The International Financial Services Centres Authority (IFSCA) has brought out a consultation paper dated August 5, 2024 (Consultation Paper), which proposes a number of amendments to the IFSCA (Fund Management) Regulations, 2022 (IFSCA FM Regs). Some of the proposed changes are meant to facilitate ease-of-doing-business and could have far-reaching impact. Some others merely improve the existing language and/or offer more clarity. For example, currently Regulation 32 of the IFSCA FM Regulations provide that restricted schemes shall have “less than one thousand investors” or such number as may be specified by the Authority. The Consultation Paper proposes to modify Regulation 32 and provide that restricted schemes shall “not have more than one thousand investors” or such number as may be specified by the Authority. Some of the key amendments that have been proposed to the IFSCA FM Regs are detailed and analysed below:
- Third Key Managerial Person (KMP) for Fund Management Entities (FME) managing an AUM of USD 1 billion or more: Currently, every FME is required to designate a principal officer who shall be responsible for overall activities of the FME including but not limited to fund management, risk management and compliance. In case of a Registered FME, in addition to the principal officer, one additional KMP is required to be designated as Compliance and Risk Manager. In case of Registered FME (Retail), in addition to the principal officer and Compliance and Risk Manager, the FME is required appoint an additional KMP who shall be designated with the responsibility of fund management. The Consultation Paper proposes that all FMEs that manage an AUM of USD 1 billion or more should appoint a third KMP. Appointment of the third KMP should be before the filing of the retail schemes or ETFs in case of Registered FME (Retail) and within 3 months from the close of the financial year in case of FMEs that are managing AUM of at least USD 1 Billion as at the close of a financial year.
- Requirement for KMPs to be based in GIFT City: The IFSCA FM Regs require the Principal Officer and other KMPs to be based out of the relevant IFSC[1]. The Consultation Paper proposes the insertion of a declaration in the format of the application form prescribed by the IFSCA FM Regs to the effect that the applicant shall ensure that the Principal Officer and other KMPs shall be based out of IFSC.
- Changes in professional qualifications for KMPs: A KMP is required to have a professional qualification or a post-graduate degree or post graduate diploma (which is of a minimum of 2 years in duration) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognised by the Central Government or any State Government or a recognised foreign university or institution or association; or a certification from any organization or institution or association or stock exchange which is recognised/ accredited by Authority or a regulator in India or Foreign Jurisdiction[2].
- In this context, the Consultation Paper proposes that:
- the requirement that the post-graduate degree or post graduate diploma should be of a minimum of 2 years in duration is proposed to be changed to 1 year’s duration; and
- the option to hold a “certification from any organization or institution or association or stock exchange which is recognised/ accredited by Authority or a regulator in India or Foreign Jurisdiction” is being modified with the specific requirement that the certification should be a CFA or a FRM from the Global Association of Risk Professionals.
- It is also clarified by the Consultation paper that the Professional qualification shall include membership of Institute of Chartered Accountants of India (ICAI), Institute of Company Secretaries of India (ICSI), Institute of Cost Accountants of India (ICMAI) or any institution equivalent thereto in a foreign jurisdiction. For a Compliance and Risk Manager, the professional qualification may be bachelor’s degree in law.
- Changes in experience requirements for KMPs. Currently, a KMP is required to have at least 5 years’ experience in related activities in the securities market or financial products including in a portfolio manager, broker dealer, investment advisor, wealth manager, research analyst or fund management[3]. This requirement is proposed to be amended in the following manner:
- Experience as an investment banker or in a credit rating agency will also be counted;
- For a Compliance and Risk Manager, the relevant experience may be 3years (instead of 5years) if such KMP is a member of the ICSI or any institution equivalent thereto in a foreign jurisdiction and has experience in compliance or risk management in an entity regulated by a financial sector regulator or a listed company.
- Fit and proper requirements. Currently, anyone who has been convicted for any offence – economic offence or any offence against securities laws is disqualified from being a KMP. The Consultation Paper proposes that, instead of a conviction, mere filing of a charge-sheet by any enforcement agency in matters concerning economic offences would disqualify such person as long as the charges are pending. It should be noted in case of offences involving moral turpitude, conviction would still be required, as is currently the case.
- Validity of PPM extended. Currently, the validity of the placement memorandum for launch of a venture capital scheme or a restricted scheme or a special situation fund is 6 months from the date of filing with the IFSCA. The Consultation Paper proposes to increase this period to 12 months. Further, the FME is required to declare the first close of the scheme within such period by achieving at least the minimum size of corpus (of USD 5 million), failing which it shall file the placement memorandum again with the Authority by paying the full fee as applicable for a fresh scheme.
