The International Financial Services Centres Authority (IFSCA) held its 42nd Authority Board meeting on December 19, 2024, where it approved significant revisions to the IFSCA (Fund Management) Regulations, 2022. These changes reflect the evolving dynamics of the fund management industry within the International Financial Services Centre (IFSC), which has seen impressive growth. The revised regulations aim to enhance ease of doing business, protect investor interests, and align the regulatory framework with global best practices.
Overview of Key Changes
The revised regulations maintain the core principles that fund management entities (FMEs) must be registered with IFSCA and authorized to carry out a broad range of fund management activities. However, there have been several key updates aimed at increasing flexibility, reducing barriers to entry, and enhancing operational efficiency. Below are the main amendments:
1. Non-Retail Schemes (Venture Capital and Restricted Schemes)
- Minimum Corpus Reduction: The minimum corpus requirement for non-retail schemes has been reduced from USD 5 million to USD 3 million, providing more flexibility to fund managers looking to launch such schemes.
- Increased Validity for Private Placement Memorandum (PPM): The validity of a scheme’s PPM has been extended from 6 to 12 months after IFSCA’s communication about taking it on record. For open-ended schemes, investment activities can now begin once the scheme achieves a corpus of USD 1 million, with the goal of reaching the USD 3 million minimum within 12 months.
- FME Investment in Schemes: Fund management entities (FMEs) and their associates can now invest up to 100% in a scheme, a significant change from the previous limit of 10%. This flexibility is subject to conditions such as the FME and its associates being non-residents of India and ensuring that no more than one-third of the scheme’s corpus is invested in any single company or its associates.
- Joint Investments by Individuals: The revised regulations introduce provisions for joint investments by two individuals with specific relationships, enhancing collaboration in non-retail schemes.
- Transaction Approvals and Investor Safeguards: Schemes are now restricted from buying or selling securities from associates or related schemes unless prior approval is obtained from 75% of investors by value, excluding major investors from voting on transactions involving their own stake.
2. Manpower Requirements for FMEs
- Simplification of KMP Appointment: FMEs are no longer required to seek prior approval from IFSCA for appointing Key Managerial Personnel (KMPs), although they must inform IFSCA of such appointments. This reduces bureaucratic delays and increases operational efficiency.
- Additional KMP Requirement for Larger AUMs: FMEs managing an assets under management (AUM) of USD 1 billion (excluding fund of funds schemes) will need to appoint an additional KMP.
- Streamlining Qualifications for KMPs: The regulations now clarify the qualifications and professional experience required for KMPs, ensuring that FMEs adhere to a consistent standard of competence.
3. Registered FME (Retail) and Retail Schemes
- Track Record and Experience Criteria: The experience requirements for FMEs applying for retail schemes have been adjusted to consider the experience of holding companies and subsidiaries, providing a more holistic evaluation of an entity’s capabilities. Additionally, persons in control of FMEs must demonstrate a background in fund management and related activities for at least five years, with a minimum net worth requirement of USD 2 million.
- Reduced Minimum Corpus: Similar to non-retail schemes, the minimum corpus for retail schemes has been reduced from USD 5 million to USD 3 million, with open-ended schemes permitted to commence investment once they achieve a corpus of USD 1 million.
- Investment Limits for Thematic and Sectoral Funds: The cap on investments in single companies by thematic, sectoral, or index-based schemes is now linked to the weightage of that company in the benchmark index, providing more flexibility while ensuring diversification.
4. Other Key Changes
- Custodian Requirements: For schemes that require a custodian, the regulations now mandate the appointment of an IFSCA-registered custodian, ensuring better oversight and transparency in the handling of assets.
Implications for Fund Managers and Investors
The review of the IFSCA (Fund Management) Regulations, 2022, marks a significant step toward creating a more dynamic, investor-friendly regulatory environment in the IFSC. For fund managers, the revised regulations reduce operational complexities, lower the threshold for starting new schemes, and enhance flexibility in fund management structures. These changes are expected to attract more global capital to India’s IFSC, boosting the growth of the asset management industry in the region.
For investors, the introduction of clearer guidelines on governance, transparency, and investor protection enhances confidence in the system. With safeguards in place, such as approval requirements for transactions involving related parties, investors can be assured that their interests are protected.
In conclusion, the revised IFSCA regulations reflect the authority’s commitment to fostering a thriving financial ecosystem while maintaining robust investor protection standards. These updates are poised to further accelerate the growth of the fund management industry in the IFSC, making it an increasingly attractive destination for global investment.
