Gift City's regulator wants more say in fund formation for business district

The International Financial Services Centres Authority (IFSCA), the Gift City regulator, is understood to have approached the government for a change of rules that would quicken the formation of funds in the business district.

According to the proposal, fund sponsors (which do not meet certain conditions) would not be required to obtain the Reserve Bank of India's (RBI) permission for setting up private equity, venture capital and public equity funds in the financial centre, two persons familiar with the matter told ET.

If approved, sponsorship applications for such alternative investment funds (AIFs) would be directly approved by the IFSCA-the unified authority that was established in April 2020 under a separate statute for development and regulation of financial products, services and institutions in the Gandhinagar centre, which is trying to position itself as a financial services hub.


Since IFSC is treated as 'foreign territory' from exchange control perspectives, capital infusion for setting up a fund in the IFSC is considered as 'outbound investment' for floating an offshore financial services subsidiary. A sponsor that fails to fulfil certain rules has to take RBI's permission before going ahead with the investment for fund formation.

ODI Rules may have to be Tweaked
Under these rules - as per regulation 7 of overseas direct investment (ODI) rules-the investor is required to have earned net profit during the preceding three financial years from the financial services activities, registered with an Indian financial services regulatory authority of India and met necessary capital adequacy norms, among other things.

"If the asset management company of a local mutual fund sponsors an AIF in GIFT, it may not have to approach the RBI as most of these conditions are likely to be met. But often that's not the case. The sponsor could be an unregulated investment company of a conglomerate. Such an entity needs NOC from RBI... and this takes a long time," said a source. "If RBI has to delegate the powers to IFSCA, the ODI regulation has to be tweaked," said the person.

IFSCA officials did not comment on the subject.

The sponsor of a category-1 AIF (such as VC and infra funds) and category-2 (such as private equity and debt funds) have to chip in 2.5% of the corpus or ₹5 crore, whichever is less.

The investment for category-3 AIFs (which are allowed to invest the entire fund corpus in companies listed on Indian exchanges under foreign direct investment policy) has to invest 5% of the corpus or ₹10 crore, whichever is less. Category-1 and 2 funds can invest up to 49% in listed stocks.

The manager of an AIF (which is the asset management company with employees carrying out day to day functions) and the sponsor (which primarily lends its balance-sheet) can either be two different entities or combined into one.

One of the attractions of setting up AIFs in IFSC is that the investors in such funds are not required to have PAN or file income-tax return in India.

"While the government has relaxed some of the regulations and made GIFT a tax friendly centre, it is yet to reach a critical mass. IFSCA has taken several initiatives and is pursuing different proposals to develop it. Even if FPIs (foreign portfolio investors) do nor relocate to GIFT from Mauritius or Singapore, IFSCA can be a hub for AIFs. I feel the government would consider more regulatory changes to attract investment in IFSC," said a banker.

"The contention has been around Indian entities making sponsor commitment to an AIF in IFSC either directly or via a IFSC-based subsidiary. Several Indian groups struggle to meet the outbound investment conditions. Seeking RBI approval in such instances can be uncertain at least and time consuming at best. IFSCA, with a mandate to regulate as well as encourage IFSC-based activities, should be an optimum regulator to interface for such approvals," said Richi Sancheti, Partner, Algo Legal.