 "GIFT City FMEs face IFSCA scrutiny over failure to meet substance norms")
Several fund management entities (FMEs) operating out of Gujarat International Finance Tec-City (GIFT City) have come under the regulatory spotlight for failing to meet the so-called ‘substance’ requirements.
According to sources, the International Financial Services Centres Authority (IFSCA) has issued advisories and warnings to around 10 FMEs that the unified regulator suspects could be operating from the International Financial Services Centre (IFSC) solely to lower their tax burden.
The IFSCA has issued advisories to eight entities, while two have been given warnings for flouting the criteria laid down regarding having a minimum number of officials on the ground and meeting other thresholds.
Substance requirements refer to minimum criteria that need to be adhered to to avail the benefits of a financial hub. Most global financial hubs have a unique set of requirements. Experts say that substance requirements for setting up shop at GIFT City are more cost-effective than other centres, such as those in Mauritius and Singapore.
“International financial centres are established to provide special economic benefits for financial sector activities and substance requirements are imposed to ensure there is no misuse of such economic benefits, including taxation benefits. While GIFT IFSC has imposed substance requirements in alignment with global standards, practically it has been difficult for funds to comply due to a lack of clear metrics and established practices,” said Nandini Pathak, partner at Bombay Law Chambers.
As of September, there were 128 FMEs registered in GIFT City.
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Even though the IFSCA has initiated action against some funds, it has also eased some of the stringent requirements around registrations following industry feedback. This is being done by revising the IFSCA (Fund Management) Regulations, 2022.
The GIFT City regulator has removed the requirement to seek prior approval during the appointment of key managerial persons. Now, entities will only be required to inform the IFSCA of such appointments.
Moreover, the educational qualifications and professional experience of key officials have been streamlined. However, employees will be required to undergo certifications from institutions specified by the IFSCA.
At its board meeting earlier this month, the IFSCA also decided to reduce the minimum corpus for non-retail schemes from $5 million to $3 million.
“The validity of the scheme’s private placement memorandum has been increased to 12 months from the IFSCA’s communication regarding taking it on record. Further, for open-ended schemes, it was decided that investment activities may commence upon achieving a corpus of $1 million, and the minimum corpus of $3 million must be achieved within 12 months,” said IFSCA in a recent release.
Regulations for retail schemes have also been relaxed on sectoral caps, minimum experience, minimum corpus, and valuations.
The minimum investment in portfolio management services has been halved to $75,000 from $150,000.
Several other exemptions have been granted to fund-of-funds for smoother operations, such as the requirement to appoint a custodian.
“For securities issued in foreign jurisdictions, a regulated custodian may be appointed in that jurisdiction if local laws mandate the appointment of a custodian there. However, the FME will be required to make necessary arrangements to provide such information to the authority whenever directed to do so,” IFSCA added.
COME UP SHORT
Several FMEs fail to meet GIFT City’s operational requirements:
* Eight entities received advisories, two got warnings
* Firms must meet criteria to access tax and other benefits
* IFSCA revises Fund Management Regulations:
> No prior approval needed for key managerial appointments
> Lowered minimum corpus, streamlined qualifications and experience requirements