Capital flows into alternative investments are likely to receive a boost following the Union Budget’s announcement allowing the formation of Variable Capital Companies (VCCs) in India. This move could shift preferences away from traditional structures such as trusts or partnerships, including Alternate Investment Funds (AIFs), experts said.
Finance Minister Nirmala Sitharaman announced plans to seek legislative approval for pooled private equity fund structures as VCCs, akin to those in Singapore and Mauritius, aiming to attract offshore investors.
“In India, funds are mostly set up as private trusts, which poses certain challenges. Global investors are accustomed to corporate structures like VCCs and hence the proposal is a forward-looking one,” Vivaik Sharma, Partner at Cyril Amarchand Mangaldas said.
The dynamic or “variable” paid-up capital of VCCs, pegged to their net asset values (NAVs), offers higher flexibility in distributing returns to investors without restrictions on the redemption of investor interest, Sharma said.
Along with attracting more overseas investments, industry experts anticipate that the simplified structure of VCCs will draw investors away from the current trust or partnership models, including AIFs.
“VCCs provide several advantages over traditional investment vehicles such as AIFs, trusts, or partnerships, including flexible issue and redemption of shares, distribution of dividends from capital, and reduced compliance burdens,” said Siddharth Mody, Partner at JSA Advocates and Solicitors.
VCCs, unlike AIFs, can accommodate various investment strategies and investor profiles within a single corporate entity, potentially replacing multiple AIFs. So effectively one VCC can substitute 10-15 AIFs, experts said.
This structure allows for efficient management of multiple sub-funds, each with distinct objectives and risk profiles, while ensuring that the liabilities of one sub-fund do not impact others.
Investors will benefit from tailored investment strategies and risk management through various share classes, and flexible entry and exit options.
“Now that AIFs are maturing, this is a good time to introduce VCCs. This development could expand the industry and pave the way for products that currently lack the infrastructure or market,” said Sonit Singh, chief business officer (Real Estate, Asset Management & Advisory), Arka Financial Holdings.
While clarity is still awaited on whether VCCs will be allowed only in the GIFT City or across the country, the International Financial Services Centres Authority (IFSCA) is considering implementing VCCs within GIFT City. An expert committee set up by the IFSCA has already submitted a report providing a legal framework for adopting VCCs in GIFT City.
“Implementing VCCs in India, especially beyond GIFT City, will require comprehensive regulatory changes. Key among these will be amendments to the Sebi regulations governing AIFs to incorporate provisions for VCCs,” said Mody of JSA Advocates.
The framework will need to define the VCC structure, operational guidelines, and compliance requirements, addressing aspects such as the variable nature of share capital, the ability to create multiple sub-funds, and the segregation of assets and liabilities at the sub-fund level.
Clarity is also awaited from the government on whether the legislature will modify the existing Companies law framework or enact a new law on VCCs, experts said.