IFSCA eases capital requirement for AIFS

The International Financial Services Centres Authority (IFSCA) has done away with the need for managers or sponsors to have a continuing interest in alternative investment funds (AIFS) domiciled in IFSC and allowed such funds to invest in units of domestic mutual funds, as well as that of other Fatf-compliant jurisdictions.

Domestic AIF regulations require a fund’s sponsor or manager to contribute a certain amount towards the fund — known as continuing interest. This amount is supposed to remain locked in the fund until distributions have been made to all other investors.

Minimum continuing interest translates to the lower of 2.5 per cent of the corpus or $750,000 for category I and II AIFS, and the lower of 5 per cent of the corpus or $1,500,000 for a category III AIF. Many global jurisdictions, however, do not mandate managers or sponsors to put money into their funds.

“The move to relax the minimum continuing interest requirement for offshore funds relocating to the IFSC will encourage such funds to consider IFSC. More so, considering the funds set up in offshore jurisdictions, such as Ireland, Singapore and Mauritius, are not subject to such minimum continuing interest,” said Suresh Swamy, partner, Price Waterhouse & Co.

According to experts, the GIFT AIF regime was originally introduced as a sub-set of the

Sebi AIF regulations with the former regulations having the same form and manner as the latter, which were primarily designed to protect Indian investors. And it was important to bring the IFSC AIF regulations — which are meant for offshore investors and asset managers — on a par with other key offshore jurisdictions.

The requirement to have sponsor commitment in an IFSC fund would have been a commercial impediment for some sponsors and managers. “If an overseas fund wants to relocate to GIFT IFSC, its manager/sponsor will be required to put money into the fund, as prescribed in the AIF regulations which may not be always possible owing to liquidity constraints,” said Dhaval Jariwala, partner with PNDJ & Associates.

“Certain offshore regulatory authorities prohibit co-mingling

of manager funds with the investor funds being managed. In such situations, it became difficult to comply with the sponsor commitment obligations under the IFSC AIF regulations,” said Divaspati Singh, partner, Khaitan & Co.

IFSC AIFS have now been permitted to invest in mutual fund units regulated in Fatfcompliant jurisdictions, including India.

"There is no clarity in the AIF regulations on whether an AIF can invest in units of mutual funds, be it equityoriented or debt funds. But an FPI is permitted to invest in units of such mutual funds. Thus, allowing an AIF in GIFT IFSC — which is also registered with Sebi as an FPI — to invest in MF units simply brings the entire regulatory framework for an AIF in GIFT IFSC in sync with the current FPI regulations,” said Jariwala.