Public Comments received in response to the Addendum to the Consultation Paper on Review of IFSCA (Fund Management) Regulations, 2022

Public Comments received in response to the Addendum to the Consultation Paper on Review of IFSCA (Fund Management) Regulations, 2022 The addendum to the Consultation Paper on Review of IFSCA (Fund Management) Regulations, 2022 seeking comments/suggestions from the public on the proposal for third- party fund management services in IFSC was issued by IFSCA on August 17, 2024. The following comments / suggestions were received: S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications 1 B(6) We propose raising the AUM The current threshold of USD 10 million threshold to USD 75 million for may impose undue financial and requiring the establishment of a operational strain on small and medium- distinct FME sized funds, potentially deterring them from utilizing the platform play. A higher threshold of USD 75 million would provide these funds with the necessary runway to grow and establish themselves before facing the additional complexities of setting up a distinct FME. By allowing funds to focus solely on investment strategies and delegating operational tasks to the platform, the proposed change would better support the development of a vibrant and diverse fund management ecosystem within the IFSC. 2 B(4) Disclosure Requirements: > Such additional information will provide > The Offer Document shall also transparency to the Investors and outline the description/ profile of disclose the details of the FME who will Distinct FME. be ultimately responsible for the management of the Fund. > Distinct FME shall also comply > It is submitted to the Regulatory with the Fit and Proper Authorities to define a process for requirements before undertaking hygiene checks and the criteria shall be assignments.S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications fulfilled by all the FMEs before their formation. 3 B(5) Governance and Oversight: > Such provision of Platform play is to >Sound Track Record and grow the fund market and not to leverage regulatory requirement shall be the regulation. Hence certain compliance met by the FME. shall be maintain to ensure integrity of GIFT City. >Multiple Funds by same FME > Each strategy under the platform play may have same Principle and should appoint a distinct Principal Officer Compliance Officer. and Compliance Officer to ensure dedicated oversight and adherence to regulatory requirements. This shall not restrict the FMEs to appoint same personnel as the officers for multiple Funds launched by them under their head. 4 B(6) Size Threshold: > The enabler is considered to encourage > It is sugegsted to define an setting up of Funds and provide cost upper limit on the number of benefit. One should not take adverse Funds as well as Size or advantage of not hitting 10 million and Aggregate AUM issuing multiple Funds over time just to save cost. >Timeline for delinking > Timelines and requirement for approvals shall be defined upfront to delink from platform. Since it is proposed for establishment a separate legal and operational FME in case the AUM of the Scheme surpasses USD 10 Million, appropriate revisions under regulations for setting up and granting Registration of a FME shall also be worked upon.S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications 5 B(5) Requirement to appoint a distinct We propose to relax the requirement to (a) Principal Officer and Compliance appoint separate Principal Officer and Officer should be done away. Compliance Officer at each strategy under ‘Platform Play’ mechanism. While the objective of the ‘Platform Play’ mechanism is to provide fund managers with a cost-effective way to test their strategies using the existing platform, requiring the appointment of a separate Principal Officer and Compliance Officer could undermine this purpose. In such a scenario, the Principal Officer and Compliance Officer of the existing FME can ensure regulatory supervision and compliance. Typically, funds do not have their own employees, instead the FME provides the necessary personnel to undertake the operations. Although the talent pool is a significant challenge for applicants looking to establish their business in GIFT IFSC, this issue could create potential bottlenecks and hence, proposing to relax the criteria. 6 B(5), 1) Reconsider the threshold of Rationale for suggestion 1 B(6) USD 10 mn to migrate into a We believe the size threshold of USD 10 distinct FME mn to migrate into a distinct FME may not make commercial sense. Given that currently, each fund is set up as a separate entity in GIFT and anyway the proposal is to have a distinct PrincipalS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications Officer and Compliance Officer for each fund, this requirement may not make commercial sense for participants to enter this space. 