TLDR: The 42nd meeting of the IFSCA Authority Board on December 19, 2024, marked a significant step forward for the Fund Management industry in the International Financial Services Centre (IFSC). The approval of revised IFSCA (Fund Management) Regulations, 2022, introduced amendments aimed at enhancing ease of doing business, investor protection, and regulatory clarity. These revisions, shaped by feedback from market participants and practical experiences, pave the way for more streamlined fund management operations in the IFSC.

In this article, we explore the most critical changes introduced in the revised regulations and their overarching implications for both retail and non-retail schemes.

 

Context and Objectives of the Amendments

The IFSCA Authority’s revisions are rooted in three core objectives:

  1. Ease of Doing Business: Simplifying operational requirements to encourage more participation in fund management within IFSC.

  2. Regulatory Clarity: Addressing ambiguities in earlier provisions to make compliance more straightforward.

  3. Investor Protection: Enhancing safeguards to ensure trust and integrity in fund management practices.

While the core principles of the original regulations remain intact—including the registration framework for Fund Management Entities (FMEs) and their ability to undertake a broad range of fund management activities—the amendments reflect a forward-looking approach to address industry needs.

 

Key Changes in Retail Schemes

The revised regulations introduce several impactful changes for Retail Schemes, which cater primarily to individual investors. Here are the highlights:

  1. Reduced Minimum Corpus:

    • Previous Requirement: USD 5 million.

    • Revised Requirement: USD 3 million, with open-ended schemes allowed to start operations at USD 1 million, provided they achieve the full corpus within 12 months.

    • Implications: This reduction lowers entry barriers for smaller fund managers and enables quicker launches, fostering greater participation in the retail segment.

  2. Optional Listing for Close-Ended Schemes:

    • Close-ended retail schemes are no longer required to be listed if the minimum investment per investor is USD 10,000.

    • This flexibility reduces administrative overheads for fund managers while maintaining investor accessibility.

  3. Custodian Requirements Simplified:

    • Funds of Funds (FoFs) are exempted from appointing an IFSCA custodian if their underlying funds comply with regulatory standards.

    • For securities issued in foreign jurisdictions, local custodians can be appointed, streamlining cross-border operations.

  4. Investment Limits Adjusted:

    • Investments in a single company are now linked to either the benchmark index weightage or 15%, whichever is higher.

    • This alignment with market benchmarks promotes more strategic and diversified investment approaches.

  5. Valuation and Deployment Enhancements:

    • Funds pending deployment can now temporarily invest in bank deposits and overnight schemes.

    • The inclusion of valuation guidelines within the regulations, rather than through separate circulars, provides a consolidated compliance framework.

 

Key Changes in Non-Retail Schemes

Non-retail schemes, such as venture capital funds and restricted schemes, also benefit from tailored amendments to better serve their unique operational needs:

  1. Flexible Minimum Corpus:

    • Previous Requirement: USD 5 million.

    • Revised Requirement: Reduced to USD 3 million, with open-ended schemes allowed to start operations at USD 1 million, subject to achieving USD 3 million within 12 months.

  2. Enhanced Validity for Private Placement Memorandums (PPMs):

    • Validity extended to 12 months from the date of approval by IFSCA.

    • This provides fund managers with greater operational flexibility and reduces the administrative burden of frequent renewals.

  3. Increased FME/Associate Contributions:

    • The contribution limit for FMEs and associates has been raised from 10% to 100%, with conditions that investors and Ultimate Beneficial Owners (UBOs) are non-residents in India.

    • This change encourages fund managers to have greater “skin in the game,” thereby increasing investor confidence.

  4. Joint Investments Allowed:

    • Joint investments are now permitted for specific relationships, broadening the scope for collaborative investment strategies.

  5. Manpower and KMP Requirements Streamlined:

    • Key Managerial Personnel (KMP) appointments no longer require prior approval from IFSCA; only intimation is necessary.

    • FMEs managing assets under management (AUM) exceeding USD 1 billion must appoint additional KMPs to ensure effective oversight.

 

Consolidation of Circulars into Regulations

A notable improvement in the revised regulations is the consolidation of previously issued circulars into a single comprehensive framework. This change simplifies compliance by:

  • Providing a unified source of reference for fund managers.

  • Reducing the complexity of navigating multiple circulars and amendments.

 

Impact on the Fund Management Industry

  1. Operational Flexibility:

    • The reduction in minimum corpus requirements and streamlined regulatory provisions enable fund managers to launch and operate schemes with greater ease.

  2. Investor Protection and Confidence:

    • Enhanced valuation norms, custodian requirements, and increased FME contributions ensure robust safeguards for investors, fostering trust in the industry.

  3. Encouragement of Innovation:

    • The ability to launch schemes with lower corpus requirements and the flexibility in custodian arrangements promote innovation in fund offerings.

  4. Alignment with Global Standards:

    • By allowing local custodians and aligning investment limits with market benchmarks, the revised regulations position the IFSC as a globally competitive fund management hub.

 

Conclusion

The revised IFSCA (Fund Management) Regulations, 2022, represent a well-considered approach to balancing operational flexibility with investor protection. By lowering entry barriers, consolidating compliance requirements, and introducing strategic changes for both retail and non-retail schemes, the amendments pave the way for sustainable growth in the fund management industry.

For fund managers and investors alike, these changes signal a new era of opportunity and innovation within the IFSC. In the coming weeks, we will delve deeper into the specific implications for retail and non-retail schemes, as well as practical steps for Fund Management Entities to align with these updates.