Gujarat International Fin-Tech City (GIFT City), acknowledged as an International Financial Services Centre (IFSC) since 2015, has marked a significant milestone with the introduction of the Fund Management Regulations by the International Financial Services Centres Authority (IFSCA) in April 2022.

These regulations, designed to elevate the financial landscape, focus on the meticulous oversight and regulation of fund managers within the IFSC. Unlike conventional approaches, the emphasis is on regulating the entities engaged in fund management rather than directly intervening in fund operations.

Under the comprehensive Fund Management Entity (FME) Regulations, meticulous attention is placed on establishing a secure regulatory framework. A key stipulation necessitates Fund Managers to secure registration from IFSCA, subject to specified conditions governing the launch of funds or schemes.

Legal structure

 

Legal structure for Establishing Funds in GIFT City

Categories of Funds/Schemes 

Categories of Funds/Schemes in GIFT City

Fund management entity(s) Regulations classify FMEs into three (3) categories 

  1. Authorized FME
  2. Registered FME (Non-Retail)
  3. Registered FME (Retail)

Based on the license obtained, FME will be allowed to launch relevant schemes or carry out activities as described below:

Type of Fund/Schemes  Authorized Fund Management Entity Registered Fund Management Entity (Non-Retail Fund)  Registered Fund Management Entity (for Retail fund) 
1. Venture Capital Schemes (VCS)  √  √  √ 
2. Restricted Schemes  ×  √  √ 
3. Retail Schemes   ×  ×  √ 
4. Family Investment Fund (FIF)  √  √  √ 
5. Special Situation Funds (SSF)  ×  √  √ 
6. Exchange Traded Funds (ETF)    ×  ×  √ 
7. Environmental, Social, and Governance (ESG)      ×  √  √ 

Effectively, a registered FME (Retail) can do all the functions of an authorized FME or registered FME (non-retail), and a registered FME (Non-retail) can perform all the functions of an authorized FME. Read more about Fund Management Entities under GIFT IFSC here.

Key Points on Schemes

Particulars  Venture Capital Scheme  Restricted Scheme (Scheme for non-retail)  Retail Scheme 
Coverage of schemes  
  • Schemes that invest primarily in unlisted securities of start-ups,
    emerging or early-stage venture capital undertakings, etc. 
  • Can invest in the following: 
  1. Start-ups, Social ventures, SME Funds, etc. 
  2. Securities of listed entities including for undertaking
    diverse/complex trading strategies.     
  3.  Investment which does not fall under the clause (a) and (b) above.
    These schemes can only be privately placed with select investors.
  • Can invest in Social Ventures, Infrastructure, ESG sector, specific sectors
    certain sectors such as infrastructure asset class (equity/debt scheme),
    or towards certain solutions (retirement schemes, schemes for education, etc.)      
  • These schemes can invite funds from public investors as well. 
Launched by  Any FME   Registered FME   Registered FME (Retail) 
Type of Scheme   Close-ended   Close-ended & Open-ended   Open-ended & Close-ended 
Permissible Investment 
  • Investment in Unlisted Company, Limited Liability Partnership. 
  • Securities listed/traded on stock exchange in IFSC, India or
    Foreign Jurisdiction     
  • Money Market Instrument  
  • Debt /securities debt instrument 
  • Other venture capital scheme setup in IFSC 
  • Units of Mutual fund and AIF in India, IFSC or foreign Jurisdiction 
  • Other securities as specified by the Authority 
  • Investment in Unlisted Company, Limited Liability Partnership 
  • Securities listed/traded on stock exchange in IFSC, India or Foreign
    Jurisdiction     
  • Money Market Instrument  
  • Debt /securities debt instrument 
  • Other venture capital scheme setup in IFSC 
  • Units of Mutual fund and AIF in India, IFSC or foreign Jurisdiction 
  • Derivatives including commodity derivatives. 
  • Other securities as specified by the Authority 
  • Investment in Unlisted Company, Limited Liability Partnership 
  • Securities listed/traded on stock exchange in IFSC, India or Foreign Jurisdiction 
  • Money Market Instrument  
  • Debt /securities debt instrument 
  • Other venture capital scheme setup in IFSC 
  • Units of Mutual fund and AIF in India, IFSC or foreign Jurisdiction 
  • Derivatives including commodity derivatives. 
  • Other securities as specified by the Authority 
Limitation on the number of investors   Maximum 50/scheme 

