Committee on Variable Capital Company

Context

Dr. K.P. Krishnan headed expert committee on Variable Capital Company has submitted its report on the feasibility of Variable Capital Companies in the International Financial Services Centres to the International Financial Services Centres Authority (IFSCA).

Variable Capital Company in IFSC GIFT City

In order to ensure India’s IFSC is at par with the developments in other parts of the world, IFSCA had set up a Committee of Experts headed by Shri K P Krishnan (IAS-Retd.),  for examining the feasibility of the Variable Capital Company (VCC) in India with the following terms of reference:

• Comprehensive analysis of fund structures under Indian Trust Act and VCC.
• To examine VCC structure and suggest appropriate model/ framework that may significantly enhance the competitiveness of IFSC in India.
• Feasibility of introducing VCC as separate chapter in Companies Act, 2013 versus need of enacting a separate legislation.
• To explore alternative structures having characteristics like VCC.
• The Committee may also deliberate on any issues which may be considered necessary but not mentioned in the above terms of reference.

Key-recommendations made in the Report

• The Committee assessed the features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg.
• The Committee recommended the adoption of a VCC-like legal structure for the purpose of conducting fund management activity in IFSCs.
• The Committee recognized that the legal framework governing entities that undertake fund management should provide for certainty and clarity to investors, effective segregation and ring-fencing of different pools of asset, the ability to issue different classes of shares, alterations to the funds’ capital structure without regulatory approvals and the freedom to choose the appropriate accounting standards applicable to funds with different characteristics, the ability to wind up quickly.

What is Variable Capital Company (VCC)?

• The Variable Capital Company (VCC) is a new corporate entity structure under which several collective investment schemes (whether open-end or closed-end) may be gathered under the umbrella of a single corporate entity and yet remain ring-fenced from each other.
• The new corporate entity structure gives funds an alternative to unit trusts, limited partnerships, limited liability partnerships and companies.
• A key characteristic of the VCC is its umbrella structure is that it allows the sub-funds to share a board of directors and have common service providers, such as the same fund manager, custodian, auditor and administrative agent.
  • Certain administrative functions, for instance, the holding of general meetings and preparation of prospectuses, can also be consolidated.
  • Where a VCC is set up as an umbrella fund with several sub-funds, members may hold shares that are referenced to a particular sub-fund held by the VCC.

India’s International Financial Services Centre

• The International Financial Services Centres Authority (IFSCA) was established in 2020 under the International Financial Services Centres Authority Act.
• For the first time, the regulatory powers of the following four financial services regulators in India, have been vested in IFSCA with respect to regulation of financial institutions, financial services and financial products in the IFSC, making it a unified regulator for the International Financial Services Centre in India.
  • Reserve Bank of India (RBI)
  • Securities & Exchange Board of India (SEBI)
  • Insurance Regulatory Development Authority of India (IRDAI)
  • Pension Fund Regulatory Development Authority of India (PFRDAI)
• Financial institution being a branch or entity in IFSC is deemed as a ‘person resident outside India’ for exchange control purposes.