Overview

The Variable Capital Company (VCC) is a new corporate entity structure under which several collective investment schemes (whether open-end or closed-end) may be gathered under the umbrella of a single corporate entity and yet remain ring-fenced from each other. The new corporate entity structure gives funds an alternative to unit trusts, limited partnerships, limited liability partnerships and companies. A key characteristic of the VCC is its umbrella structure is that it allows the sub-funds to share a board of directors and have common service providers, such as the same fund manager, custodian, auditor and administrative agent. Certain administrative functions, for instance, the holding of general meetings and preparation of prospectuses, can also be consolidated. Where a VCC is set up as an umbrella fund with several sub-funds, members may hold shares that are referenced to a particular sub-fund held by the VCC.

The idea of the new flexible investment fund structure was first floated in 2016 at the Investment Management Association of Singapore’s annual conference. Later in March 2017, the Monetary Authority of Singapore issued a public consultation to seek feedback on the various aspects of this new Variable Capital Company corporate structure. The Ministry of Finance announced in the 2018 Singapore Budget Statement that a VCC would be treated as a company and a single entity for tax purposes. On 10 September 2018, a draft bill for the VCC was presented for the first reading in the parliament, and the bill was subsequently passed in the parliament on 1 October 2018. 

India’s International Financial Services Centre

The Government of India established International Financial Services Centres Authority (IFSCA) in April 2020 under the International Financial Services Centres Authority Act passed by the Indian Parliament.

For the first time, the regulatory powers of four financial services regulators in India, namely, Reserve Bank of India (RBI), Securities & Exchange Board of India (SEBI), Insurance Regulatory Development Authority of India (IRDAI), Pension Fund Regulatory Development Authority of India (PFRDAI), have been vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the International Financial Services Centre in India. Financial institution being a branch or entity in IFSC is deemed as a ‘person resident outside India’ for exchange control purposes.

The efforts of IFSCA to make IFSC at GIFT city a world-class financial services centre have come a long way as today there are over 225 units operating employing more than 11,000 people. The latest Global Financial Centres Index, London in September 2020 mentions the IFSC at GIFT City among 15 centres which globally, are likely to gain greater significance over the next 24 months.

Variable Capital Company in IFSC GIFT City

In order to ensure India’s IFSC is at par with the developments in other parts of the world, IFSCA had set up a Committee of Experts for examining the feasibility of the Variable Capital Company (VCC) in India with the following terms of reference:

• Comprehensive analysis of fund structures under Indian Trust Act and VCC.
• To examine VCC structure and suggest appropriate model/ framework that may significantly enhance the competitiveness of IFSC in India.
• Feasibility of introducing VCC as separate chapter in Companies Act, 2013 versus need of enacting a separate legislation.
• To explore alternative structures having characteristics like VCC.
• The Committee may also deliberate on any issues which may be considered necessary but not mentioned in the above terms of reference.

The Committee consisted of the following:

• Shri K P Krishnan (IAS-Retd.) - Chairman,
• Shri J Ranganayakulu (Former ED-Legal, SEBI) - Member
• Shri Bobby Parikh (Managing Partner, Bobby Parikh & Associates) - Member
• Shri Ketan Dalal (Founder, Katalyst Advisors LLP) - Member
• Shri Tushar Sachade (Partner, PWC) - Member
• Shri Jitesh John (Director, Department of Economic Affairs) - Member
• Shri Pranay Chaturvedi (Deputy Director, Ministry of Corporate Affairs) - Member
• Shri Denning K. Babu (DGM-Legal, IFSCA) - Member Secretary

The committee has submitted its report on the feasibility of Variable Capital Companies in the International Financial Services Centres to the Chairperson of the International Financial Services Centres Authority (IFSCA), Shri. Injeti Srinivas. The Committee assessed the features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg. The Committee recommended the adoption of a VCC-like legal structure for the purpose of conducting fund management activity in IFSCs.

The Committee recognized that the legal framework governing entities that undertake fund management should provide for certainty and clarity to investors, effective segregation and ring-fencing of different pools of asset, the ability to issue different classes of shares, alterations to the funds’ capital structure without regulatory approvals and the freedom to choose the appropriate accounting standards applicable to funds with different characteristics, the ability to wind up quickly.

Way Forward

Fund management activities are an important pillar of the overall financial services ecosystem. In line with the mandate given to the Committee, it examined the relevance and adaptability of the VCC for the IFSC in India or alternative structures to attract fund business in the IFSC. Conventionally, pooling of funds in India is undertaken through three types of entities, namely, limited liability companies governed under the Companies Act, 2013; limited liability partnerships under the Limited Liability Partnership Act; and trusts governed under the Indian Trusts Act, 1882. As the dynamic nature of business in the IFSCs requires a high degree of inter-regulatory coordination within the financial sector, IFSCA has left no stone unturned in providing a robust yet light touch business and regulatory environment. Therefore, it comes as no surprise that today, there is a record surge in the companies which are willing to set up offices in IFSC GIFT City.

Update: On December 3, 2021, Hon'ble Prime Minister Narendra Modi will inaugurate the Infinity Forum on fintech, which among other things will discuss and come up with actionable insights into how technology can be leveraged by the fintech industry for inclusive growth.