The International Financial Services Centres Authority (Fund Management) Regulations, 2022

The International Financial Services Centres Authority (Fund Management) Regulations, 2022

Executive Summary:

This article describes:

• • • The International Financial Services Centres Authority and its functions.
    • Registration of Fund Management Entity.
    • Categories under which the schemes may be launched.
    • Special Situation Funds & Exchange Traded Funds.

Introduction:

The Ministry of Finance issued the International Financial Services Centres Authority (Fund Management) Regulations, 2022 (hereinafter referred to as Regulations) on April 19, 2022. These regulations will take effect on May 19, 2022. The International Financial Services Centres Authority (IFSCA) (hereinafter referred to as Authority) sets the norms, roles, and limits for all entities that register as Management Entity with the Authority.

If a company wants to engage in the fund management industry, it must first obtain a certificate of registration as an FME (Fund Management Entity) from the Authority and then manage various types of funds and schemes. An entity seeking registration as an FME shall meet the net worth requirements set forth in these regulations at all times or such other amount as may be set out by the Authority.

What is the International Financial Services Centres Authority and its functions?

• The Central Government established the IFSCA to manage all financial services in International Financial Services Centres (IFSCs), with its headquarters in Gandhinagar (Gujarat).
• Financial products that have been previously approved by any regulator, such as the RBI or SEBI, will be managed by the IFSCA. Securities, deposits or insurance contracts, financial services, and monetary institutions are examples of financial products.

Registration of Fund Management Entity

• Any company interested in starting fund management business shall obtain a certificate of registration as an FME from the Authority under one of the categories noted in regulation before starting operations in an IFSC.
• It shall submit an application form in the format and manner given in the First Schedule, of Regulations along with documents and application fees as may be specified by the Authority for obtaining certificate of registration.
• Unless the Authority suspends or cancels an FME’s certificate of registration, or the FME surrenders it, an FME’s certificate of registration is valid for the period specified by the Authority.
• Any Company shall begin a scheme with the prior consent of the Board of Directors to meet the basic requirements of Fund Management under Chapter III of the Regulation. The schemes can be launched under one of three categories.

1. Venture Capital Schemes:

• Venture Capital Schemes are Schemes which can be formed by FMEs and invest primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings primarily engaged in new products, new services, technology, or intellectual property rights-based activities, or a new business model, or other schemes that invest in such entities, including angel funds.
• Venture Capital Schemes have to be filed with the Authority as a Venture Capital Fund under Category I Alternative Investment Fund.
• A FME may establish Venture Capital Schemes through a private placement by filing a placement memorandum with the Authority and along with the application fees as set down by the Authority.
• The filing of scheme documents for such venture capital schemes will be done through a green channel i.e., the schemes can be open for subscription by investors immediately once they are filed with the Authority.
• The number of investors in a venture capital scheme should be less than fifty (50).
• Accredited investors or those investing more than USD 250,000 will be able to participate in such schemes. If the investor is an employee, director, or designated partner/partner of the FME, the minimum investment amount is USD 60,000.

2. Restricted Schemes (Non-Retail Schemes):

• Registered FMEs may establish Restricted Schemes for a variety of investment strategies, including:
• Investing in early-stage ventures, social ventures, SMEs, infrastructure, and other sectors or areas that the government or regulators deem socially or economically desirable, including venture capital funds, SME funds, social venture funds, infrastructure funds, ESG funds, Special Situation funds, and other Schemes/Funds as the Authority may explain.
• A Registered FMEs may launch restricted schemes through a private placement by filing the placement memorandum with the Authority along with the application fees as specified by the Authority before twenty-one working days of launch of the scheme.
• Restricted schemes should have less than 1000 investors, or such other number as the Authority may specify.
• Accredited Investors or investors investing above USD 150,000 may invest in such schemes. The minimum investment amount for employees, directors, designated partners, or partners of the FME is USD 40,000.

3. Retails Schemes:

• It is a scheme in which a group of investors pool their funds through an offer document within a 12-month period.
• There has to be at least 20 investors in a retail scheme, with no single investor investing more than 25%.
• Within 45 days, the FME will invest a minimum of 1% of the scheme’s Assets under management (AUM) or USD 200,000.
  Note: The total market value of the investments that a person or company manages for clients is known as AUM.
• A draft offer document should be filed with the Authority, along with the necessary application fees, at least 21 working days before the scheme is to be launched.
• There must be at least 20 investors in a retail scheme, with no single investor contributing more than 25%.
• The condition should be met within 6 months of the closure of the offer.

Special Situation Funds:

• A Registered FME may launch a Special Situation Fund through a private placement memorandum by filing the memorandum with the Authority along with the application fees at least 21 working days before launch of the scheme.
• A special situation fund shall invest only in special situation assets.
• It should have a minimum corpus that the Authority may specify from time to time.
• Under the applicable Indian laws, a special situation fund should be formed in IFSC as a corporation, LLP, or trust.

Exchange Traded Funds:

• Only Registered FMEs (Retail) are allowed to set up Exchange Traded Funds (ETFs) by filing a draft offer document with the Authority, along with the application fees, at least 21 working days before the launch of the ETF.
• Any material changes to the information given in the draft offer document should be immediately informed to the Authority.
• ETFs should be listed and traded on a recognized stock exchange and should include the following:
  • Equity Index based ETFs
  • Debt Index based ETFs
  • Commodity based ETFs
  • Hybrid ETFs (investing in 2 or more asset class)
  • Actively Managed ETF
  • Any other ETFs subject to approval of the concerned recognised stock exchange and the authority.

Conclusion:

The Finance Ministry manages IFSCA’s funds under the IFSCA (Fund Management) Regulations, 2022.Any FME that wants to do business should register under one of three categories i.e., Authorised FME, Registered FME (Non-Retail), Registered FME (Retail).

Regards,
Legal Team

Proind Business Solutions Private Limited
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