The International Financial Services Centres Authority (“IFSCA”) notified an amendment to the IFSCA (Fund Management) Regulations, 2025 (“FM Regulations”) and introduced the framework for Registered Fund Management Entities (“FME”) to undertake third party fund management services, i.e., setting up and managing schemes on behalf of third parties. A new chapter VI titled ‘Other Fund Management Activities’ has been introduced in the FM Regulations and comes into effect on the date of official notification, i.e., July 24, 2025.
The salient features of the amendment are enumerated herein:
1. Eligibility of the FME providing third-party FUND management services
1.1. Legal Form – Company, Limited Liability Partnership (“LLP”) or any other form as may be permitted by IFSCA. However, the incorporation documents, i.e., MoA, in the case of a company, or LLP Agreement, in the case of LLP, should have a clause enabling the entity to undertake third-party fund management services.
IC RegFin Comment: IFSCA has not expressly permitted FMEs formed in the form of a branch to undertake third-party fund management services. While the Regulation provides for “any other form as may be permitted by IFSCA”, a specific clarification may be required from IFSCA on whether this shall include FMEs formed as a branch.
1.2. Net worth – Should maintain a net worth of $500,000, or such other amount as specified by IFSCA, in addition to the minimum net worth required to be maintained by the FME for activities not falling within the ambit of third-party fund management services, within or outside the International Financial Services Centre (“IFSC”). Such networth shall be separate and in addition to the minimum networth requirements applicable for its other activities of managing schemes, portfolio management services, or other activities as permitted under the FM Regulations, wherein third-party fund management is not involved. The said net worth also excludes minimum net worth requirements as may be applicable for any other activities undertaken by the FME within or outside the IFSC.
1.3. Personnel Requirement:
1.3.1. Principal Officer – FME shall be required to appoint a dedicated Principal Officer for each third-party scheme managed, who shall be responsible for the overall activities of the scheme, including fund management, risk management, and compliance. The eligibility of the Principal Officer for such schemes shall be the same as that prescribed for registered FMEs.
1.3.2. Compliance Officer – The Compliance Officer of the registered FME (Non-Retail) may also act as the Compliance Officer for the third-party schemes managed by the FME. However, in the case of a registered FME (Retail), the Compliance Officer for the retail scheme is required to be different from the Compliance Officer of non-retail schemes, whether they are self-managed or managed through a third-party fund management arrangement. The eligibility of the Compliance Officer for such schemes shall be the same as that prescribed for registered FMEs.
1.3.3. Additional Key Managerial Personnel – An additional KMP shall be required to be appointed if the AUM of the schemes, collectively for self-managed and third-party schemes, managed by the FME is more than $1 billion, excluding AUM of the fund of funds schemes, whether it is self-managed or a third-party scheme.
IC RegFin Comment: A FME intending to undertake third-party fund management can undertake single or multiple strategies for each third-party manager. Hence, to ensure economies of scale and the effective use of resources, a principal officer should be assigned to each third-party fund manager who can launch multiple schemes by the said manager, rather than to a scheme launched by such a third-party manager.
Further, IFSCA has eased the requirement for the appointment of a separate Compliance Officer for each scheme by the FME, as was proposed in the consultation paper, in the case of FME (Non-Retail). However, IFSCA has now prescribed the requirement for appointment of a separate Compliance Officer for FME (Retail) in case it is managing even its own non-retail scheme. The requirement was not prescribed previously in the regulations and should be clarified that only in case an FME (Retail) intends to provide third-party fund management services, it is only in such cases the requirement for a separate Compliance Officer for its own non-retail fund will also be applicable.
1.4. Regulatory Approval Required – FME shall seek authorization from IFSCA prior to undertaking third-party fund management services. Such FME may, in accordance with the registration, also undertake fund management activities for its own schemes, portfolio management services, and other permitted activities.
