IFSCA tightens scrutiny of FMEs over disclosure, valuation and compliance violations

A Fund Management Entity (FME) is a financial institution that manages investments for investors, and are registered with the IFSCA.

The International Financial Services Centre Authority (IFSCA) – a regulatory body for GIFT City - has intensified its scrutiny over supervision of Fund Management Entities (FMEs), recently conducting surprise visits to examine violations of rules, people familiar with the development told Moneycontrol on condition of anonymity.

The examination pertains to disclosures by FMEs to investors, as well as fund valuation, NAV calculations, due diligence in client on-boarding and compliance with disclosures in Private Placement Memorandum (PPM), said a person familiar with the matter.

A Fund Management Entity (FME) is a financial institution that manages investments for investors, and are registered with the IFSCA.

The GIFY City regulatory body has already issued warning letters to certain entities, cautioning those failing to take corrective action with adjudication action. Moneycontrol has learnt that IFSCA has already initiated enforcement action in certain cases of grave violations.

The root of the matter go back to April last year, when IFSCA introduced the green channel route for FMEs to launch new schemes. Under the route, an FME could introduce any scheme - except a retail-oriented one - immediately upon submitting the PPM and the scheme application form to the IFSCA without waiting for the regulatory approval for the scheme.

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A partner at a law firm who regularly deals with FMEs said that the regulator might have started to rigorously inspect PPMs after the green channel route was put in place, doing a post-facto check if the PPMs were being followed or not.

The IFSCA conducts two types of examinations – the routine, pre-scheduled, deep-dive supervision with advance notice to FMEs, and the surprise inspections triggered by suspected regulatory breaches.

The regulator has also ramped up its scrutiny of substance requirements, according to people engaged with FMEs. These norms pertain to the physical presence of companies, particularly regarding employee headcount. The IFSCA mandates that each FME in GIFT IFSC must have at least two employees.

“The regulator conducts planned visits to verify whether FMEs meet the minimum staffing requirement,” said a person requesting anonymity.

Currently, GIFT IFSC has 139 FMEs, of which 123 are registered as non-retail schemes and only eight as retail schemes, and the balance are authorised FME schemes. Collectively, these schemes raised $14.33 billion till December 2024 as per data by IFSCA.

There are a total of 198 registered schemes in GIFT City with Category III AIFs leading the way with 116 schemes, followed by 70 schemes under Category I and Category II AIFs. Additionally, 12 schemes fall under the angel and venture capital category.