Maximum 200 / portfolio scheme (AF) 

 Maximum 1000  Minimum 20 (with no single investor investing more than 25% in a scheme) 
Minimum Investor Contribution Value  
  • Accredited Investors – No minimum contribution  
  • Employees/directors/partners – USD 60,000  
  • Others – USD 250,000 (USD 40,000 – AF) 
  • Accredited Investors –  

   No minimum contribution  

  • Employees/directors/partners – USD 40,000  
  • Others – USD 150,000 
  • Open-ended Schemes – No minimum contribution  
  • Close-ended Schemes – USD 10,000  
  • Close-ended Schemes investing less than 15% in unlisted securities – No minimum
    contribution     
Investment Restrictions in Unlisted Entities  
  • No restriction 
  • Open-ended scheme -Maximum 25% of the corpus 
  • Close-ended scheme – No restriction 
  • Open-ended scheme -Maximum 15% of Assets under Management of the scheme 
  • Close-ended scheme – Maximum 50% of Assets under Management of the scheme  
Custodian Requirement in Schemes   Compulsory, if Asset Under Management > USD 70 million  Compulsory, if Asset Under Management > USD 70 million  Compulsory 
Corpus of the scheme  
  • Minimum – USD 5million       

(USD 1 million – AF) 

  • Maximum USD 200 million 
  • Minimum- USD 5 million 
  • Maximum-NA 
  • Minimum- USD 5 million 
  • Maximum-NA 
Valuation frequency 
  • Yearly 
  • Close Ended: Half yearly 
  • Open Ended: Monthly 
  • Open Ended: Daily 
  • Close Ended: Weekly 
Constitution 
  • Company 
  • LLP 
  • Trust 
  • Company 
  • LLP 
  • Trust 
  • Company 
  • Trust 
Tenure of schemes  
  • Minimum 3 years 
  • Extension up to 2 years permissible with 2/3rd investor’s consent 
  • Minimum 1 year for close-ended scheme 
  • Extension up to 2 years permissible with 2/3rd investor’s consent 
  • Minimum 3 years for close-ended scheme 
  • Extension up to 2 years permissible with 2/3rd investor’s consent 
FME’s Contribution to the Schemes  
  • If targeted corpus is < $30mn: > 2.5% but < 10% of targeted corpus  
  • If targeted corpus is > $30mn: > $ 750,000 but < 10% of targeted corpus  

(this condition can be waived off subject to obtaining 2/3rd investor approval) 
  • In case of close-ended schemes, same as venture capital scheme.  
  • In case of open-ended schemes, If  targeted corpus is < $30mn: > 5%
    but < 10% of targeted corpus o If targeted corpus is > $30mn: > $ 1,500,000
    but < 10% of the targeted corpus (this condition can be waived off
    subject to obtaining 2/3rd investor approval)     
  • Lower of at least 1% of the Asset Under Management or USD 200,000. This is
    mandatory     

Fund Set-up Process in GIFT City, IFSC

Ensure the Fund Management Entity (FME) is registered and operational before proceeding with the steps below.

Step 1: Availability of name for Fund (new setup) 

Step 2: Identification of office space in GIFT City – Notified SEZ area 

Step 3: Obtaining NOC from SEZ Developer 

Step 4: Apply for company/LLP/trust incorporation 

Step 5: Obtain Certificate of Incorporation 

Step 6: Application to the Development Commissioner (delegated to IFSCA {Administrator})

Step 7: Application to IFSC Authorities (IFSCA)

Step 8: Obtain letter of approval from SEZ Authorities (now IFSCA {Administrator})

Step 9: Obtain letter of approval from IFSCA 

Step 10: Commencement of business and focus on post-setup compliances

Benefits for Funds Registered in GIFT City, IFSC

Funds registered under IFSC regulations will have the following benefits:

1. Investor’s benefits

Funds incorporated in GIFT IFSC are permitted to invest in following securities (which may not be allowed to Funds operating out of India):

Ship Leasing in GIFT IFSC

Related Read: Ship Leasing in GIFT IFSC: Exploring the Impact Beyond Borders

  • Securities Listed in GIFT IFSC 
  • Securities issued by Companies incorporated in GIFT IFSC 
  • Securities issued by Companies incorporated in India or foreign jurisdiction. 
  • Units of other funds in IFSC 
  • Other permissible investments as per Fund Regulations (like LLP, REIT, InvIT, Derivatives, SPV etc.) 
  • Overseas entities (without restriction applicable for domestic Funds)

Funds registered in GIFT City IFSC can invest in India subject to FME regulations through the following modes:

  • Foreign venture capital investment (FVCI) route  
  • Foreign portfolio investor (FPI) route 
  • Foreign direct investment (FDI) route.

