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India’s 1st IFSC in GIFT City: Constitution of an Expert Committee on Investment Funds

IFSC

What is IFSC?

An International Financial Service Centre is a jurisdiction that provides world class financial services to non-residents and residents, to the extent permissible under the regulations, in a currency other than the domestic currency of the location where the IFSC is located. 

India’s first IFSC

The Government of India established International Financial Services Centres Authority in April 2020 under the International Financial Services Centres Authority Act passed by the Indian Parliament. For the first time, the regulatory powers of four financial services regulators in India, namely, Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory Development Authority of India (PFRDAI), have been vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the International Financial Services Centre in India. Approved by Government of India as an International Financial Services Centre (IFSC) at GIFT City, the IFSC reinforces India’s strategic position as a global hub for financial services. Apart from providing a global financial platform, it provides easy access to the Indian economy, which is amongst the largest and fastest growing economies in the world and connects ~30 Mn strong Indian diaspora globally to India through the IFSC.

What are AIFs

As per SEBI, Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. AIFs can be classified into 3 categories as-

  • Category I-Funds which invest in startups or early-stage ventures, social ventures, Small and Medium Enterprise (SMEs). Eg Venture capital and social venture funds.
  • Category II- Residual category i.e., other than Category I AIF and Category III AIF. Eg PE Funds.
  • Category III- Funds which employ diverse or complex trading strategies and leverage including through investment in listed or unlisted securities / derivative. Eg Hedge Funds.

Key differences in IFSC AIFs vs AIF Regulations in India

1. Single Window Clearance 

The Regulatory powers of 4 regulators (RBI, SEBI, IRDA and PFRDAI) are vested in IFSCA which ensure a smooth and single window approval for setting up in IFSC.

2. Leverage

The SEBI AIF regulations restrict category I and Category II AIFs from borrowing or engaging in any leverage. The only excepting is to meet temporary funding requirements up to 30 days, on not more than 4 occasions in a year and subject to a maximum of 10% of investible funds. Category II AIFs are permitted to engage in leverage subject to consent from investors of the fund, up to a maximum limit not exceeding 2 times of the Net Asset Value.

However, these restrictions do not apply to IFSC AIFs. They are permitted to take leverage subject to-

  • The maximum leverage by the IFSC AIF, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum.
  • The leverage shall be exercised subject to consent of the investors.
  • The IFSC AIF employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund.

3. Co-investments

The regulatory framework for AIFs is such that monies from all investors is pooled in the AIF and all the investors generally participate in deals on basis of their pro-rata share in the AIF. The AIF is not permitted to allow investors to increase their allocation to a particular deal on a standalone basis. However, IFSC AIFs are permitted to co-invest in portfolio company through a segregated portfolio by issuing a separate class of units and such that the investments by such segregated portfolios shall, in no circumstance, be on terms more favourable than those offered to the common portfolio of the AIF; and appropriate disclosures have been made in the placement memorandum regarding creation of such segregated portfolio. This will simplify deal structuring and provide flexibility to AIFs and investors to allocate more capital to lucrative opportunities.

4. Diversification Norms

As per SEBI Regulations, category I and II AIFs cannot invest more than 25% on the investable funds in any one investee company. For Category III AIFS, this is capped at 10%. However, for IFSC AIFs, these limits do not apply provided appropriate disclosures have been made in the placement memorandum and the investments by AIFs are in line with the risk appetite of the investors. It is common for offshore funds to be set up for investment in a few targeted companies or sectors. Therefore, ensuring that these limits do not apply to IFSC AIFs would go a long way in establishing IFSC among the global Financial Centers like Singapore and Mauritius.

5. Deployment of Funds

IFSC AIFs have 5 investment avenues to deploy funds-

•    Securities listed in IFSC; 
•    Securities issued by companies incorporated in IFSC; 
•    Securities issued by companies incorporated in India or foreign jurisdiction 
•    Units of an AIF 
•    Securities which a domestic AIF is permitted to invest in. 

For Investments in India, FPI/ FDI/ FVCI limits would apply. However, existing conditions on outbound investments by AIFs do not apply to IFSC AIFs i.e. no SEBI approval required for investments outside India


The Expert Committee on Investment Funds

IFSCA, in its endeavour to develop a comprehensive and consistent regulatory framework based on global best practices with a special focus on ease of doing business, has constituted an Expert Committee on Investment Funds to recommend to IFSCA on the road map for the funds industry in the IFSCs. The Committee has been constituted under the Chairmanship of Mr. Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd. The Committee comprises of leaders from the entire fund management ecosystem including from areas such as technology, distribution, legal, compliance, and operations.

While the committee has been constituted to holistically review the global best practices and make recommendations to IFSCA on the roadmap for the industry, the following shall be the specific terms of reference of the Expert Committee:

  • To recommend IFSCA on long term vision for operations of Investment Funds in IFSC.
  • To make recommendations with respect to structure of Investment Funds in IFSC. The recommendations may be two-fold:
  • Short term in nature that can be implemented by IFSCA immediately (i.e. less than 3 months). Such suggestions may fall under the exclusive regulatory purview of IFSCA.
  • Recommendations that may be implemented in mid-term (6 months to 1 year). Such suggestions may also pertain to regulatory purview of other regulators.
  • To identify issues that may be critical for development of the investment funds industry at IFSCs including inter-regulatory issues.
  • Any other relevant item on building the ecosystem inter-alia on asset managers, hedge funds, PE, VC, sovereign funds, family offices, and the accompanying professional services.

Committee Members

S No

Name

Designation

Capacity

1

Mr. Nilesh Shah

Group President & MD, Kotak Mahindra Asset Management Co. Ltd, Chairman, AMFI & Member, PMEAC

Chairperson

2

Mr. Leo Puri

Former MD, UTI AMC Ltd, Chairman of J P Morgan, South Asia & South-East

Member

3

Mr. N S Venkatesh

CEO, AMFI

Member

4

Mr. Neeraj Choksi

Co-Founder, NJ Group

Member

5

Mr. Nithin Kamath

Co-founder & CEO, Zerodha

Member

6

Mr. Ramamoorthy Rajagopal

Chief Operating Officer, DSP Investment Managers Private Limited.

Member

7

Mr. Sachin Bansal

Founder-Navi AMC Ltd, Co-Founder-Flipkart

Member

8

Ms. Shagoofa Khan

Partner (Head – Funds), Cyril Amarchand Mangaldas

Member

9

Mr. Sundeep Sikka

CEO, Nippon Life India Asset Management Ltd

Member

10

Mr. V Balasubramaniam

MD & CEO, India International Exchange (IFSC) Limited- India INX

Member

11

Ms. Vinaya Datar

Chief Compliance Officer, SBI Funds Management Pvt. Ltd.

Member

12

Mr. Pavan Shah

Deputy General Manager, IFSCA

Member Secretary