The International Financial Services Centres Authority (IFSCA) released a consultation paper introducing a Special Purpose Vehicle (SPV) framework under the IFSCA (Fund Management) Regulations, 2022. This initiative aims to streamline co-investment and leverage transactions within International Financial Services Centres (IFSCs). By operationalizing the SPV model, the IFSCA seeks to bolster alternative investment avenues, enhance transparency, and foster ease of doing business in the region.
Key Objectives of the SPV Framework
The SPV framework is designed to enable Fund Management Entities (FMEs) to create SPVs under their controlling schemes, facilitating co-investment alongside other investors and enabling leverage at the SPV level. This approach is intended to support the growth of the alternative investment industry in the IFSC by introducing flexibility and aligning regulatory norms with global standards.
Structural Aspects of SPVs
Constitution:
The SPV must align with the structure defined under Regulation 17 of the IFSCA (Fund Management) Regulations, 2022. The controlling scheme should hold at least 50% of the SPV’s equity or commitments.
Filing Requirements:
Unlike standard schemes requiring a Private Placement Memorandum (PPM), SPVs can submit a simplified Term Sheet within 21 working days of investment.
Eligibility:
SPV investors include the controlling scheme, its existing investors or affiliates, and other approved participants.
Investment and Operational Flexibility
Permissible Investments:
SPVs will primarily invest in single portfolio companies, with exceptions allowing holdings in multiple entities arising from corporate restructuring.
Leverage:
SPVs may leverage within limits defined by the controlling scheme’s PPM. Shareholders may encumber their interests in favor of SPV lenders.
Open and Close-Ended Structures:
SPVs can adopt open-ended or close-ended models, matching the tenure of the controlling scheme. However, SPVs must dissolve upon the termination of their controlling schemes.
Enhanced Governance and Compliance
The IFSCA mandates robust governance for SPVs:
Disclosure Obligations:
Comprehensive disclosures under the IFSCA (Fund Management) Regulations, 2022, are required. Existing scheme investors must be informed about SPV formation before filing the Term Sheet.
Decision-Making Authority:
The FME retains decision-making and control over the SPV, ensuring alignment with regulatory compliance.
KYC and Reporting:
KYC for existing investors can be leveraged, while new investors must undergo fresh checks. SPVs are also subject to detailed reporting requirements under Regulation 119.
Facilitating Dispute Resolution and Regulatory Harmony
To safeguard investor interests and regulatory compliance, the SPV framework mandates the inclusion of dispute resolution mechanisms in SPV agreements. In cases of conflict between SPV agreements and IFSCA regulations, the latter will prevail.
Conclusion
The proposed SPV framework under the IFSCA (Fund Management) Regulations, 2022, marks a significant step toward creating a robust investment environment within IFSCs. By enabling FMEs to establish SPVs for co-investment and leveraging, the framework promises greater flexibility, improved capital allocation, and enhanced investor confidence. As stakeholders provide feedback on this consultation paper, the IFSCA’s efforts could further solidify India’s position as a global hub for financial services and alternative investments.
