In a consultation paper dated August 5, 2024 (Consultation Paper), the International Financial Services Centres Authority (IFSCA), has proposed changes to the extant IFSCA (Fund Management) Regulations, 2022 (FME Regulations) with the objective of laying down a unified regulatory framework governing activities of Fund Management Entities (FMEs) operating out of the Gujarat International Fin-Tech City International Financial Services Centre (GIFT City IFSC) in consonance with the regulatory landscape of other international financial centers across the globe. The Consultation Paper was followed by an addendum to the Consultation Paper dated August 17, 2024 (Addendum) proposing addition of a new chapter on third-party fund management services termed as ‘Platform Play’ for funds set up in GIFT City IFSC.
The Consultation Paper makes the following recommendations and proposals:
(a) Additional Key Managerial Personnel for FMEs with assets under management of more than USD 1 billion
- IFSCA proposes appointment of a third Key Managerial Personnel (KMP) by all FMEs managing assets under management (AUM) of at least USD 1 billion at the end of a financial year in addition to a principal officer responsible for all activities of an FME including but not limited to fund management, risk management and compliance and a compliance and risk manager. This additional KMP is required to take on the responsibility of fund management similar to the requirement for an additional KMP appointed by Registered FMEs (Retail) under the current FME Regulations.
- The third KMP is required to be appointed before filing of a retail scheme or exchange traded fund (ETF) by Registered FMEs (Retail) and within three months of the close of a financial year in case of FMEs managing AUM of at least USD 1 billion.
(b) Relaxation in qualifications of KMPs and principal officers
- The Consultation Paper recommends expanding the eligibility criteria for appointment of KMPs and principal officers to permit a wider set of people to take positions of KMPs and principal officers in FMEs. Some of these proposals include:
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- requiring post graduate diploma of a minimum period of one year (against the requirement of a two-year diploma) in specified fields and inclusion of Chartered Financial Analyst (CFA) certification from CFA Institute or Financial Risk Manager (FRM) certification from the Global Association of Risk Professionals within education qualifications;
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- requiring memberships of Institute of Chartered Accountants of India (ICAI) or Institute of Company Secretaries of India (ICSI) or Institute of Cost Accountants of India (ICMAI) or any equivalent institution in a foreign jurisdiction as part of professional qualifications. Additionally, for a KMP appointed as a compliance and risk manager, the professional qualifications also include obtaining a degree of Bachelor of Laws (LLB) from a university recognized by the Central Government or any State Government or a recognized foreign university;
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- inclusion of areas of ‘investment banking’ and ‘credit rating’ for fulfilment of five-year experience requirement for KMPs; and
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- relaxation in the five-year experience requirement for KMPs appointed as compliance and risk managers to three years if such KMP is a member of the Institute of Company Secretaries of India (ICSI) or any equivalent institution in a foreign jurisdiction and has experience in compliance or risk management in an entity regulated by a financial sector regulator or a listed company.
- In terms of the Consultation Paper, applicant entities filing applications for registration as an FME under the FME Regulations are required to make declarations during the application procedure to the effect that the KMPs and principal officers proposed to be appointed by such entities will be domiciled in the International Financial Services Centre (IFSC).
(c) Increasing the validity period of private placement memorandum
The validity period of private placement memorandums (PPMs) for venture capital schemes, restricted schemes (non-retail) and special situation funds has been proposed to be increased from the existing six months to 12 months from the date of filing of the PPM with the IFSCA – in light of representations made by industry participants as to the inadequacy of the current validity period for the completion of procedures inter-alia related to Know Your Customer (KYC) / customer due diligence, investor outreach and tax registrations. FMEs would be required to declare first close of the scheme in the period of 12 months failing which the PPM would need to be refiled with the IFSCA.
(d) Reduction in minimum corpus size of venture capital schemes
IFSCA has proposed reducing the minimum corpus size of venture capital schemes, restricted schemes (non-retail) and retail schemes to USD 3 million from the current minimum requirement of USD 5 million.
(e) Acceptance of investments from joint investors
The Consultation Paper recommends permitting FMEs to accept investments in venture capital schemes and restricted schemes (non-retail) from joint investors where each investor would invest the minimum applicable contribution amount. Investors acting along with their spouse / parent / child are required to invest a minimum amount of USD 250,000 in case of venture capital schemes and USD 150,000 in the case of restricted schemes (non-retail) as aggregate investment. The aforesaid minimum investment thresholds are also applicable per investor excluding accredited investors.
(f) Investor approval for certain conflict of interest transactions
It has been proposed that prior approval from 75% of investors by value of their investment, in case of venture capital schemes or restricted schemes (non-retail), would be required before undertaking sale of securities involving associates, other schemes of the FME or its associates or investors who have committed investment of at least 50% of the corpus of the scheme. It is further proposed that, for the purposes of approval of investors as aforesaid, the investor committing at least 50% of the corpus of the scheme shall be excluded from the process of voting.
(g) Relaxation in the ceiling limit for FME’s commitment
The extant FME Regulations prescribe certain minimum and maximum commitment limits for FMEs and their associates in the corpus of venture capital schemes and restricted schemes (non-retail). IFSCA has proposed relaxing the upper commitment limit of 10% for FMEs if: (i) the FME or its associates are not Indian residents and do not have Indian residents as their ultimate beneficial owners; and (ii) not more than 33% of the corpus of the relevant scheme shall be invested in an investee company and associates of such company.
(h) Relaxation of investment in unlisted securities
In terms of the current FME Regulations, open-ended restricted schemes are not permitted to make investment in unlisted securities exceeding 25% of their corpus. The Consultation Paper recommends exempting open-ended fund of fund scheme from the aforesaid investment requirement if such scheme is investing in other open-ended scheme(s) which shall not invest in unlisted securities in excess of 25% of their corpus. Similarly, such open-ended fund of fund schemes are expected to be exempted from the requirement of undertaking mandatory valuations of their assets through an independent third-party service provider if they are investing in regulated schemes which have already undertaken valuation of their assets.
(i) Appointment of custodian
The Consultation Paper recommends that the custodians appointed under the FME Regulations be based out of the IFSC unless the local laws of the jurisdiction where securities have been issued do not permit appointment of such external custodian. In such case, the custodian may be appointed outside the IFSC (i.e. in India or in any other foreign jurisdiction) and shall be within the regulatory purview of such jurisdiction.
(j) Introduction of third-party fund management services
- The Addendum to the Consultation Paper recommends incorporating a new chapter under the FME Regulations to provide for modalities of provision of third-party fund management services (also termed as ‘Platform Play’) to FMEs within the IFSC. The Addendum proposes disclosure and governance requirements and provisions requiring formulation of a risk management framework for dealing with peculiar risks associated with the provision of fund management services which are applicable specifically to FMEs offering third-party fund management services to their clients. Such FMEs are also required to establish a system for effective redressal of investor complaints and disputes.
- If any scheme breaches the threshold of AUM of USD 10 million, it is required to make the shift to a distinct FME, essentially dissociating from the platform providing third-party fund management services by establishing a separate FME.
Conclusion
It is evident that IFSCA has been taking onboard concerns and suggestions from stakeholders and international best standards all of which have been posited as part of this Consultation Paper and Addendum and the resultant recommendations are expected to enhance ease of doing business and provide operational clarity. IFSCA is yet to take up these recommendations for approval and its decision is awaited.