Categories of Fund Management Entities in Gift City IFSC: A Comprehensive Guide
In recent years, the International Financial Services Centre (IFSC) in Gift City, India has emerged as a prominent destination for global financial services activities. To support the growth of the asset management industry in IFSC, the International Financial Services Centres Authority (IFSCA) has introduced new regulations for fund management entities. These regulations aim to streamline the fund management process and align it with global best practices.
I. Introduction to IFSC and the Importance of a Robust Asset Management Industry
The development of a robust asset management industry is crucial for the growth of capital markets in any economy. The Government of India has been making efforts to "onshore the offshore" financial services activities and position IFSC as a competitive jurisdiction globally.
The IFSC was established as a center for financial services transactions that were previously conducted outside India by overseas financial institutions and overseas branches/subsidiaries of Indian financial institutions. To facilitate the growth of financial services intermediaries in IFSC, significant regulatory reforms have been introduced in the fund management regime.
II. Evolution of the Fund Management Regime in India
Over the years, the fund management regime in India has witnessed several changes. It started with the SEBI (Venture Capital Funds) Regulations, 1996, which provided a framework for venture capital funds. This was followed by the SEBI (Alternative Investment Funds) Regulations, 2012, which introduced a more comprehensive regulatory framework for alternative investment funds (AIFs). With the establishment of IFSC, a new fund management regime was introduced, bringing a streamlined global approach to fund management in IFSC.
III. Snapshot of Fund Regime in IFSC
The IFSCA (Fund Management) Regulations, 2022 provide a comprehensive framework for various types of fund management activities in IFSC. These activities include managing private investment funds, special situations funds, mutual funds, hedge funds, portfolio management services, exchange-traded funds (ETFs), family offices, real estate investment trusts (REITs), and infrastructure investment trusts (InvITs).
IV. Changes Introduced by the IFSCA (Fund Management) Regulations, 2022
The IFSCA (Fund Management) Regulations, 2022 have brought significant changes to the fund management regime in IFSC. One key shift is the focus on regulating the "fund manager" instead of the "fund" itself. This allows for a single registration process for multiple fund management activities, streamlining the process and promoting ease of doing business.
A. Categories of Fund Management Entities
Under the new regulations, fund management entities (FMEs) can be registered under different categories based on the type of fund management activities they undertake. The three main categories are:
- Authorised FME: These entities pool money from accredited investors or investors investing above a specified threshold through private placement. They primarily invest in start-ups or early-stage ventures through venture capital schemes.
- Registered FME (Non-Retail): These entities pool money from accredited investors or investors investing above a specified threshold through private placement, investing in securities, financial products, and other permitted asset classes through restricted schemes. They can also provide portfolio management services and act as investment managers for private placement of investment trusts.
- Registered FME (Retail): These entities pool money from all investors or a section of investors under one or more schemes for investing in securities, financial products, and other permitted asset classes through retail or restricted schemes. They can also act as investment managers for public offers of investment trusts and launch exchange-traded funds.
B. Green Channel Route
The regulations also introduce a "green channel" route for the launch of certain schemes. Venture capital schemes and restricted schemes that solicit funds only from accredited investors qualify for the green channel. These schemes can open for subscription immediately upon filing the required documents with the Authority, reducing lead time and promoting faster scheme launches.
C. Skin in the Game Contribution
The regulations exempt fund management entities from the requirement of having a minimum continuing interest or "skin in the game" in venture capital schemes or restricted schemes. This exemption can be availed if two-thirds of the investors in the scheme waive the requirement or if the scheme is a fund of fund scheme investing in a scheme with similar requirements. This relaxation is expected to simplify regulatory compliance for Indian entities.
V. Documents and Process for Setting up a Fund Management Entity in IFSC
To set up a fund management entity in IFSC, certain documents and processes need to be followed. These include:
- Application for Registration: The entity must submit an application for registration as a fund management entity to the IFSCA, along with the required documents and information.
- Eligibility Criteria: The entity must meet the eligibility criteria specified by the IFSCA for the chosen category of registration.
- Submission of Documents: The entity must submit the necessary documents, such as the certificate of incorporation, memorandum and articles of association, board resolution, and other relevant documents.
- Compliance with Substance Requirements: The entity must ensure compliance with the substance requirements specified by the IFSCA, which include having personnel based in the IFSC office for decision-making and management of the investment portfolio.
- Approval and Registration: Upon satisfying all requirements and completing the necessary documentation, the IFSCA will review the application and, if deemed satisfactory, grant registration as a fund management entity.
VI. Requirements for Different Categories of Fund Management Entities
Each category of fund management entity has specific requirements that need to be met. These requirements include:
- Authorised FME: Authorised FMEs must pool money from accredited investors or investors investing above a specified threshold. They primarily invest in start-ups or early-stage ventures through venture capital schemes.
- Registered FME (Non-Retail): Registered FMEs (Non-Retail) pool money from accredited investors or investors investing above a specified threshold. They can also provide portfolio management services and act as investment managers for private placement of investment trusts.
- Registered FME (Retail): Registered FMEs (Retail) pool money from all investors or a section of investors. They can act as investment managers for public offers of investment trusts and launch exchange-traded funds.
VII. Advantages and Opportunities for Fund Management Entities in IFSC
The new regulations provide several advantages and opportunities for fund management entities in IFSC. These include:
- A streamlined registration process for multiple fund management activities, promoting ease of doing business.
- The green channel route for faster scheme launches, reducing lead time and administrative burden.
- Exemptions from "skin in the game" requirements, simplifying regulatory compliance for entities.
- Access to a comprehensive framework for various types of fund management activities, allowing for diversification and growth opportunities.
The IFSCA (Fund Management) Regulations, 2022 have introduced significant changes to the fund management regime in IFSC. By focusing on regulating the fund manager and providing a streamlined framework, these regulations aim to support the growth of the asset management industry in IFSC and position it as a leading global destination for fund management activities. Fund management entities can take advantage of the new regulations to expand their operations and tap into the opportunities offered by IFSC.
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