IFSC eases capital norms for AIFs, exempts need for sponsors' commitment

Also allows such funds to invest in units of domestic MFs as well as those of other FATF-compliant jurisdictions

The International Financial Services Centres Authority (IFSC) has done away with the need for managers or sponsors to have continuing interest in alternative investment funds (AIFs) domiciled in IFSC and allowed such funds to invest in units of domestic mutual funds as well as those of other FATF-compliant jurisdictions.

Domestic AIF regulations require the fund's sponsor or manager to contribute a certain amount of capital to the fund, which is known as continuing interest. This amount is supposed to remain locked in the fund until distributions have been made to all other investors in the fund.

Minimum continuing interest translates to the lower of 2.5 per cent of corpus or $750,000 for category I and II AIFs, and lower of 5 per cent of corpus or $1,500,000 for a category III AIF.

Many global jurisdictions, however, do not mandate a manager or a sponsor to put money into their funds.

"The move to relax the minimum continuing interest requirement for offshore funds relocating to the IFSC will encourage such funds to consider IFSC.

More so, considering the funds set up in offshore jurisdictions such as Ireland, Singapore and Mauritius are not subject to such minimum continuing interest," said Suresh Swamy, Partner, Price Waterhouse & Co.

According to experts, the GIFT AIF regime was originally introduced as a subset of the Sebi AIF regulations with the former regulations having the same form and manner as the latter, which were primarily designed to protect Indian investors. And it was important to bring the IFSC AIF regulations -- which are meant for offshore investors and asset managers -- on par with other known offshore jurisdictions.

The requirement to have sponsor commitment in the IFSC fund would have been a commercial impediment for some sponsors and managers. "If an overseas fund wants to relocate to GIFT IFSC then its manager/sponsor will be required to put money into the fund, as prescribed in the AIF regulations, which may not be always possible owing to liquidity constraints," said Dhaval Jariwala, partner with PNDJ & Associates LLP.

"Certain offshore regulatory authorities prohibit the co-mingling of managers' funds with the investors' funds being managed. In such situations, it became  difficult to comply with the sponsor commitment obligations under the IFSC AIF regulations," added Divaspati Singh, partner, Khaitan.

IFSC AIFs have now been permitted to invest in mutual fund units regulated in FATF-compliant jurisdictions, including India. Permitting AIFs in IFSC to invest in domestic mutual fund schemes brings them at par with other FPIs who have no such restrictions, said experts.

"There is no clarity in the AIF regulations on whether an AIF can invest into units of mutual funds, be it equity-oriented or debt funds. However, an FPI is permitted to invest into units of such mutual funds. Thus, allowing an AIF in GIFT IFSC which is also registered with the SEBI as an FPI to invest into MF units simply brings the entire regulatory framework for an AIF in GIFT IFSC in sync with the current FPI regulations," said Jariwala.

Fillip for fund migration

Move to relax minimum continuing interest requirement for IFSC AIFs will encourage relocation of offshore funds to the IFSC

Domestic AIF regulations require the fund's sponsor or manager to contribute a certain amount of capital to the fund, known as continuing interest

Minimum continuing interest translates to the lower of 2.5 per cent of corpus or $750,000 for category I and II AIFs, and lower of 5 per cent of corpus or $1,500,000 for a category III AIF

Offshore jurisdictions such as Ireland, Singapore and Mauritius are not subject to such minimum continuing interest

Certain offshore regulatory authorities prohibit the co-mingling of managers' funds with the investors' funds being managed

IFSC AIFs have now been permitted to invest in mutual fund units regulated in FATF-compliant jurisdictions, including India

Permitting AIFs in IFSC to invest in domestic mutual fund schemes brings them at par with other FPIs who have no such restrictions