India considers Singapore's VCC model to get funds for GIFT City IFSC

Island nation has established more than 200 VCCs established since January 2020 using the model.

India is likely to adopt Singapore's Variable Capital Company model for investment funds at the International Financial Services Centre (IFSC) in Gujarat's GIFT City --- with a separate legislation that is not part of the Companies Act, 2013, for the same. 

An IFSC appointed-committee headed by Dr KP Krishnan submitted a report on the feasibility of a VCC structure at IFSC on Tuesday after evaluating structures in jurisdictions such as the UK, Singapore, Ireland and Luxembourg.

"We will have to Indianise some of the features but many of the committee's suggestions have come from Singapore's VCC regime. The committee has also suggested that a separate legislation be created for it rather than tweaking the Companies Act," said a person familiar with the matter. 

Singapore has succeeded with this model, with more than 200 VCCs established since January 2020 despite the coronavirus pandemic, according to reports. 

The Singapore structure allows investment funds for traditional and alternative strategies. Such funds are either open or closed-ended. A VCC can be set up as a stand-alone entity, or as an umbrella entity with multiple sub-funds. Foreign corporate fund structures can be inward re-domiciled to Singapore as a VCC.

Funds in India pool through limited liability companies governed under the Companies Act, 2013 or LLPs under the Limited Liability Partnership Act or trusts governed under the Indian Trusts Act, 1882. Such structures may not be ideal for fund management activities. Alternative investment funds (AIFs) operationalise in IFSC under the trust structure. 

The VCC structure aims at doing away with the limitations of these three structures. 

"Global investors prefer a company structure over that of a private trust. A trust structure, for example, is difficult to administer and may not provide for provisions to avail of a tax treaty," said the person quoted above. 

The new structure aims to enable effective segregation and ring fencing of different pools of asset, the ability to issue different classes of shares, altering the funds’ capital structure without regulatory approvals, the freedom to choose the appropriate accounting standards applicable to funds with different characteristics and the ability to wind up quickly.  

Replicating the success of Singapore's VCC framework in India, however, may not be easy. 

According to Yashesh Ashar, partner at Bhuta Shah & Co, Indian laws today do not recognize umbrella structures and any introduction of VCC-type structures would necessitate changes to the corporate, taxation and trust laws.

"Whether we need a separate law for setting up such a structure or amend the Companies Act itself is something that needs to be looked at. The VCC offers a lot of benefits under the Singaporean regulatory framework but whether similar benefits will apply for such structures under the Indian Companies Act needs to be assessed," said Dhaval Jariwala, partner with PNDJ & Associates LLP, a boutique tax advisory firm. 

"The cost factor also needs to be borne in mind. Will India come up with something similar to the VCC grant scheme to promote such structures at the GIFT IFSC remains to be seen," he said.

Last year, Singapore's VCC grant scheme helped defray costs involved in incorporating or registering a VCC by co-funding up to 70 per cent of eligible expenses paid to Singapore-based service providers. The grant was capped at about $111,160 for each application, with a maximum of three VCCs per fund manager.

Ashar recommends that the VCC structure should be made available for AIFs set up in the mainland as well. This is to mitigate any unintended competition between them and the AIFs set up at the IFSC. IFSC already provides concessions and tax benefits for fund managers to consider it as an option over mainland funds, he said .

Last year saw a slew of relaxations for the AIFs in IFSC with regard to diversification norms, co-investment and permissibility of leverage by PE/VC category of funds. A VCC structure, however, is touted to be a game changer for the investment funds industry.