7 B(5), 2)Reconsider the requirement of a Rationale for suggestion 2 and 3 B(6) distinct Principal Officer and Based on the experience of the Kotak Compliance Officer for each fund international team who has first hand 3)Ability to have umbrella experience in third party fund schemes in GIFT management entities and platform-play solutions in Luxembourg (UCITS), USA (1940 Act Funds) and Mauritius, we would like to add that globally, what makes the Third party fund management entities/platform-play attractive is:- a)the ability for a quick launch under the platform compared to setting up a new fund on its own – It is important to consider how to facilitate umbrella schemes for this purpose, where most of the entity approvals from regulators and legal arrangements with third parties like fund administrator, custodians etc. are already in place. In such a case, an addition of a sub- fund/scheme under the umbrella would be much faster as compared to setting up an independent fund each time. b)Benefits of scale – One of key advantage for the Third Party FME/Platforms to offer this and the managers coming under the same is theS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications economies of scale. Generally, these platforms house multiple schemes and strategies whereby these entities have negotiated rates at the umbrella level and have resources and infrastructure which can be utilised across schemes. Therefore, as the umbrella grows in size, the marginal costing gets reduced which allows new fund managers to test their strategy without incurring too much costs as part of the umbrella. 8 B(5) We believe there needs to be clarity on this requirement. Instead of appointing distinct officers for each scheme (Fund), we recommend that this requirement be applied at the Fund Management Entity (FME) level. This approach would still ensure dedicated oversight and adherence to regulatory requirements while streamlining the governance process and bring economies of scale. 9 B(6) For clarity, the AUM cap of USD 10 million is per scheme (fund). Additionally, we would like to draw your attention to the de minimis regime, outlined in Article 3 of the Alternative Investment Fund Managers Directive (AIFMD). This regime allows Alternative Investment Fund Managers (AIFMs) with assets under management (AUM) below certain thresholds to opt for a lighter regime rather than the full AIFMS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications regime, with the cap set at EUR 100 million. Therefore, our recommendation is to set the cap at USD 50 million and provide guidance on the requirements for surpassing this cap. 10 B(7) We believe there needs to be NIL (d) clarity on the requirement for “operational independence.” Each scheme/fund will have separate books of accounts. However, FME will be leveraging operational service providers such as Fund Administrators, Transfer Agencies, Brokers, Custodians, and Trustees, which may be common across different schemes under the same FME. That said, Data, emails, risk management, corporate governance such as fund boards/ICs, valuation committee, risk committee, separate email addresses. Suppliers such as FA, TA, Brokers, Custodians, Trustees, Auditors (internal and external) who may be common but should have separate legal contracts by fund entity. 11 NIL Other point which are not outlined in the consultation paper but suggested by us:S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications We would appreciate it if you could provide clarity on the requirements for an FME that intends to distribute funds of different FMEs in GIFT City or International Funds using a technology platform. Specifically, we are interested in understanding the regulatory expectations for a platform that leverages blockchain technology to enhance liquidity in private markets and tokenize the manual investments. Example, ADDX in Singapore 12 B(3) The existing FMEs should also be The existing FMEs should not be denied allowed to offer Platform services. the opportunity to offer platform services. They should also have the chance to benefit from providing these services. By connecting with other investors and launching multiple schemes, the existing FMEs could potentially leverage their capabilities further. This would be helpful in increasing the number of players in the GIFT city Funds domain and bring in depth. 13 B(5) A)FME should be allowed to have Finding suitable compliance and principal one common compliance and officers is challenging and could delay the principal officer. Or launch of the schemes. A common B) On the contrary, FME should be compliance officer would provide holistic allowed to delegate compliance oversight of the FME for all regulatory function to the Fund purposes and help avoid conflicts of administrators. opinion that could arise if multipleS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications compliance officers are involved. Many AIFs are currently searching for compliance and principal officers, but it's difficult to find qualified talent willing to relocate. B) Many of our clients have expressed a preference for delegating the compliance function to fund administrators, as they believe the administrators have a better understanding of the rules and regulations than the Asset Managers (FME). Their reasoning is that they excel in fund management, and by entrusting compliance to experts, they can navigate the compliance landscape more effectively without unnecessary stress. The above suggestion if agreed to; would reduce the delay in launching a scheme due to dearth of talent who are willing to relocate. 