International Financial Services Centres Authority (“IFSCA” or “Authority”) released a Press Release[1] dated December 21, 2024, regarding the review of the IFSCA (Fund Management) Regulations, 2022 (“Fund Management Regulations”). The 42nd IFSCA board meeting was held on December 19, 2024, marking the approval and notifying the review of the Fund Management Regulations. While the regulatory framework of the Fund Management Regulations remains the same, certain changes have been made to facilitate ease of doing business and streamline the fund management process. The key changes inter-alia include:
I. Non-Retail Schemes:
Significant modifications have been made to the non-retail schemes of IFSCA, encompassing both venture capital schemes and restricted schemes, as detailed below:
- The minimum corpus of the schemes, earlier set at $ 5 million (Five Million United States Dollars) has been reduced to $ 3 million (Three Million United States Dollars) and the validity period for the Private Placement Memorandum (“PPM”) for non-retail schemes is now increased to 12 months.
- For the open-ended schemes, the investment activities may commence upon achieving $ 1 million (One Million United States Dollars) but the minimum corpus to be achieved in 12 months shall be set at $3 million (Three Million United States Dollars).
- Another major change includes the lifting of cap on the contribution of FMEs or its associates in a scheme, which was previously set at 10%. The FMEs may now be permitted to contribute up to 100% of the corpus. However, the same shall be subject to the condition that the FME, its associates, along with their Ultimate Beneficial Owners (UBOs), are persons and non-residents of India. Further, it is mandated that the scheme shall not invest more than 1/3rd of its corpus in a single company.
- The changes introduce a provision permitting joint investment by 2 individuals with specific relationships.
- The Authority restricts the associates, schemes of the FMEs or their associates, or a major investor from buying or selling securities without prior approval from 75% investors in the scheme by value. However, if the transaction involves a major investor, they shall be excluded from the voting process. For clarity, a major investor is an investor who has committed to at least 50% of the corpus of the scheme.
- Lastly, the independent asset valuation requirement for fund-of-funds schemes has been exempted, if the underlying fund is valued by an independent service provider.
II. Manpower requirements for FMEs:
The Authority introduced various key changes in the requirements with respect to manpower for FMEs, as outlined below:
- As per the extant regulations, the FMEs were required to seek IFSCA’s prior approval for appointing any Key Managerial Personnel (“KMPs”), however, as per the new regulations, the changes brought in simplify the process by requiring the FMEs to merely intimate IFSCA about such appointments.
- The FMEs managing an Assets under Management (“AUM”) of minimum $ 1 Billion (One Billion United States Dollars), excluding the funds-of-funds scheme shall need to, at the close of a Financial Year (FY), appoint an additional KMP. However, such a requirement may be met before the filing of a retail scheme or Exchange Traded Funds (ETF) with the IFSCA.
- The Authority streamlines the educational qualification and professional experience of the KMPs. Further, the changes brought in now require the employees of FMEs to undergo certifications from such institutions, as specified by IFSCA.
III. Registered FME (Retail) and Retail Schemes:
The Authority upon review of the track record of the registered FME (Retail) made the following amendments:
- The existing criteria of requiring 5 years of experience of a registered FME (Retail) in managing AUM of $ 200 million (Two Hundred United States Dollars) and 25,000 (Twenty-Five Thousand) investors, may now be evaluated by considering the experience of the FME along with its holding company or their subsidiaries.
- The revisions require the FMEs to have persons holding more than 25% (Twenty-Five Percent) shareholding in the FME and carrying on business related to fund management or other financial services for at least 5 (Five) years. The FME must also manage assets of at least $ 50 million (Fifty Million United States Dollars) for at least 1,000 (One Thousand) investors and have a net worth of $ 2 million (or any other net worth, as specified by IFSCA).
- The minimum corpus of such schemes was earlier set at $ 5 million (Five Million United States Dollars) which has now been reduced to $ 3 million (Three Million United States Dollars). Further, the open-ended schemes may commence investment activities upon $ 1 million (One Million United States Dollars) and the minimum corpus to be achieved within 12 (Twelve) months by the open-ended schemes shall be $ 3 (Three Million United States Dollars).
- Investment caps in sectoral, thematic, or index schemes are now based on the weight of the company, in the representative index, by an independent entity or at 15%, whichever is higher.
- Moreover, if the underlying fund(s) for the fund-of-funds scheme comply with the specified regulations, they will be exempted from the investment restrictions outlined in the Fund Management Regulations along with the requirement of valuation of the scheme to be performed by an independent service provider.
- The revisions further relaxed the requirement of listing of close-ended retail schemes on recognized stock exchanges by making such listing optional, in case the minimum amount of investment by each investor in the scheme is at least $ 10,000 (Ten Thousand United States Dollars).
IV. Other Key Revisions:
- Certain revisions have been made for the schemes requiring appointment of a custodian wherein, funds-of-funds schemes are exempt from the requirement of appointing a custodian. However, for any securities issued in foreign jurisdictions, a regulated custodian may be appointed, provided local laws mandate it. Further, a transition period of 12 (Twelve) months shall be provided for schemes requiring appointment of a custodian in the IFSC.
- The Authority now permits the retail and non-retail schemes to invest in bank deposits and overnight schemes for any pending deployment of money along with existing permitted financial products.
- For Portfolio Management Services (“PMS”), the minimum investment requirement has been reduced from $ 150,000 (One Hundred Fifty Thousand United States Dollars) to $ 75,000, (Seventy-Five Thousand United States Dollars) and clients under the PMS can transfer their funds into a designated broking account, which will then be managed under the PMS, subject to certain safeguards.
- FMEs are also now permitted to open branch or representative offices in other jurisdictions for marketing and client servicing without requiring prior approval from IFSCA.
- Lastly, the provisions related to valuation by credit rating agencies, investment restrictions, and other areas previously issued through circulars are being incorporated into the revised Fund Management Regulations.
[1]https://ifsca.gov.in/Viewer?Path=Document%2FLegal%2Ffinal-press-release_1-021122024061409.pdf&Title=Review%20of%20IFSCA%20%28Fund%20Management%29%20Regulations%2C%202022&Date=21%2F12%2F2024
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