India’s new VCC proposal and what we can learn from Singapore

12 August 2021
India is looking to implement a new investment fund regime to promote inward capital investment. The model is largely based on Singapore’s Variable Capital Company structure, and the government hopes it will transform India’s GIFT City — a locally-based international financial services centre — into a competitive global financial hub.

Singapore launched its Variable Capital Company (VCC) structure in 2020 via the Variable Capital Companies Act. This legislation aimed to elevate Singapore’s position as a competitive financial domicile by making collective investment schemes simpler to establish and maintain. The structure has significantly enhanced Singapore’s already strong position as an international investment fund centre, alongside traditional offshore centres such as the Cayman Islands and Channel Islands.

For investors who find other corporate entity structures — such as limited liability companies, limited liability partnerships and trusts — to be too rigid, VCCs present a more flexible capital management option. A VCC is a legal entity specifically designed to operate as a collective investor scheme and structured either on a standalone basis or as an umbrella structure incorporating multiple sub-funds. These sub-funds can be open-end (where they may issue an unlimited number of shares) or closed-end (where they offer an IPO and listing shares for trade).

The core benefits of the VCC structure include:

  • Under a VCC, the funding administration is consolidated, providing operational cost savings. The sub-funds can share a fund manager, board of directors and auditors. However, investors still maintain the flexibility of having separate funds. Members can hold shares for sub-funds individually. Dividend payments may be distributed from the fund’s capital, rather than profits, which provides fund managers the flexibility to meet dividend payment obligations. 
  • From a cost mitigation perspective, a VCC is treated as a single entity for taxation regardless of how many sub-funds are established. 
  • VCCs provide additional confidentiality and discretion for shareholders and investors. Public disclosure of investor details is not required.
  • Investment funds established in foreign jurisdictions may be transferred to and registered in Singapore under the VCC Act if certain parameters are met. The process is easy to implement. 

Singapore provided an additional important incentive to attract investors. The Monetary Authority of Singapore (MAS) launched a grant scheme where they will co-fund up to 70 percent of eligible expenses paid to Singapore-based service providers. 

Singapore’s VCC implementation has been well received, and many consider the program to be the gold standard in the APAC region. Since its launch, hundreds of Singapore VCCs have been established. Not surprisingly, other emerging markets are looking to establish similar processes.

India’s steps to implement a VCC structure

The Indian government and financial authorities have been considering taking similar steps to Singapore to transform GIFT City, also known as Gujarat International Finance Tec-City, into a more attractive destination for foreign investment. As of 2015, GIFT City has been home to a globally recognised International Financial Services Centre (IFSC). In 2020, the Indian government established the International Financial Services Centres Authority (IFSCA), marking the beginning of a more established financial services ecosystem within the local financial marketplace. 

The IFSCA assembled a committee of experts to ensure India’s IFSC keeps pace with the developments in other countries as regards investment fund establishment and management to incentivise foreign investment. This committee was tasked with assessing whether a Singaporean VCC structure or similar construct would be feasible in India.

In their report, published in May, the committee recommended adopting a “VCC-like legal structure for the purpose of conducting fund management activity in IFSCs.” It identified recommended elements for this framework, including but not limited to the following:

  • VCCs should have a separate legal identify from its shareholders.
  • VCCs should have a variable share capital to enable easy entry, redemption and buy-back of shares by investors. VCCs may pay dividends out of capital as well as profits. VCCs should be able to issue, redeem or buy-back issued securities without restriction.
  • VCCs may have an umbrella structure with multiple sub-funds, where investor shares are tied to a specific sub-fund and its assets and liabilities.
  • The financial statements of each sub-fund should be maintained separately. From a tax perspective, each sub-fund will be regarded as a separate “person” and will need its own permanent account number.
  • Two or more sub-funds may be merged if the majority of their investors approve. Mergers and acquisitions of VCCs and sub-funds are to remain tax-neutral, regardless of whether the change takes place within a VCC or between two separate VCCs.

It’s important to note that many implementation details remain unclear. For instance, the Committee’s report recommends that “the concept of re-domiciliation should be introduced to the IFSC,” with an implementation roadmap to come. The Indian government may follow Singapore’s lead with a re-domiciliation clause, which would encourage foreign investment by making it easy for existing entities to transfer registration to GIFT City.

What potential investors can learn and expect from India's VCCs

Conventionally, the pooling of funds in India is undertaken through three types of entities: limited liability companies governed under the Companies Act, 2013; limited liability partnerships under the Limited Liability Partnership Act, 2008; and trusts governed under the Indian Trusts Act, 1882. Implementation of this new investment fund structure will need to be carefully considered, given the overlapping existing regulatory regimes.

Pending the specific provisions in the law that will establish, govern and maintain the new framework, the proposed Indian VCC structure may offer increased flexibility, cost savings and anonymity compared to the traditional corporate entity structures.

Investors should keep a close eye on the specific language of the proposed legislative framework and subsequent implementation details to understand all compliance requirements, timelines and other factors that will affect budgets and projections. It is still unclear not only how streamlined implementation will be, but how the new model will be applied in certain scenarios. For example, VCCs with public funds may be subjected to higher governance thresholds than VCCs with only private funds. It’s also possible that India will implement some form of incentives for foreign investors, as Singapore did. 

Finally, VCCs under India’s proposed model will need to be prepared to comply with the IFSCA’s regulations, in addition to the legislation governing the establishment and maintenance of the new structure.