14 B(6) Delinking from the original Legal and tax issues may arise as PAN platform and establishing a and such other regulations become separate legal and operational applicable. Taxes would need to be FME may be challenging, as it recalculated if investment is made in such would require closing all open instruments having tax applicability which positions and transferring the could impact the NAV of existing entire investment to a separate investors. Managing open positions in the entity. This process is market adds further complexity. For FPI cumbersome, especially investments, it is recommended to obtain considering the complexities of a separate PAN from the beginning for income tax regulations. inbound investments and to keep distinctS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications Appropriate carve-outs such as order placements, as well as separate no tax neutral transfer should be Demat and bank accounts provided under the Income Tax laws to avoid causing unnecessary difficulties for investors. 15 B(7) It is recommended to clarify who Clearly defined regulatory guidelines will (b) qualifies as eligible auditors to help GIFT enhance its reputation as a perform this audit, as well as the strong financial service center. Any frequency of the audit and the ambiguity may hinder the work of both the internal policies that the FME FME and compliance officers. needs to establish for all its schemes. Audit should be conducted by CA/CS/Law/ Advisory entities who have been conducting Audit of other SEBI registered entities. The Frequency can be annual. 16 NIL Duties and obligations of the FME, Such undertakings shall make it binding Principal Officers and Compliance on the FME to comply strictly with IFSCA officers especially those catering rules and guidelines, ensuring a to Platform schemes in an FME consistent and transparent operational need to be well defined and framework. This practice is commonly captured in the Fund Documents. seen in jurisdictions like Mauritius and IFSCA should take an annual Singapore, where regulatory compliance undertaking from FME that it is rigorously enforced to promote investor complies with all the rules and confidence and maintain the integrity of regulations set out by IFSCA. the financial ecosystem. By adopting similar commitments, the FME can strengthen its credibility and enhance its appeal as a destination for international investments.S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications 17 NIL The recording of portfolio This is a fundamental compliance transactions for each scheme requirement across all fund jurisdictions, should be mandatory and kept necessitating that the FME demonstrates separate from other schemes order placement and its traceability. Each launched by the FME. The FME investment should be authorized by the must be able to establish a clear FME or the investment committee. This trail of all transactions conducted practice will help prevent any potential within each scheme. misconduct and foster discipline within the funds ecosystem. 18 NIL IFSCA should clarify whether the While there is no objection to two platform can accommodate more separate schemes employing a common than two strategies that share a strategy, some fund jurisdictions, such as similar investment rationale. For Mauritius, do not permit this practice. instance, there could be a situation Obtaining approval for such schemes where Strategy of Scheme A and would be a significant challenge. This Strategy of Scheme B both focus point is emphasized because the fund on investing in debt securities with industry will likely raise this question, and an A++ rating, or both strategies it would be beneficial to hear IFSCA's may target investments in Nifty 50 perspective on the matter. stocks. 19 NIL IFSCA should permit the listing of The listing process enhances credibility AIF units launched by FMEs. The and transparency regarding the NAV of tradability of AIF units would specific AIFs, as it involves a thorough significantly increase if they were evaluation before any unit is allowed to be listed on the stock exchanges listed on the stock exchange. This would located in GIFT City, similar to provide reassurance to investors, making other currently available financial it easier to buy and sell units on the instruments. exchange platform instead of relying on the AIF to find a seller during urgent redemptions by any investor.S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications 20 NIL IFSCA may kindly clarify which It would greatly benefit the fund industry if kind of schemes shall be allowed clarification is provided regarding the under the Platform services types of schemes that can be launched whether Open ended or close under the platform, as the functioning, ended? subscription and redemption processes, and investment criteria for open-ended and closed-ended schemes are quite different. 