By ITTeam The International Financial Services Centres Authority (IFSCA) has introduced a consultation paper proposing a structured framework for Special Purpose Vehicles (SPVs) under the IFSCA (Fund Management) Regulations, 2022. This initiative aims to enhance the ease of doing business and foster the growth of the alternative investment industry within International Financial Services Centres (IFSCs), particularly in Gujarat International Finance Tec-City (GIFT City).
Key Proposals of the Framework
The proposed framework allows Fund Management Entities (FMEs) registered with IFSCA to establish SPVs linked to an existing Controlling Scheme within an IFSC. The Controlling Scheme must hold at least 50% of the SPV’s equity, interest, or capital commitments, ensuring alignment with its investment strategies. This structure is designed to facilitate co-investment opportunities and enable leveraging at the SPV level, thereby broadening investment avenues and strengthening financial operations in IFSCs.
Operational Flexibility and Investor Participation
The framework provides significant operational flexibility:
- Nature and Tenure: SPVs can be either open-ended or close-ended, depending on the nature of the Controlling Scheme. The tenure of an SPV must align with that of the Controlling Scheme, ensuring a synchronized lifecycle.
- Eligible Investors: Investors eligible to participate in SPVs include the Controlling Scheme, current investors or affiliates of the Controlling Scheme, and other approved investors. This inclusivity allows for a diverse investor base, enhancing capital mobilization.
Leverage and Investment Strategies
The framework permits leverage at the SPV level, provided it complies with the overall limits specified in the Controlling Scheme’s Private Placement Memorandum (PPM). This provision offers flexibility for financing strategies, enabling FMEs to optimize capital structures. Additionally, SPVs will focus on investing in single portfolio companies and may be used for co-investment, leverage transactions, or ring-fencing the investments of the Controlling Scheme. This targeted investment approach is expected to attract investors seeking specific exposure.
Simplified Compliance and Reporting
To streamline operations, SPVs are exempted from filing a comprehensive PPM. Instead, a simplified Term Sheet must be submitted within 21 working days of the investment. This measure reduces administrative burdens and accelerates the investment process. Furthermore, SPVs must adhere to the valuation norms and Net Asset Value (NAV) computation guidelines under the IFSCA (Fund Management) Regulations, 2022, ensuring transparency and consistency in financial reporting.
Implications for GIFT City and the Alternative Investment Landscape
Legal experts suggest that the SPV framework will encourage potential investors in Alternative Investment Funds (AIFs) in IFSCs to select their preferred portfolio companies and invest through SPVs. This approach allows investors to tailor their investment strategies more precisely, aligning with their risk appetites and return expectations. FMEs may also prefer this model, as they are not required to make any contribution to such SPVs, thereby facilitating greater flexibility in fund management.
Conclusion
The IFSCA’s proposed framework for SPVs represents a significant step towards enhancing the investment ecosystem within GIFT City. By providing greater flexibility for co-investment opportunities and streamlining compliance requirements, the framework is poised to attract a diverse range of investors and stimulate growth in the alternative investment sector. Stakeholders have been invited to provide feedback on the consultation paper, signaling a collaborative approach to refining the regulatory landscape in India’s IFSCs.