On August 5, 2024, the International Financial Services Centres Authority (“IFSCA”) brought out a consultation paper (“Consultation Paper”) that proposed several amendments to the International Financial Services Centres Authority (Fund Management) Regulations, 2022 (“FME Regulations”). Thereafter, on December 19, 2024, at the 42nd meeting of the IFSCA Authority Board (“IFSCA Board”), the IFSCA Board approved the proposal to revise the FME Regulations.
In light of the above, IFSCA has issued the International Financial Services Centres Authority (Fund Management) Regulations, 2025 (“Amended Regulations”) repealing the FME Regulations on February 19, 2025 (accessible here).
The key revisions brought about in the FME Regulations with respect to funds are as follows:
I. Flexibility and Enhancement in the Appointment of Principal Officer and other KMPs
-
- For qualification of Principal Officer, certification from any organization or institution or association or stock exchange that is recognized/ accredited by IFSCA or a regulator in India or Foreign Jurisdiction now stands removed.
New qualifications such as a CFA or an FRM from the Global Association of Risk Professionals have now been included. Further, in the case of a Principal Officer with at least 15 years of experience in activities related to fund management, including portfolio management, investment advisory or similar activities, the qualification has been lowered to a graduate level.
-
- Apart from the requirement to appoint a Principal Officer and Compliance Officer, any FME managing an AUM of at least USD 1 billion (excluding fund of fund scheme) at the end of the financial year, is required to appoint an additional KMP for fund management within 6 months from the end of the financial year. Further, continuation of such additional KMP would be optional if the AUM remains below USD 1 billion for 2 consecutive years and there is a reasonable expectation that such AUM shall remain below USD 1 billion for the next term.
In the case of an FME in which 75% of the control is with a government or government-related investor and such investors are the sole contributors of such schemes, the requirement of additional KMP shall not be mandated.
-
- Experience criteria have now been revised to state that 5 years of experience in related activities in the securities market or financial products including in a portfolio manager, fund manager, investment advisor, broker-dealer, investment banker, wealth manager, research analyst or fund management, credit rating agency, market infrastructure institution, financial sector regulator or consultancy experience in areas related to fund management, such as deal due diligence, transaction advisory or similar activities.
In case of consultancy experience in areas related to fund management, such as deal due diligence, transaction advisory, etc., such experience shall be considered for a maximum period of 2 years and experience in other areas as mentioned above shall be required for at least 3 years.
-
- Experience criteria have been revised for Compliance Officer which includes a minimum of 3 years of experience as compliance or risk manager of a listed company or an entity regulated by a financial sector regulator.
- Additionally, the requirement to obtain prior approval of IFSCA for the appointment of KMP has been removed and FMEs shall now be required to only intimate the same to IFSCA along with filing fees. Where IFSCA has concerns, it shall revert within 7 working days post and such comments shall be taken into consideration while effecting the proposal for appointment of such KMP.
- Vide clarificatory circular dated February 20, 2025 (accessible here), it has been clarified that a vacant position of a KMP should be filled at the earliest and the intimation to IFSCA should be filed in no case later than 3 months from the date on which such a vacancy arises. In any case, a KMP position shall not remain vacant for a period of more than 6 months from the date such vacancy arises i.e. the next candidate for a vacant KMP position must join the FME within 6 months from the date of relieving of the previous candidate.
- Further, to ensure competence, the employees of FMEs will be required to undergo certification from such institutions as may be specified by IFSCA.
- II. Revised Eligibility Norms for Registered FME (Retail)
-
- For criteria evaluation for Retail FME, it is now been clarified that the holding company of the applicant or its subsidiaries should have (i) at least 5 (five) years of experience in collectively managing AUM of at least USD 200 million with more than 25,000 investors; or (ii) Person(s) in control of the FME holding at least 25% shareholding in the FME be carrying on business activities related to fund management, including portfolio management, wealth management, distribution of financial products, and investment advisory, for a period of not less than five (5) years, collectively for at least one thousand (1,000) investors on assets of at least USD 50 million, and such FME has a net worth of at least USD 2 Million or such other amount as may be specified.
- For Registered FME (Retail), the third key person can be appointed before filing its offer document for its first Retail scheme.
