Asset managers seeking easier IFSCA rules for Fund Management Entities at GIFT City

The rationale behind the platform play circular was to facilitate the growth of the funds management industry in GIFT IFSC and allow fund managers to test their strategies in a cost-effective manner, as per the consultation paper dated August 17, 2024.  

Asset managers are keen that regulator IFSCA should lower the requirements relating to personnel and infrastructure at GIFT City, and increase the upper limit of funds that can migrate into a new Fund Management Entity (FME) at the GIFT IFSC.

In order to bring ease of doing business framework in-line with foreign jurisdictions like Mauritius, Singapore and Dubai, IFSCA had in August 2024 proposed rules for ‘platform play’, allowing FMEs to use existing infrastructure to provide third-party fund management services to offshore asset managers. The proposed rules, as part of a consultation paper, were meant to lower costs for offshore funds to set up base at GIFT IFSC.

Fund managers have now approached the GIFT City regulator seeking certain tweaks, people familiar with the matter told Moneycontrol. The demands include lowering ‘substance requirements’ and increasing maximum threshold for funds to migrate into a new FME.

Substance requirements refer to the criteria by IFSCA to ensure operations at IFSC have a genuine presence, conducting business activities from location, including key management personnel (KMPs) based at the IFSC itself. This is aimed at demonstrating that the company is not a 'letterbox' entity but engages with clients while based out of the IFSC.

Asset managers are also seeking that the threshold of funds that can migrate into a new Fund Management Entity (FME) at the IFSC should be raised higher.

The August 2024 consultation paper said that an FME, in addition to managing their own funds, can also manage funds on behalf of clients. The clients here refer to asset managers who can open a fund without the need to obtain an FME license from the regulator. Currently, asset managers have to obtain an FME license to start their own fund.

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"Unlike SEBI, where funds are directly regulated, at the IFSC, it is the investment manager that is regulated. As a result, the asset manager must obtain an FME license from the regulator, while the funds they launch require approval from the IFSCA," said Ketaki Mehta, partner at Cyril Amarchand Mangaldas.

The consultation paper said that each fund, as part of the platform play, should appoint a distinct principal officer and compliance officer to ensure oversight and adherence to regulatory requirements. Two employees will be appointed by the FME entity for every new fund it opens. "Even if the fund is not employing two people but the FME is, the FME will pass on the price to the fund," said a person familiar with the workings of the FME.

In order to lower the cost, the industry has now asked the regulator that FMEs should employ one instead of two people, said people in the know.

The circular, which mandates the FME to employ two people at the GIFT City office, is done to promote employment, however, experts argue that this requirement is more relaxed in other jurisdictions.

"The cost and availability of qualified compliance professionals can be challenging, especially in new regulatory hubs. Given this constraint, DFSA (Dubai Financial Services Authority), under DIFC’s regulatory framework, allows one compliance officer to serve multiple entities (currently up to five), as long as the nature of activities are closely aligned" said Rohit Agarwal, CEO, Funds Business, Dovetail Capital.

Another point mentioned in the circular is that once a scheme touches $10 million in terms of assets under management, it must migrate to a distinct FME. However, funds have asked the regulator to raise this threshold to $50 million, as $10 million is considered a relatively small size for offshore funds globally, said a person with direct knowledge of the matter.

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The IFSCA is however not immediately planning to take up the platform play circular for discussion, said a person with direct knowledge of the matter.

The rationale behind the platform play circular was to facilitate the growth of the fund management industry at GIFT IFSC and allow fund managers to test their strategies in a cost-effective manner, as per the August 2024 consultation paper.

It is not just the cost that is a pain point for offshore funds, the process and time for getting a FME license is also difficult, said experts.

"To get a FME license, the asset manager has to first secure a space in GIFT City, set up a company, and apply through the IFSCA's single-window IT clearance platform. After receiving IFSCA administrator approval, you’ll need to complete a few additional registrations, including the eligibility certificate, bond cum legal undertaking, GSTIN, and importer-exporter code. Once the eligibility certificate is obtained, you can proceed to sign and register your lease deed with the developer, based on the provisional letter of allotment. With the lease deed signed and IFSCA approvals in place, you're ready to start operations as an FME," said Mehta.

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