GIFT City’s VCC Structure to drive innovation and attract global finance

The Gujarat International Finance Tec (GIFT) City has always been a focal point for the Government, with a dedicated effort to transform it into a world-class financial services hub in India. To further enhance GIFT City’s appeal for raising international finance, the Finance Minister Nirmala Sitharaman has announced regulations that will facilitate the creation of a Variable Capital Company (VCC) structure for flexible financing of aircraft and ship leasing, as well as private equity pooled funds.

What is a Variable Capital Company?

The concept of VCC has been established internationally for several years and was extensively covered by an Expert Committee in June 2021. The committee analysed features of VCC or similar structures in jurisdictions such as the UK, Singapore, Ireland and Luxembourg, and proposed its adoption for GIFT IFSC.

The VCC structure addresses several key limitations associated with traditional company and LLP structures, provides a higher regulatory standard compared to trusts, and is poised to become a dominant force in the fund space.

Some key features facilitated by a VCC include:

• Separate Legal Entity status and limited liability status, thereby giving legal protection to investors and capping their exposure to risk.

• Flexible/ Floating capital structure,e., a VCC may have multiple classes of shares, can issue and redeem shares at various points, and adjust its capital base to meet fluctuating demands. This is particularly useful for investment funds that experience dynamic capital flows and require capital repayment.

• Company in Company/ Sub-fund structure e., VCCs can create separate sub-funds or sub-asset classes within their own assets and liabilities. This can be visualised as a company within a company.

How VCC can revolutionise IFSC:

By offering the best of all worlds in terms of regulated entities.

While India offers multiple structures such as trusts, companies and LLPs for setting up funds, each comes with its own set of limitations. Trusts offer remarkable flexibility, but face issues with unclear regulations, uncapped trustee liability, and uncertainty in treaty eligibility. Companies and LLPs, on the other hand, often encounter difficulties with the transfer of ownership, excessive compliance burdens, lack of confidentiality, and complex tax implications on profit distribution and redistribution. Additionally, these structures may be subject to NBFC regulations, CIC regulations, etc., making them cumbersome, especially for internationally acclimatised investors.

To address these limitations and enhance the effectiveness of investment pooling, the Government has indicated plans to roll out a new legal entity structure specifically tailored for the fund industry.

A VCC has the potential to revolutionise the investment landscape by:

• Offering flexibility for dynamic capital needs by functioning as a single-window platform, attracting multiple investors interested in investing across multiple asset classes with minimal regulatory exposure.

• Better integration with Global Financial Markets that operate at advanced levels, utilising multiple currencies, sophisticated hedging techniques, and hybrid use of securitisation instruments in financing activities such as factoring and discounting.

• Encouraging Fund Domiciliation to attract the international funds market to India.

Challenges that a VCC may face in IFSC

One of the key challenges to consider is the clarity of regulatory framework. The VCCs in GIFT City are likely to operate on a cross-border basis, so ambiguous regulations with limited clarity may delay or undermine the successful implementation of the VCC structure. Further, GIFT IFSC structures may be vulnerable to misuse, such as round-trip funding, where funds from India are sent abroad and then reinvested via IFSC. To address this, appropriate safeguards must be established to ensure that VCC structures do not hamper the domestic fund environment.

Legal framework challenges such as cap on liabilities, permitted activities, and the imposition of existing Indian regulations like the Companies Act, 2013, will also need to be addressed to bring out the full potential of VCCs. Most importantly, timely development and implementation of these regulations will be crucial for driving momentum in IFSC

The moot question: Will IFSC achieve parity with other countries by implementing VCC?

Cost optimisation is one of the key performance factors for any fund, as it directly impacts returns for both investors and fund managers. If implemented correctly, a VCC structure – combined with India’s inherent advantages in human resource and IT costs – could be a powerful incentive for the domiciliation/ re-domiciliation of funds in the IFSC. This could attract fund managers to establish operations within the IFSC.

The Finance Minister’s announcement about VCCs marks a significant step forward for GIFT IFSC, with the potential to transform it into a more dynamic and competitive financial hub. However, the successful implementation of this new structure will depend on meticulous planning, regulatory alignment, and robust infrastructure development. If these challenges are tackled effectively, VCCs could usher in a new era of growth and innovation for GIFT IFSC.