Alerts & Updates 13th Jan 2025

IFSCA’s Consultation Paper on SPV Framework for Co-investments

Authors

Vinod Joseph Partner | Mumbai
Paridhi Jain Associate | Mumbai

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  • The International Financial Services Centre Authority (IFSCA) has released a consultation paper dated January 9, 2025, on a Framework for Special Purpose Vehicle (SPV) for Co-investment and leverage transaction under IFSCA (Fund Management) Regulations 2022 (SPV Framework).

    The following are the salient features of the proposed SPV Framework:

    • Any FME registered with the IFSCA, which has an existing scheme (“Controlling Scheme”) in the IFSC, can set up a special purpose vehicle (“SPV”) to make co-investments in the portfolio companies of the Controlling Scheme.
    • The SPV should have the same constitution as the Controlling Scheme. Therefore, if the Controlling Scheme has been set up as a trust, the SPV should also be a trust. The SPV shall be open-ended or close-ended like the Controlling Scheme. The term of the SPV should be the same as the term of the Controlling Scheme.
    • The Controlling Scheme should hold at least 50% of the equity share capital or interest or capital commitments of such SPV. However, the FME is not required to contribute to the SPV.
    • A distinct SPV is requirement for co-investment into each portfolio company.
    • The FME must be the decision-making and controlling authority for the relevant SPV.
    • The leverage at the SPV level should be within the overall leverage limits specified in the PPM of the Controlling Scheme. However, the Controlling Scheme and other shareholders, beneficiaries, members or partners of the SPV can create encumbrances over their interests in the SPV in favour of any lender(s) to the SPV.
    • To launch an SPV, all the requirements mentioned in the IFSCA’s circular titled “Ease of doing business – Filing of Schemes or funds under IFSCA (Fund Management) Regulations 2022” dated 5 April 2024 (“Filing of Schemes Circular”) has to be fulfilled, except for the filing of a PPM.
    • A Term Sheet, as mentioned in Annexure A of the SPV Framework, is to be filed within 21 working days from the date of making the investment.
    • In addition to the Controlling Scheme, the Controlling Scheme’s investors or affiliates of such investors and any other third party may invest in an SPV, subject to compliance with applicable KYC norms.
    • Paragraph 14 of the FMV Framework says that “the fees applicable for the SPV will be commensurate with the fee of the Controlling Scheme.” The fee payable when an FME launches a scheme in an IFSC has been provided in a circular dated Feb 6, 2024 issued by the IFSCA. As per this circular, the fee for launching a Restricted (Non-Retail) are as follows:
    • Category – I AIF USD 7,500
    • Category –II AIF USD 15,000
    • Category –III AIF USD 22,500

    It appears that the same fee would be payable for each SPV of a Controlling Scheme.

  • ELP comments
    • Controlling Scheme has been given the same meaning as contained in Regulation 2(1)(h) of the IFSCA (Fund Management) Regulations 2022 (“IFSCA FM Regs”). Regulation 2(1)(h) of the IFSCA FM Regs merely defines control in a traditional manner – “control” shall include the right to appoint majority of the directors or to control the management or policy decisions. It may be better idea to explicitly state that any scheme launched by an FME in an IFSC would be a Controlling Scheme for the purpose of the SPV Framework and can launch SPVs.
    • It is likely that the SPV Framework will encourage potential investors in alternative investment funds set up in an IFSC to cherry pick their preferred portfolio companies and invest in them through an SPV structure. FMEs may also prefer this approach since they would not be required to make any contribution to such SPV.
    • SEBI requires investment managers offering co-investment services for a fee/consideration to obtain a Co-Investment PMS Licence. A similar requirement is not in place under the IFSCA FM Regs.
    • Co-investment is usually meant to enable investors in a fund to co-invest with the fund. However, the SPV Framework permits any person to invest in the SPV, provided the Controlling Scheme holds at least 50% of the SPV.
    • Paragraph 2(a) of the FMV Framework says that “An FME registered with IFSCA will be able to form an SPV having an existing Controlling Scheme in IFSC”, making it clear that the SPV should also be in an IFSC. This would necessary mean that such SPV would have to registered with the SEZ in the same manner as a scheme would be registered.

    To launch an SPV, all the requirements mentioned in the Filing of Schemes Circular have to be fullfilled, except for the filing of a PPM. However, the Filing of Schemes Circular primarily deals with the minimum disclosures to be made in the PPM of each scheme / fund. Since no PPM needs to be filed, these minimum disclosures become irrelevant. Annex – A to the Filing of Schemes Circular contains an Application Form to be filed with the IFSCA when launching a scheme. Annex – B to the Filing of Schemes Circular contains a list of documents to be filed with the IFSCA when launching a scheme. Most of the information required by Annex – A and the documents listed in Annex – B are relevant for a scheme, but not for an SPV.

    The IFSCA’s consultation paper on the SPV Framework 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

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

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