III. Criteria for Fit and Proper Person Requirement
-
- In addition to the existing criteria, the following additional requirements have been specified:
a) No charge sheet has been filed against such a person by any Indian enforcement agency in matters concerning economic offences and is pending.
b) No charges have been made by a court of law or an equivalent institution in matters concerning economic offences.
c) No order restraining, prohibiting or debarring the person from accessing or dealing in a financial product(s) or financial service(s) has been passed by any regulatory authority in any matter concerning securities laws or financial services market and such order is in force. This criteria provided a restriction for only three years from the expiry of the period specified in the order, which has now been removed.
d) Further, the materiality threshold has been introduced in case of an order against a person which has a bearing on the securities market which has been passed by IFSCA, or any regulatory authority and a period of three years has elapsed from such order. Additionally, the materiality threshold shall be determined at the discretion of IFSCA.
e) A person who has been declared as not a ‘fit and proper person’ by an order of any regulatory authority, such person shall not be eligible to apply for any registration, until the fit and proper criteria are satisfied.
IV. Changes concerning the Venture Capital Scheme (“VCF Scheme”), Restricted Scheme and Retail Scheme
| Particulars | VCF Scheme | Restricted Scheme | Retail Scheme |
|---|---|---|---|
| Change in Subscription Conditions |
Only upon receipt of communication from IFSCA confirming PPM has been taken on record. Further, IFSCA may provide comments to be incorporated into the PPM at any stage. |
Only upon receipt of communication from IFSCA confirming PPM has been taken on record. Further, IFSCA may provide comments to be incorporated into the PPM at any stage. |
– |
| Validity of PPM |
Increased to 12 months, from 6 months. Further, a one-time extension of 6 months shall be provided by IFSCA to meet the minimum corpus by paying 50% of the fee as applicable for filing a new scheme. |
Increased to 12 months, from 6 months. Further, a one-time extension of 6 months shall be provided by IFSCA to meet the minimum corpus by paying 50% of the fee as applicable for filing a new scheme. |
Increased to 12 months, from 6 months. Further, a one-time extension of 6 months shall be provided by IFSCA to meet the minimum corpus by paying 50% of the fee as applicable for filing a new scheme. |
| Minimum Corpus | Reduced to USD 3 million from USD 5 million. | Reduced to USD 3 million from USD 5 million.However, open-ended schemes may commence investment activities on raising USD 1 million and shall achieve the minimum corpus of USD 3 million within 12 months of communication from IFSCA of taking the placement memorandum on record. | Reduced to USD 3 million from USD 5 million.However, open-ended schemes may commence investment activities on raising USD 1 million and shall achieve the minimum corpus of USD 3 million within 12 months of communication from IFSCA of taking the placement memorandum on record. |
| Particulars | VCF Scheme | Restricted Scheme | Retail Scheme |
|---|---|---|---|
| Joint Investor | Investor along with spouse, parent and children making minimum investment of at least USD 250,000 | Investor along with spouse, parent and children making a minimum investment of at least USD 150,000 | – |
| Investment Conditions | – | Restrictions for open-ended scheme investing in unlisted securities have been carved out for open-ended fund of funds schemes, subject to such requirements being met on a look-through basis by the underlying fund. |
Additionally, the requirement of listing close-ended retail schemes on recognized stock exchanges has been made optional, if the minimum amount of investment by each investor in the scheme is at least USD 10,000. |
Unlisted security:| Particulars | VCF Scheme | Restricted Scheme | Retail Scheme |
|---|---|---|---|
| Restriction on Transactions with Associate entities |
Shall not buy or sell securities from its associates, other schemes of the FME or its associates, or an investor who has committed to invest at least 50% of the corpus of the scheme, without taking prior approval from 75% of investors in the scheme by value. No such approval is required for funds of fund schemes, subject to disclosure in the PPM the details of the underlying scheme(s) wherein the investments are intended to be made and the nature of association, if any, that the FME has with the manager(s) of such underlying scheme. |
Shall not buy or sell securities from its associates, other schemes of the FME or its associates, or an investor who has committed to invest at least 50% of the corpus of the scheme, without taking prior approval from 75% of investors in the scheme by value. No such approval is required for funds of fund schemes, subject to disclosure in the PPM the details of the underlying scheme(s) wherein the investments are intended to be made and the nature of association, if any, that the FME has with the manager(s) of such underlying scheme. |
– |
| Condition concerning leverage | FME intending to employ leverage has to adopt a comprehensive risk management framework, whilst earlier such policy had to be adopted upon undertaking leverage | FME intending to employ leverage has to adopt a comprehensive risk management framework, whilst earlier such policy had to be adopted upon undertaking leverage | – |
| Contribution of FME and its associates | An exemption has been provided from the 10% contribution restriction when FME and its associates are residents outside India and have no UBO in India, and when such schemes are not investing more than 1/3rd of the corpus in one investee company and its associates. | An exemption has been provided from the 10% contribution restriction when FME and its associates are residents outside India and have no UBO in India, and when such schemes are not investing more than 1/3rd of the corpus in one investee company and its associates. | Exemption from the requirement of minimum contribution in case of fund of funds scheme which has similar requirements. |
| Particulars | VCF Scheme | Restricted Scheme | Retail Scheme |
|---|---|---|---|
| Computation of NAV | In addition to disclosure of portfolios on a yearly basis, VCFs are now required to disclose NAVs on a yearly basis. | – | – |
| Condition concerning valuation | The requirement to adopt third-party valuation, shall not apply in case of a fund of funds scheme that invests in the scheme(s) regulated by a financial sector regulator, directly or through a manager, in IFSC, India or foreign jurisdiction(s), which are valued by any independent entity. | The requirement to adopt third-party valuation, shall not apply in case of a fund of funds scheme that invests in the scheme(s) regulated by a financial sector regulator, directly or through a manager, in IFSC, India or foreign jurisdiction(s), which are valued by any independent entity. | The requirement to adopt third-party valuation, shall not apply in case of a fund of funds scheme that invests in the scheme(s) regulated by a financial sector regulator, directly or through a manager, in IFSC, India or foreign jurisdiction(s), which are valued by any independent entity. |
| Temporary Deployment | Permitted to be made in bank deposits and overnight mutual fund schemes. | Permitted to be made in bank deposits and overnight mutual fund schemes. | Permitted to be made in bank deposits and overnight mutual fund schemes. |
V. Relaxations provided to Portfolio Managers
-
- The Amended Regulations have reduced the minimum funds/securities to be accepted from a client to USD 75,000 from the previous USD 150,000.
