Variable capital firms to boost India's fund management space, says Sahoo

Such entities have a variable capital base as they issues and redeems shares on an on-going basis. With every issue or redemption, the capital base of the VCC changes

Variable capital companies (VCC) would enrich the fund management space and make international financial services centres (IFSC) the preferred global hub for global financial services, M S Sahoo, head of the nine-member expert committee for drafting the structure of VCCs, told Business Standard.

A VCC is a body corporate that, as its name suggests, has a variable capital base. It issues and redeems shares on an on-going basis. With every issue or redemption, the capital base of the VCC changes.

“These companies would be a blend of two structures of polling and investing funds--companies and trusts--with appropriate regulatory burden coupled with flexibility,” Sahoo said.

While mutual funds and alternate investment funds form a trust structure, other bompanies with equity capital are not in the fund management business. VCC would be able to bring the features and flexibility of both.

VCCs are expected to have a framework that would have higher regulatory standards than those applicable to companies but lower compared to mutual funds.

“Reducing capital, though rarely done by companies, is a tedious process. For variable capital companies, it can change on an on-going basis, somewhat similar to the issue and redemption of units by mutual funds,” the former chairman of the insolvency and bankruptcy board of India said.

He added that such a company may have several sub-funds, each of which is ring-fenced from the other and the capital of each fund may vary continuously.

The nine-member panel has proposed changes in the International Financial Services Centres Authority Act (IFSCA), which are yet to be considered by the government.

GIFT City in Gujarat is the first and the only IFSC in India. The Sahoo-led committee said VCCs should first be set up in IFSCs as global players would be familiar with the use of VCC-like structures in other jurisdictions.

“The functioning of the VCC-structure in IFSCs would provide a template for the introduction of a VCC-structure in the domestic Indian financial system too, at a later stage,” the committee said in its report.

The panel has agreed with most of the recommendation of the Krishnan committee but has differed on the process to be followed for insolvency and closure of VCCs. It wants VCCs to be brought under the ambit of IFSC's fund management rules instead of the insolvency and bankruptcy code, as suggested earlier by the Krishnan committee.

The expert panel has also said that the accounting and auditing should be done for VCCs in the same manner that it is done for other vehicles housing funds.

The expert committee for drafting a legal framework to allow a VCC structure in IFSC had finalised its report in October.

Globally while Singapore and Mauritius have a separate Variable Capital Companies Act, in the UK, VCCs are referred to as “Open Ended Investment Companies” under that country's Financial Services and Markets Act.

In its report of May 2021, the Krishnan Committee recommended the introduction of VCCs in the IFSC under a separate law.

What is a Variable capital company or VCC?

VCC is a body corporate, with a variable capital base. Similar to mutual funds, it issues and redeems shares on an on-going basis. With every transaction - issue or redemption, the capital base of the VCC changes. A VCC may house a single pool or multiple pools of capital along with corresponding investments. It can thus be a standalone or an umbrella entity.