Key Changes To IFSCA (Fund Management) Regulations, 2022

BACKGROUND

The IFSCA Authority has interalia approved the proposal on review of IFSCA (Fund Management) Regulations, 2022 in its meeting held on 19th December 2024¹

While the overall regulatory framework of registering the Fund Management Entity (FME) remain the same, certain key changes have been undertaken and safeguards have been introduced to facilitate the ease of doing business, clarify the intent of certain regulatory provisions and protect and promote investor's interest.

The significant changes have been listed below.

NON-RETAIL SCHEMES (VENTURE CAPITAL SCHEMES & RESTRICTED SCHEMES)

1. The requirement of minimum corpus per scheme reduced from UDS 5 Mn to USD 3 Mn. (Further, open-ended schemes can now commence operations with a corpus of USD 1 million, and shall have the time to achieve the minimum corpus requirement of USD 3 million within 12 months.)
2. Validity of the Scheme's PPM increased from 6 months to 12 months post IFSCA's communication about taking it on order.
3. The contribution of FME / its Associate(s) in a scheme increased from 10% to 100% , subject to the following conditions :
   • The FME /its associate should not be resident in India.
   • Scheme shall invest only up to 1/3 rd of its corpus in any 1 company and its associates.
4. Joint Investments by 2 individuals with specific relationships shall be permitted.
5. The categorisation of AIFs & Family Investment Funds (FIFs) to be streamlined for better clarity.
6. Restrictions on schemes from buying/selling securities from associates/other schemes of FME or a major investor without seeking prior approval of 75% of investors in the scheme by value, which shall exclude the major investors from voting on transactions that involve their own stake.
7. Waiver of undertaking Independent valuation of Fund of Fund schemes, if the underlying fund is valued by an independent service provider.

MANPOWER REQUIREMENTS FOR FME

1. FMEs shall no longer be required to seek prior approval from IFSCA in order to appointment KMPs, only intimation to IFSCA shall suffice.
2. Requirement of appointment of additional Key Managerial Personnel (KMP) to manage Asset Under Management (AUM) (excluding fund of funds) above USD 1 Billion, which shall be met before filing a retail scheme/ETF with the IFSCA.
3. FME employees shall be required to undergo certifications from IFSCA-specified institutions to maintain competence.

GISTERED FME (RETAIL) AND RETAIL SCHEMES

1. Criteria for track record of Registered FME (Retail) shall include the following:
   • 5 years experience of managing AUM of USD 200 Million and 25,000 investors, which shall be evaluated based on the experience of FME including its holding as well as subsidiary companies.
   • Persons holding over 25% in the FME must collectively have atleast 5 years of experience managing activities for minimum 1,000 investors on assets of at least USD 50 Million.
   • FME must maintain a net worth of USD 2 Million or such amount as specified by IFSCA
2. The requirement of minimum corpus per scheme has been reduced from USD 5 Mn to USD 3 Mn. (Further, open-ended schemes can now commence operations with a corpus of USD 1 million, and shall have the time to achieve the minimum corpus requirement of USD 3 million within 12 months.)
3. The cap on investment in single company by a sectoral/thematic/Index scheme is linked to the weightage of that company in the representative index (by an independent entity) that such scheme intends to benchmark with or 15%, whichever is higher.
4. Retail scheme restrictions (e.g., single company, sector) shall not apply to fund of funds, if underlying funds meet regulatory investment restriction
5. Fund of funds are exempt from independent asset valuation if the underlying fund(s) are valued by an independent service provider.
6. Listing of close-ended retail schemes on stock exchanges made optional if the minimum investment per investoris at least USD 10,000.

OTHER KEY MATTERS

1. Schemes requiring a custodian must appoint an IFSCA-registered custodian, subject to the following conditions:
   • Funder of Fund schemes are exempt from appointing a custodian
   • For securities issued in foreign jurisdictions, a regulated custodian may be appointed if required by local laws, but the FME must provide relevant information to the Authority when directed
   • Schemes that are required to appoint an IFSCA-registered custodian will have a 12-month transition period.
2. The "fit and proper" criteria under the regulation have been streamlined.
3. For Non-Retail and Retail Schemes, pending deployment, funds can be invested in bank deposits and overnight schemes, in addition to existing financial products.
4. The minimum investment for Portfolio Management Services (PMS) is reduced to USD 75,000 from USD 150,000. Clients can also transfer funds to a designated broking account managed by the FME under PMS, subject to certain safeguards.
5. FMEs can open branch or representative offices in other jurisdictions for marketing and client service without prior IFSCA approval
6. Provisions on valuation by credit rating agencies, retail scheme restrictions, family investment funds, etc., issued by way of circular in the past, have been subsumed in the proposed regulations.

Footnote

1 Press Release dated 21 st December 2024

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.