- Minimum investment threshold for joint investors. For Venture Capital Schemes (VCS), the minimum investment threshold per investor (other than Accredited Investors) is USD 250,000. For restricted schemes, the minimum investment threshold per investor (other than Accredited Investors) is USD 150,000. The Consultation Paper clarifies that where multiple investors acting together as joint investors, each such investor has to invest at least the minimum applicable investment amount. However, where the following pairs of individuals act as joint investors, the individuals can jointly meet the prescribed minimum investment threshold: (i) An investor and his/her spouse (ii) An investor and his/her parent (iii) An investor and his/her daughter/son
- Mandatory valuations: Currently the IFSCA FM Regs provides that the valuation of the assets of a VCS, a restricted scheme and a retail scheme by an independent third-party service provider is optional[4]. The Consultation Paper proposes to word replace ‘may’ with ‘shall’ to make it mandatory to carry out a valuation of the assets of the scheme by an independent third-party service provider. Further, the Consultation Paper clarifies that valuation shall not be mandatory in case of a fund of funds scheme investing in regulated scheme(s) which are valued by any independent third-party service provider.
- Investments of 80% of corpus in startups: At present, VCSs are required to invest at least 80% of their AUM in investee companies incorporated for less than 10 years or in other venture capital schemes[5]. The Consultation Paper proposes that 80% of their AUM shall be replaced with 80% of their corpus.
- Relaxation in ceiling on FME’s commitment: The IFSCA FM Regs prescribe minimum and maximum commitments for the FME of VCSs and restricted schemes[6]. The Consultation Paper proposes that the ceiling of 10% on the FME’s commitment shall not apply if the following condition are met:
– the FME (and its associate, if any) are not Indian resident and do not have any Indian resident as their ultimate beneficial owners; and
– not more than 33% of the scheme’s corpus shall be invested in an investee company and associates of such company.
- Relaxation for investment in securities of unlisted companies: Regulation 35 of the IFSCA FM Regs provides that the maximum investment in securities of unlisted companies by an open-ended restricted scheme should not exceed25% of the corpus of the scheme. The Consultation Paper proposes that in case of an open-ended fund of fund scheme, this requirement shall not be applicable if such scheme is investing in other open-ended scheme(s) which shall not invest in securities of unlisted companies in excess of 25% of their corpus.
- Minimum fund size: The IFSCA FM Regs provide that the minimum size of each VCS or restricted scheme or retail scheme shall be USD 5 Million[7]. The Consultation Paper proposes to reduce this threshold to USD 3 Million.
- Investments in associates by restricted schemes: Currently a restricted scheme may invest in its associate subject to the prior approval of 75%investors in the scheme by value[8]. The Consultation Paper proposes to insert a new section (4) in Regulation 35 to provide that restricted schemes shall not buy or sell securities from associates, other schemes of the FME or its associates, or an investor who has committed to invest at least 50% of the corpus of the scheme, unless prior approval has been obtained from 75%investors in the scheme by value. When obtaining such approval from its investors, investor(s) who have committed to invest at least 50% of the corpus of the scheme and is buying or selling the investment, from or to, the scheme, shall be excluded from the voting process.
- Deadline for disclosure of NAV: Every FME is required to ensure that the NAV is disclosed to the investors at least on a monthly basis in case of an open-ended scheme and half-yearly in case of a close ended scheme[9]. The Consultation Paper proposes to amend Regulation 36 (3) to provide that such disclosure shall be within 15 days from the end of month in case of an open-ended scheme and within 30 days from the end of half-year in case of a close ended scheme.
- PMS limits reduced: Currently an FME which acts as a portfolio manager cannot accept funds or securities worth less than USD 150,000 from any client.[10] The Consultation Paper proposes to lower this limit to USD 75,000.
- Appointment of a custodian: Every FME is required to appoint an independent custodian to carry out the custodial services at least retail schemes, open ended restricted schemes and all other schemes managing AUM above USD 70 Million[11]. The Consultation Paper proposes that a Custodian appointed under the IFSCA FM Regs shall be based in an IFSC, unless the local laws of the jurisdiction where the securities have been issued do not permit the same, in which case, the FME may appoint a custodian which is based in India or foreign jurisdiction and is regulated by the financial sector regulator of that jurisdiction.
| ELP Comments |
- Many of the changes proposed by this Consultation Paper, such as the proposal to reduce the minimum size of each VCS or restricted scheme or retail scheme from USD 5 Million to USD 3 Million, could provide a major fillip to GIFT City.
- The requirement for all FMEs that manage anAUM of USD 1 billion or more to appoint a third KMP would add to the burden of FMEs, since IFSCA has reiterated that the principal officer and all KMPs should be based in GIFT City.
- Many of the proposed changes will make it easier to do business in GIFT City. For example, it has been proposed that the requirement for VCSs to invest at least 80% of their AUM in investee companies incorporated for less than 10 years or in other venture capital schemes be replaced by a requirement that 80% of the corpus of the VCS be so invested. Since AUM fluctuates frequently, it is difficult for FMEs to ensure compliance with the requirement of 80% investments in specific types of companies. On the other hand, corpus is a static number and FMEs would find it easier to comply with the new proposal.
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The Consultation Paper can be found here.
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
Paridhi Jain, Associate, Email – paridhijain@elp-in.com
