International Financial Services Centres Authority (IFSCA) proposes to introduce a regulatory framework operationalising special purpose vehicles (SPVs) under the IFSCA (Fund Management) Regulations, 2022 (FM Regulations) vide a consultation paper dated January 9, 2025 (Consultation Paper). The framework is aimed at fostering ease of doing business and facilitating expansion of the alternative investment sector in International Financial Services Centres (IFSC) by permitting co-investment by other investors (along with the scheme) in underlying securities or allowing schemes to undertake leverage at SPV level.
The Consultation Paper makes the following key proposals and recommendations in respect of the SPV framework:
- Nature and Structure of the SPV:
An SPV may be established by a Fund Management Entity (FME) registered with the IFSCA having an existing scheme (Controlling Scheme) in IFSC. The SPV is required to be constituted in accordance with Regulation 17 of FM Regulations, i.e., the SPV should have the same constitution as the Controlling Scheme. A minimum 50% of the SPV’s equity share capital or interest or capital commitments should be held by the Controlling Scheme with no contributions required from the FME. Further, the nature of the SPV including its term is required to be identical to that of the Controlling Scheme. Accordingly, the SPV may be close ended or open ended like the Controlling Scheme and the term of the SPV should be co-terminus with that of the Controlling Scheme.
- Filing and Compliance Requirements:
SPVs are exempt from filing a Private Placement Memorandum (PPM) which is a mandatory requirement in case of schemes. However, all other requirements as mentioned in the IFSCA circular on ‘Ease of doing business’ – Filing of schemes or funds under FM Regulations’ dated April 05, 2024 as applicable to schemes need to be complied with by the SPV. The SPV is required to file a term sheet with the IFSCA within 21 working days from the date of making the investment. Additionally, all disclosures required under FM Regulations need to be provided to investors and existing investors of the Controlling Scheme must be notified about setting up of an SPV before filing the term sheet.
- Eligible Investors and KYC Verification:
Eligible investors under the proposed SPV framework include (i) the Controlling Scheme; (ii) current investors of the Controlling Scheme or their affiliates; and (iii) other investors approved under the framework. For existing investors, FME may rely on know your customer (KYC) verification undertaken for the scheme, whereas, for new investors, KYC verification (as applicable to the Controlling Scheme) will need to be conducted.
- Investment and Leverage Provisions:
SPVs will be permitted to invest in a single portfolio company, as per the investment strategy of the Controlling Scheme. The SPV may (i) engage in co-investment; or (ii) undertake leverage; or (iii) undertake both (i) and (ii); or (iv) ringfence investments of the Controlling Scheme. Leverage at the SPV level must adhere to the overall limits specified in the PPM of the Controlling Scheme. The Investors, beneficiaries, members or partners in the SPV will be permitted to create an encumbrance over their interests in favour of a lender providing leverage to the SPV.
- Reporting and Operational Requirements:
Valuation and Net Asset Value computation is required to be done in accordance with FM Regulations. FMEs will be the decision-making and controlling authority in respect of the SPV. Additionally, record keeping and reporting obligations as outlined in Regulation 119 of FM Regulations including maintenance of copies of balance sheets, profit and loss account and auditor’s report for each accounting year and documents related to compliance with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) guidelines for a minimum period of ten years (along with relevant circulars) will be applicable on the SPV.
- Dispute Resolution and Other Conditions:
Other shareholders, members, or partners of the SPV must not exercise rights in a manner which prevents the Controlling Scheme from complying with IFSCA requirements. The SPV level agreements must include appropriate mechanisms for resolution of disputes that may arise between the Controlling Scheme and other shareholders, beneficiaries, members or partners. In case of inconsistencies between SPV level agreements and IFSCA obligations of the Controlling Scheme, the latter shall prevail. Additionally, all obligations under FM regulations would extend to the SPV.
Conclusion:
The proposed regulatory framework introducing an SPV structure under Controlling Schemes is intended to enhance ease of doing business and accelerate growth of the alternative investment sector within IFSCs by facilitating co-investment opportunities and leverage transactions. This will encourage greater investor participation by offering flexible investment structures. IFSCA is yet to take up these recommendations for approval and its decision is awaited.