What are variable capital companies that Budget talks about?

Explained: Variable capital companies - a flexible structure for pooled investments

The government will seek the required legislative approval for providing an efficient and flexible mode for financing and leasing of aircraft and ships, through a variable company structure, Finance Minister Nirmala Sitharaman said while presenting the Budget for FY25 on July 23.  The new structure will also be beneficial for private equity investors.

Moneycontrol takes a look at what a variable company or a variable capital company (VCC) is and what will the introduction of this structure mean for investors as well as capital flows into the Indian economy.

What is a variable capital company?

A VCC is a corporate structure that has been gaining popularity among global investors over the past years due to the flexibilities it offers to fund managers.

As against traditional pooled investment vehicles, where fund manager needs to set up individual funds for every distinct investment strategy or different investor profiles, a VCC is an umbrella entity under which a fund manager can manage different funds for different investment strategies and for investors with different risk profiles.

What are the advantages of a VCC?

A VCC provides flexibility in the issuance and redemption of its shares. A VCC can also pay out dividends from its capital, giving fund managers flexibility to meet obligations of dividend payments.

For fund managers, the VCC structure can save costs by managing various funds under a single umbrella entity. These savings can be passed on to investors in the form of lower fund management fees.

“Umbrella funds under a VCC offer substantial versatility. For instance, if an investor is interested in renewable energy projects but not in traditional energy sectors, the umbrella fund can accommodate both options, allowing the investor to select their preferred investment focus,” said Prasenjit Chakravarti, Partner, Khaitan & Co.

Which geographies are VCCs popular in?

VCCs are emerging as the go-to structure for fund managers in recent times. Some of the leading jurisdictions that have set up regulations for VCC include Singapore, Dubai and Mauritius.

Singapore passed a Variable Capital Companies Act in 2020, while Mauritius came up with its rules two years later.

Since Singapore introduced its VCC regulations in 2020, close to a 1,000 such companies have been set up, managing over 1,900 sub-funds.

What will it mean for India?

Industry experts believe that the introduction of VCCs will help increase capital flows into India and take it a step closer to its ambition of emerging as a global financial hub.

“Alternative Investment Funds (AIF) or Fund Management Industry has seen a sustained push over the last few years and this development has the potential to help expand the industry in the coming years and attract investments on a larger scale meant towards different products,” Sonit Singh, Chief Business Officer-Real Estate, Asset Management & Advisory, Arka Financial Holdings Private Limited.

Nitesh Mehta, Partner, M&A Tax and Regulatory Services, BDO India, said the introduction of VCC coupled with the existing GIFT City structure has the potential to bring India a step closer to becoming a financial hub like Singapore.

What are the limitations of VCCs?

VCCs are of a recent vintage. They were introduced only a few years ago and some investors may look at them as untested entities. These investors may want to stick to the existing and established structures, offering more comfort on issues of tax and regulations.