Regulation 47 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022 (IFSCA FM Regulations) sets out various investment restrictions applicable to retail schemes, both open ended and close ended. Some of the key investment restrictions are as follows:
- The maximum investment in unlisted securities by an open-ended scheme shall not exceed fifteen percent (15%) of the scheme’s total AUM.
- The maximum investment in unlisted securities by a close-ended scheme shall not exceed fifty percent (50%) of the scheme’s total AUM.
- The minimum investment by an investor in case of close ended schemes investing more than fifteen percent (15%) in unlisted securities, shall be USD 10,000.
- No retail scheme shall invest more than fifteen percent (15%) of its AUM in securities of a single company. If a retail scheme invests more than in ten percent (10%) in a single company, it should obtain the prior approval of its fiduciaries. This limit on investments in a single company shall not be applicable in case of Index schemes.
- No retail scheme shall invest more than twenty five percent (25%) of its AUM in a single sector, other than the financial services sector for which the ceiling shall be fifty percent (50%) of the AUM of the scheme. The limits on sectoral caps shall not apply in case of a sectoral or thematic or an Index Scheme.
- No retail scheme shall invest more than twenty-five percent (25%) of its AUM in its associate. As per Regulation 2(e) of the IFSCA FM Regulations, an “Associate” is (i) a company or a limited liability partnership (LLP) or a body corporate in which the FME, or any director or trustee or partner of the FME, holds twenty percent (20%) or more of its paid-up equity share capital or partnership interest or (ii) a company or a LLP or a body corporate, which holds twenty percent (20%) or more of the FME’s paid-up equity share capital or partnership interest or (iii) any company or LLP or body corporate, in which the entity referenced in (ii) above holds twenty percent (20%) or more of its paid-up equity share capital or partnership interest, as the case may be.
On October 29, 2024, the International Financial Services Centres Authority issued a circular bearing number F. No. IFSCA-IF-10PR/1/2023-Capital Markets/5 (IFSCA Circular), which disapplies many of the provisions of the aforementioned Regulation 47 of the IFSCA FM Regulations in the case of fund of fund schemes set up in an IFSC as an open-ended retail scheme, which invests in unlisted securities issued by an investment fund which meets the following criteria.
The (investee) investment fund must be:
- regulated by the concerned regulatory authority in its home jurisdiction; and
- permitted to offer its securities to retail investors in its home jurisdiction
The (investee) investment fund may be open-ended or close-ended.
The investment restrictions contained in aforementioned Regulation 47 of the IFSCA FM Regulations which have been disapplied by the IFSCA Circular are as follows:
- The ceiling of fifteen percent (15%) of an open-ended scheme’s total AUM, with respect to investments in unlisted securities.
- The ceiling of fifty percent (50%) of a close-ended scheme’s total AUM, with respect to investments in unlisted securities.
- The requirement that in case of close ended schemes investing more than fifteen percent (15%) in unlisted securities, the minimum investment by an investor shall be USD 10,000.
- The requirement that no retail scheme shall invest more than twenty-five percent (25%) of its AUM in its associate.
| ELP Comments |
- The IFSCA FM Regulations define a “fund of funds scheme” as a scheme that invests primarily in other schemes whether in IFSC or India or foreign jurisdictions. Therefore, if a n open-ended scheme primarily invests directly in corporate securities and also has some investments in investment funds, the relaxations offered by the IFSCA Circular may not be available to such investments made in in other funds.
- The IFSCA Circular does not offer any relaxation from the (15%) ceiling on investments in a single company and the sectoral caps (25% of the AUM in general and 50% of the AUM for the financial services sector) contained in Regulation 47 of the IFSCA FM Regulations. If an IFSCA registered open-ended retail scheme invests in a sector specific fund, such as a real-estate fund, it is likely that these restrictions will apply. Also, if an investment is made in a fund which has invested its entire AUM in a single company, the restrictions contained in Regulation 47 of the IFSCA FM Regulations may apply.
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Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com
Zaynali Badami, Advocate, Email – zaynalibadami@elp-in.com
