Budget 2024: India to enable VCC structures like Singapore, Mauritius

The Indian government will enable pooled private equity fund structures as variable capital companies (VCCs)—a structure more popular in the financial markets of Singapore and Mauritius—in a bid to attract more capital from overseas investors.

“We will seek the required legislative approval for providing an efficient and flexible mode for financing the leasing of aircraft and ships, and pooled funds of private equity through a ‘variable company structure’,” finance minister Nirmala Sitharaman said in Parliament.

Industry officials believe that the adoption of the VCC framework has helped Singapore become the hub for international fund management, and a similar move for India will be beneficial.

A VCC provides flexibility in fund formation and the issuance or redemption of shares. The VCC structure offers the advantages of a corporate entity (as compared to a trust or partnership) as well as ease and operational flexibility in infusing new capital from fresh investors and repayments/redemptions to investors, say legal experts. It combines the benefits of both traditional trust and corporate structures while addressing their limitations.

“As of now, most funds in India are set up as trusts.
VCCs can offer inherent benefits of a corporate structure like limited liability while granting flexibilities in making distributions or redemption of investors’ interests, which is ideal for funds. International investors are more familiar with VCCs than trusts,” said Vivaik Sharma, partner in the investment funds practice at Cyril Amarchand Mangaldas.

"The finance minister has announced the implementation of a VCC framework. It is not clear whether the VCC framework will be implemented only in the GIFT City or mainland India as well," said Rajesh Gandhi, partner at Deloitte India.

"A VCC enables funds to operate within a globally preferred corporate framework, while at the same time offering effective segregation and ring-fencing of different asset pools. Additionally, it allows for the issuance of various share classes. This structure significantly reduces compliance requirements compared to traditional corporate structures, providing greater flexibility for pooling funds and repatriating profits," added Gandhi.

Some other legal experts believe that the structure may only be permitted in the International Financial Services Centres (IFSCs). India only has one IFSC at present, known as the GIFT City in Gujarat.

“The finance minister’s speech mentions leasing of aircraft and ships and pooled funds of private equity through a VCC. The expert panel set up by IFSCA has already submitted its report and suggested the framework for VCC structure AIFs, which are currently formed as trusts or partnerships. Similarly, the framework for the business of leasing in GIFT provides for a company structure on the lines of RBI’s NBFC framework. With the finance minister’s speech, the VCC structure is likely to be operationalised soon,” said Sunil Gidwani, partner at Nangia Andersen LLP.

Gidwani added that the appropriate changes in the IFSCA regulations and allied legislation may be brought up soon.

Earlier this year, the Reserve Bank of India (RBI) allowed resident investors and companies to invest in overseas funds, including those set up in the United States and VCCs in Singapore, without any restrictions.