2. Taxation benefits to funds in GIFT City, IFSC

  • Exemption from Securities Transaction Tax (STT), Commodity Transaction Tax (CTT), and stamp duty for transactions conducted on IFSC exchanges.
  • Units of schemes, investment trusts, and ETFs transferred by non-residents on IFSC exchanges would not be subject to Income Tax.

3. Operational benefits to funds in GIFT City, IFSC

Apart from the above tax and compliance benefits, Funds registered in IFSC have some operational benefits too which are as under: 

  • Availability of skilled labor
  • Proximity to the onshore market 
  • World-class infrastructure, unparalleled connectivity, and transportation access 
  • Access to multiple markets from IFSC 
  • Operating costs will be lower due to subsidies granted by the Gujarat government 

Other Fund Schemes

1. Special Situation Funds (SSF)

Gift City IFSC

Related Read: Direct Listing of Indian Companies on Exchanges in GIFT IFSC: Process Overview

A scheme that invests in special situation assets in accordance with its investment objectives and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016 (Insolvency Code). SSFs target stressed loans/assets, security receipts by asset reconstruction companies, etc. A Registered FME (non-retail) or Registered FME (Retail) may launch an SSF as a closed-ended scheme of at least 3 years to invest in special situation assets (as specified under the FM Regulations).

2. Exchange Traded Funds (ETF)

Registered FMEs (Retail) may launch an ETF. ETFs shall be mandatorily listed and traded on a recognized stock exchange and shall include:

  • Equity index-based ETFs
  • Debt index-based ETFs
  • Commodity-based ETFs
  • Gold ETFs
  • Silver ETFs
  • Hybrid ETFs (investing in 2 or more asset classes)
  • Actively managed ETF

3. Environmental, Social and Governance (ESG) 

ESG is typically intended to encourage businesses and investors to evaluate the impact of their activities on Environmental, Social, and governance factors and to evaluate sustainability related aspects.

4. Family Investment Fund (FIF)

The Family Investment Fund (FIF) refers to the self-managed fund established by a single family that operates within the regulatory framework notified. You can read more about Family Investment Fund in GIFT City IFSC here. 

Regulator’s Fees for Setup in GIFT City, IFSC

1. IFSCA Fees would vary based on the category of Fund/scheme set up in GIFT IFSC. Following are the fee structures for various funds/schemes:

S. No.  Particulars  Activity-based fees 
i  Venture Capital Scheme  $7,500 
ii  Angel Fund  $3,000 
iii  Restricted Scheme   
  a. Category – I AIF  $7,500 
  b. Category – II AIF  $15,000 
  c. Category – III AIF  $22,500 
iv  Retail Scheme  $22,500 
v  Exchange-traded fund (ETF)  $22,500 

2. All Funds/Schemes in IFSC need prior SEZ approval and hence, the SEZ authorities’ fees are as under:

Particulars  Amount (in INR) 
Application Fees (one-time)   5,000 
Registration fees (one-time)   25,000 
Recurring fees (Annual)   5,000 

Conclusion

GIFT IFSC is becoming a prominent financial destination for Global capital market players including the biggest fund houses and family offices etc. Indian regulators with the assistance of the Government of India have relaxed various regulatory compliance to facilitate the setup of Fund Management Entities (FMEs) and launch schemes.

GIFT IFSC has approx. 95 registered funds* and the number is increasing rapidly. Regulation offers advantages to both inbound and outbound investments with rea sgulatory ease.

These advantages are coupled with tax benefits for NR investors, tax holidays, and other operational efficiencies. Fund regulations make GIFT IFSC an ideal place for fund-related financial activities when completing with other Global International service centers in Dubai, Singapore, etc.

Frequently Asked Questions (FAQs)