on FMEs that violate the IFSCA FM Regulations and these include the power to suspend and/or cancel the registration of the FME.  Therefore, the IFSCA Feb Circular states it is without prejudice to the IFSCA’s power to take action for non-compliance with Regulation 8.
    • The IFSCA Feb Circular states that if the net worth of any FME falls below the specified net worth, such FME shall not undertake “new business activities” permitted under the Fund Management Regulations till the time the net-worth is restored.  The phrase “new business activities” appears to be vague and unclear. Would an investment by the AIF in a portfolio company qualify as a new business activity by the FME? Would payment of fees by the FME to the AIF’s trustee amount to a business activity? It would be desirable if the IFSCA spells out what exactly it intends by “new business activities.  Further, it would be beneficial to all AIFs and their investors if an FME’s failure to maintain the specified net worth cannot be used as an excuse by the FME to meet the FME’s contractual obligations.
    • The FME’s obligation to maintain a specified net worth at all times should not be confused with the FME’s obligation to make a minimum contribution in the AIF. Unlike the latter which would be a contractual obligation recorded in a contribution agreement between the FME (in its role as an investor in the AIF) and the trustee of the AIF, the FME’s obligation to maintain a specified net worth is unlikely to be a contractual obligation. This may be why the IFSCA Feb Circular is silent regarding the FME’s obligation to make a minimum contribution in the AIF and the consequences of any failure to do so.

    We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

    Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com

    References:

    [1] USD 75,000 for an Authorised FME, USD. 500,000 for a Registered FME (Non-retail) and USD. 1,000,000 for a Registered FME (Retail).

    Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.