- Further, an additional alternative to maintain the funds of a client with a regulated broker-dealer in IFSC, or an equivalent entity in India or foreign jurisdiction has been provided. However, the FME shall ensure that it is duly authorized to operate the said bank account either through itself or through a custodian and it shall provide the details of all such bank accounts including any transactions undertaken whenever directed by IFSCA.
- Furthermore, where the funds of the clients are in a specific bank account maintained with a broker-dealer, the FME shall ensure that it has adequate controls to ensure the requirement of the minimum investment amount is met, the FME is duly authorized to operate the said account, and details of such accounts and its transaction should be made available to IFSCA whenever directed to do so.
VI. Mandatory appointment of Custodian in IFSC
-
- Every FME required to appoint an independent custodian shall ensure that the custodian is based in IFSC unless the local laws of the jurisdiction where the securities are issued mandate the appointment of a custodian in that jurisdiction. In such case, arrangements shall be made for the provision of such information to IFSCA.
- However, if the scheme is required to appoint a custodian in IFSC and such scheme has entered into an agreement with a custodian outside IFSC, then an independent custodian in IFSC shall be appointed within 12 months of the notification of the Amended Regulations.
VII. Family Investment Fund
-
- The definition of ‘Family Investment Fund’ now removes the reference to the statement of a self-managed fund, pooling money only from a single family under one or more investment vehicles.
- Further the definition of ‘single family office’ has now been enhanced to also include entities such as sole proprietorship firm, partnership firm, company, limited liability partnership, trust or a body corporate, in which an individual or a group of individuals of a single-family exercises control and directly or indirectly hold substantial economic interest. This is in addition to the existing definition which stated that single-family office includes a group of individuals who are the lineal descendants of a common ancestor and includes their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, ex-nuptial children).
- It has also been clarified that Single Family Office can also set up Authorised FME.
- Further, FIFs have now been permitted to set up additional investment vehicles after filing documents for such vehicles with IFSCA. It is also clarified that FIF may be construed as Category I AIF, Category II AIF or Category III AIF, depending upon the investment.
VIII. Other Changes
-
- The definition of Accredited Investor has been modified to remove reference to the Accreditation Agency and such an investor now has to only meet the criteria prescribed by IFSCA in this regard.
- Minimum years for maintenance of records is reduced to eight years from the existing 10 years.
- FME intending to open a branch or representative office in other jurisdictions for the purpose of marketing their offerings and client service shall give prior intimation to IFSCA.
Note:
This update only covers key regulatory changes with respect to investment funds in the like of Venture Capital Scheme, Restricted Scheme, Retail Scheme and FIF (minor edits and clarifications have not been captured for brevity). However, the Amended Regulations have also introduced changes with respect to other investment products which can be accessed from this link.
Authors:
Pratham Darad (Principal Associate),
Akanksha Dutta (Associate),
Kostub Singla (Associate)
(Funds, Asset Management and Regulatory Practice)
Disclaimer:
This document has been created for informational purposes only. Neither IC RegFin Legal nor any of its partners, associates or allied professionals shall be responsible/liable for any interpretational issues, incompleteness/ inaccuracy of the information contained herein. This document is intended for non-commercial use and for the general consumption of the reader and should not be considered as legal advice or legal opinion of any form and may not be relied upon by any person for such purpose.
