December 18, 2020
Relaxations for AIFs in GIFT City
The International Financial Services Centre (“IFSC”) in the Gujarat International Finance-Tec (“GIFT”) City at Gandhinagar, Gujarat is all set to offer a competitive and collaborative environment to the fund management industry in India. The establishment of the IFSC Authority (“IFSCA”) to act as a single window clearance is likely to boost investor confidence in the GIFT City.
The Securities Exchange Board of India (IFSC) Guidelines read with the Operating Guidelines for alternative investment funds (“AIFs”) in IFSC provide the regulatory framework for AIFs operating in IFSC (“IFSC AIFs”). Recently, the IFSCA issued a circular1 announcing certain relaxations for IFSC AIFs (Category-I/ II/ III) to align the regulatory framework with international best practises (“Circular”).
· Leverage limits for IFSC AIFs
The SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) restricts Category-I / Category-II AIFs from borrowing directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than 30 days, on not more than 4 occasions in a year and not more than 10% of the investible funds.2 Category-III AIFs are permitted to engage in leverage subject to consent from investors of the fund and subject to maximum limit not exceeding 2 times of the Net Asset Value of the AIF.3 However, there are no such restrictions on offshore funds which frequently undertake leverage to fund investment opportunities.
The Circular now permits IFSC AIFs to undertake leverage, subject to the following conditions:
· Investment by IFSC AIFs
· Diversification limits
Under the AIF Regulations, Category I and II AIFs cannot invest more than 25% of the investable funds in one Investee Company.6 Further, Category III AIFs cannot invest more than 10% of the investable funds in one Investee Company.7 It is common for offshore funds to be set up for investment in a few targeted companies or sectors. Such conditions on diversification may not interact well with the investment strategy of offshore funds.
The Circular now provides that these diversification limits under the AIF Regulations should not apply to IFSC AIFs provided appropriate disclosures have been made in the placement memorandum and the investments by AIFs are in line with the risk appetite of the investors. In this regard, what is considered as risk appetite is subjective and accordingly, the investment managers should ensure appropriate disclosures in the placement memorandum. The exemption from diversification limits would also enable IFSC AIFs in co-investing in portfolio companies through a segregated portfolio by creation of separate class of units.
The Circular is indeed a very welcome move for the fund industry and it depicts the commitment of the IFSCA in onshoring the fund management industry to India. These relaxations offered to IFSC AIFs were long due industry asks and should encourage fund managers to explore setting up or migrating funds to the GIFT City. These relaxations seek to bring the GIFT City at par with the international offshore jurisdictions like Singapore, Netherlands, Luxembourg etc. wherein there are no restrictions on undertaking leverage, diversification requirements for offshore funds and create a level playing field for funds set up in IFSC. The relaxations provided by the Circular coupled with the other regulatory and tax incentives provided to units set up in IFSC should provide a conducive environment for operations of IFSC AIFs in the GIFT City.
NDA’s association with GIFT City
Nishith Desai Associates (NDA) is proud to have been associated with GIFT City project right from its conceptualization in 2007 until today. After a long journey, it is on the verge of becoming a clean, transparent and FATF compliant offshore jurisdiction for international financial services. It also creates new and collaborative opportunities as mid-shore jurisdiction alongside other offshore jurisdictions. The relaxations under the Circular are a welcome move and are a result of several discussions which NDA had with the officials of the GIFT City along with other industry bodies and stakeholders. Please refer our publication “Opportunities in GIFT City – Setting up Funds in India’s New Offshore Financial Center” for our detailed analysis of the regulatory and tax framework in relation to setting of AIFs in GIFT City.
1 F. No. 81/IFSCA/AIFs/2020-21 dated December 09, 2020
2 Regulation 16(1)(c) and Regulation 17(1)(c) of AIF Regulations
3 Regulation 18(1)(c) of AIF Regulations
4 Regulation 16(1)(b) of AIF Regulations
5 Regulation 17(1)(b) of AIF Regulations
6 Regulation 15(1)(c) of AIF Regulations
7 Regulation 15(1)(d) of AIF Regulations
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