The International Financial Services Centres Authority (“IFSCA”) in exercise of the powers conferred by Section 12 and Section 13 of the International Financial Services Centres Authority Act, 2019, read with Regulation 29(1), Regulation 41(1) and Regulation 146(1) of the Fund Management Regulations, 2025, (“FM Regulations”) vide Circular No. IFSCA-AIF/6/2025-Capital Markets,[1] dated May 21, 2025, issued the framework for Co-Investment by Venture Capital and Restricted Schemes at IFSC (“Framework for Co-Investment”).
The IFSCA has issued a comprehensive framework to operationalise co-investment by Venture Capital Schemes and Restricted Schemes through a Special Purpose Vehicle (“SPV”), referred to as a Special Scheme. This move follows the powers granted under the FM Regulations and aims to streamline and accelerate investment activity at IFSC while maintaining regulatory oversight.
Salient Features of the Framework
1. Structure of the Special Scheme:
(i) Only Fund Management Entities (“FMEs”) with operational Venture Capital or Restricted Schemes or both (hereinafter referred to as “Existing Scheme”) can launch a Special Scheme, in accordance with the terms and conditions of the placement memorandum of the Existing Scheme (“Special Scheme”).
(ii) The Special Scheme can be constituted as a Company, Limited Liability Partnership (LLP), or Trust under Indian law. Further, it must be classified to the Alternative Investment Fun (AIF) category (I, II, III) of the Existing Scheme. Additionally, a detailed term sheet must be filed with IFSCA post-investment.
(iii) The Existing Scheme must maintain a minimum 25% (Twenty Five Percent) holding in the equity share capital, interest or capital contribution of the Special Scheme.
2. Objective and Investment Strategy: Special Schemes shall be intended solely for co-investment in line with the investment strategy of the Existing Scheme and the same shall be permitted to invest in a single portfolio company, though multiple holdings are allowed if arising from corporate actions (e.g., amalgamation, demergers, slump).
3. Nature and Tenure: The Special Scheme shall mirror the nature of the Existing Scheme, and the tenure of such special scheme must be co-terminus with that of the Existing Scheme, unless liquidated earlier. In the event of the liquidation of the Existing Scheme, the Special Scheme shall also be liquidated
4. Eligible Investors: The Special Scheme shall be open to any person subject to minimum contribution norms as per FM Regulations.
5. Term Sheet and Disclosures: A term sheet must be filed within 45 (Forty-Five) days of investment, which shall serve as a constitutional document for opening bank accounts under IFSCA, as specified in Annexure-A of the Framework on Co-Investment. The term sheet also must include a declaration-cum-undertaking and complies with disclosure norms, as per the format given in Annexure-B.
6. Leverage and Encumbrance: Leverage must be within limits disclosed in the Existing Scheme’s placement memorandum. Investors and the Existing Scheme may encumber ownership interests to secure loans for the Special Scheme.
7. FME Contributions and Control: FMEs may contribute capital at their discretion. FMEs shall retain full control and decision-making powers. The existing investors are not permitted to interfere in a way that impacts regulatory compliance of the Existing Scheme.
8. Reporting and KYC:
(i) Consolidation with the activities of a Special Scheme with the reporting with the Existing Scheme shall be allowed.
(ii) No separate Know Your Customer (“KYC”) required for existing investors. However, onboarding of new investors shall require compliance to all KYC provisions.
9. SEZ and Regulatory Compliance: Each Special Scheme must obtain Special Economic Zone (“SEZ”) approvals before filing the term sheet. All applicable provisions of the FM Regulations shall apply to Special Schemes.
10. Fees: FMEs shall be required to pay applicable fees as per the IFSCA circular dated April 08, 2025, on permissible activities and guidance requests.
[1]https://ifsca.gov.in/Viewer?Path=Document%2FLegal%2Fframework-to-facilitate-co-investment-by-venture-capital-scheme-and-restricted-scheme_circular21052025101801.pdf&Title=Framework%20to%20facilitate%20Co-investment%20by%20Venture%20Capital%20Scheme%20and%20Restricted%20Scheme&Date=21%2F05%2F2025