FME has been prescribed to strengthen its overall compliance function and deployment of resources commensurate with the size of its operations. However, irrespective of any arrangement of FME with the third-party fund manager, the FME shall continue to be held liable for any and all obligations or liabilities arising in connection with the third-party fund management arrangement.
IC RegFin Comment: IFSCA has prescribed authorization prior to the commencement of third-party fund management services. However, the manner of seeking authorization and the requisite documents will be required to be notified by IFSCA.
For FMEs managing schemes of multiple third-party managers, it may be pertinent to clarify that any embargo/restriction imposed on FME and/or third-party managers does not impact the functioning of other schemes managed by such FME.
1.5. Nature of Scheme – FME can manage restricted scheme(s) under a third-party fund management arrangement wherein the corpus of any such restricted scheme does not exceed $50 million. Further, a third-party fund manager shall be deemed to be an associate of the FME for compliance with the requirements relating to dealing with ‘associate’ as stated in the FM Regulations.
IC RegFin Comment: In the consultation paper, IFSCA had suggested that once the restricted scheme(s) reach USD 10 million, they shall be required to migrate to a distinct FME. However, in the regulations, IFSCA has not mandated any such requirement and has only limited the corpus limit to $50 million. It can be inferred that any such scheme of FME that are managed under third-party management services shall not be allowed to raise a corpus of more than $50 million. As venture capital schemes are excluded from being specified, it may need to be inferred that such services cannot be offered to a venture capital scheme.
Once a third-party manager is categorised as an associate, then the limit shall apply to all the funds managed by the FME directly and/or through third-party fund management.
1.6. Eligibility of third-party fund manager availing fund management services – Definition of ‘Third party Fund Manager’ has been introduced, which defines it as a third-party engaging an FME for fund management services should be registered or regulated for providing fund management, portfolio management or investment advisory services or another similar activities, by a concerned financial sector regulator in the country of its incorporation. Further, the third-party shall be required to have adequate resources and personnel, ensuring that its officials, directors/partners / designated partners, KMPs, and controlling shareholders are fit and proper persons.
IC RegFin Comment: IFSCA has prescribed the eligibility for a third-party fund manager, which essentially requires such an entity to be permitted to undertake similar activities in the country of its incorporation. However, the regulations also provide that an FME may issue instructions, review the services rendered by the third-party, and terminate the arrangement. Considering that the FME shall be managing the scheme on behalf of the third-party, clarifications and modalities regarding the same are desired.
1.7. Disclosure in Fund Documents – The FME shall ensure that the details of the third-party, along with the persons managing the business of the third-party, the responsibilities of FME vis-à-vis the third-party, and potential conflicts of interest, along with any other disclosure specified by IFSCA, shall be required to be made in the placement memorandum.
1.8. Measures for Risk Management – In order to ensure the interest of the investors and mitigate conflict of interest, IFSCA has prescribed FME to adopt a risk management framework, ensure segregation of funds and operations across schemes, extend the existing grievance redressal mechanism to all investors, and undertake periodic audits. Further, the FME is required to set internal policy for conducting periodic internal audits and reviews to ensure compliance with the regulatory requirement with respect to third-party fund management and submission of a report to the fiduciaries.
1.9. Obligations of FME – The FM Regulations prescribe additional obligations on the FME providing such third-party fund management services, which inter alia require that the liability of the FME towards any Restricted Scheme and its investors is not affected due to providing such services. The activities undertaken by the principal officer designated for the scheme of third-party management should be monitored, and if required, the arrangement should enable termination in the interest of the investors. A suitable indemnity should be in place to indemnify the FME from any potential liabilities arising from the funds managed under the third-party fund management arrangement.
IC RegFin Comment: The amendment is a significant measure to diversify the fund management opportunities in IFSC and attract global funds that are seeking to test the waters before proceeding to set up their own set up. Globalisation will lead to innovation and attract distinct managers and strategies being offered in GIFT City.
Authors: Leelavathi Naidu (Senior Partner) and Pratham Darad (Principal Associate) are part of the Funds, Asset Management and Regulatory Practice at the Mumbai office.
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