On July 23, 2024, the honourable Finance Minister in her budget speech announced the government's proposal to seek legislative approval for providing an efficient and flexible mode for financing leasing of aircrafts and ships, and pooled funds of private equity through a 'variable company structure'. The conversation around variable Capital Company ("VCC") structure is not new to India. In this article, we have outlined the basic features of a VCC structure and we revisit the key recommendations made by committees in the past with relation to introduction of the VCC structure in India.
VCC and its introduction in Singapore
Variable Capital Company (VCC) is a separate legal entity having a variable capital base to allow for issue and redemption of shares on an on-going basis1. In the context of investment funds, the VCC structure dispenses with some of the key limitations of companies and LLPs and provides for higher regulatory standards than those applicable to trusts. A VCC may house a single pool or multiple pools of capital along with corresponding investments. Multiple pools of capital would be structured as an umbrella fund.
Singapore introduced the VCC structure through a separate legislation in 2020. The enactment of the VCC legislation enhance Singapore's competitiveness as a domicile for investment funds by introducing a customised corporate structure which dispenses with elements of existing company law aspects that are not conducive to investment funds2. Globally, similar structures exist in UK, Mauritius, etc. for investment vehicles.
Introduction of VCC in Indian Context
The International Financial Services Centres Authority, by its Office Order dated 22nd September 2020, constituted an Expert Committee under the chairmanship of Mr. K. P. Krishnan to examine the relevance and adaptability of the Variable Capital Company (VCC) in the International Financial Services Centre (IFSC) in India. In its report in May 2021, the Krishnan Committee recommended the introduction of VCCs in the International Financial Services Centre by way of a separate law3. The Krishnan Committee highlighted that the VCC carried the benefits of a trusts, company and LLP, and eliminates a lot of the limitations.
This was followed by an Expert Committee, set up under Mr. M.S. Sahoo, submitting its report for drafting a Legal Framework for allowing VCC Structure in the IFSCs in October 2022 ("Sahoo Committee Report"). The Sahoo Committee Report laid down a skeletal regulatory framework for VCCs in the IFSC based on an examination of existing structures for investment funds in India, Singapore, Luxembourg, Mauritius, United Kingdom, etc. It was stated that the functioning of the VCC-structure in IFSCs would provide a template to consider the introduction of a VCC-structure for the domestic Indian financial system too at a later stage after taking into account the applicable regulatory considerations4.
Key Features of a VCC
Based on the recommendations of the Sahoo Committee Report, we have listed the key features of a VCC below.
- A VCC may house a single pool or multiple pools of capital along with corresponding investments. Multiple pools of capital would be structured as an umbrella fund.
- The sub-fund of a VCC should not be a legal person separate from the VCC; it should derive its character from the VCC.
- The assets and liabilities of each sub-fund shall be segregated from the VCC and the other sub-funds.
- The assets of a sub-fund cannot be used to discharge the liabilities of or claims against the VCC or any other sub-fund of the VCC.
- VCC structure should be available for both open-ended and close-ended strategies. The funds may be allowed to convert from open-ended to close-ended, and vice versa, in accordance with the norms specified.
- The merger/ acquisition of a sub-fund of the VCC with another sub-fund of the same or another VCC has also been recommended. It also allows the merger/ acquisition of one VCC with another VCC.
- Akin to the Singapore structure, a distinction in the share capital can be made between Management Shares (more voting rights, limited economic rights) and Participating Shares (more economic rights, limited voting rights).
The mention of the VCC in the Finance Minister's speech on July 23, 2024 is significant and formally the first instance of mention of the structure for the Indian legislature. While there have been no subsequent reports or any legislation in the IFSC post the Sahoo Committee Report, the budget speech has reinitiated the conversation around VCC for India in the private market space.
Footnotes
1. Report of the Expert Committee for drafting a Legal Framework for allowing Variable Capital Company Structure in the IFSCs ("Sahoo Committee Report"), pg. 6.
2. Report of Singapore Variable Capital Company by PwC <<a href="https://www.pwc.com/sg/en/asset-management/singapore-variable-capital-company.html" target="_blank">https://www.pwc.com/sg/en/asset-management/singapore-variable-capital-co...
3. Report of the Expert Committee on feasibility of the Variable Capital Company in International Financial Services Centres in India.
4. Sahoo Committee Report, pg. 9.
This post has been contributed by Ms. Vaneesa Agrawal, Founding Partner and Ms. Sanyukta Srivastav, Senior Associate.
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