21 NIL Borrowing/leverage limits of each The borrowing or leverage limit of each scheme should be clearly defined. scheme could affect other schemes if it exceeds the FME's control. Investors in one scheme may experience adverse effects from borrowings in another scheme, potentially leading to financial losses through no fault of their own. Therefore, platform services should be permitted under a variable capital company regime, which provides legal segregation of assets and liabilities for each scheme. This structure ensures that each scheme operates as a separate company, thereby protecting investors from financial liabilities arising in other schemes. 22 NIL IFSCA should define the number It would be helpful if the IFSCA could of investors in each strategy? clarify as to how many investors each scheme could have so as to ensure that the scheme is not being launched to facilitate investment by certain specific investors who might have ulterior motive. Further, certain Fund jurisdictions do notS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications allow less than 2 investors in each scheme being launched and if the number of investors are less than 2 then the vehicle of investment can’t be AIF rather it can be an Investment Holding company. 23 B(6) We suggest increasing the AUM The proposed Third-party Fund threshold from USD 10 million to Management Services will encourage USD 50 million before requiring small and medium-sized funds and migration into a distinct FME startups to establish themselves in the IFSC by offering cost-efficient solutions. Increasing the threshold to USD 50 million would allow these funds to scale before incurring the additional costs and operational burdens of setting up a distinct FME. These costs include managing employees (Principal Officer and Compliance Officer), maintaining an office, audit expenses, administrative expenses, managing a bank account, and compliance costs. Requiring these smaller funds to set up a distinct FME before achieving a significant scale may discourage them from using the platform play, thereby hindering innovation and growth within the IFSC. Moreover, each strategy under the platform will still have a distinct Principal Officer and Compliance Officer, ensuring dedicated oversight, regulatory adherence, and independent management. This structure maintains governance integrity, risk management,S. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications and internal audits, ensuring investor protection without burdening emerging fund managers with unnecessary costs Also, we would like to bring to your notice that in all other jurisdictions like Luxembourg, Singapore, Mauritius etc. do not have any threshold restrictions. In our opinion a restriction of USD 10 Million will be a non-starter for this product and hence we request for your consideration to take the threshold to USD 50 Million. 24 B(4) 1. Any FME that starts to manage 1. Just as investors of the third-party fund third party funds should be are entitled to know that the FME is a third required to inform the investors of party without any skin-in-the-game, the the non-third party/prop funds that investors in the non-third party/prop funds are already being managed by the that are already being managed by the FME that it is providing third-party FME are entitled to know that the FME fund management services. may be in a potential conflict of interest Details of the management fee situation. However, there should be no being received by the FME and the need to obtain any consent. If an FME has type of investments proposed to to obtain consent and fails to do so, there be made by the third party fund would be a deadlock. should also be disclosed. This After an FME starts to manage third-party should be a mere funds, if the FME launches any non-third intimation/disclosure and there party/prop fund, the PPM of such fund should be no need to obtain any should contain detailed disclosures consent. After an FME starts to regarding the services being rendered to manage third-party funds, if the third party funds, including details of the FME launches any non-third third party funds. This will ensure that party/prop fund, the PPM of suchS. Para Comments/ Suggestions/ Rationale Provided No No. Suggested Modifications fund should contain detailed investors in such funds are forewarned of disclosure regarding the services any potential conflict of interest. being rendered to third party funds. B(4) 2. It is not clear from the 2. Whether or not an FME managing a consultation paper whether an third-party fund would be required to FME managing a third-party fund make a minimum contribution in such would be required to make a fund should be made clear when the minimum contribution in such actual amendment is issued. fund. We assume that the FME would not be so required and the FME would be without any skin-in- the-game. 25 B(6) We recommend increasing the •In the Luxembourg Manco example threshold to US$ 50 million provided in the consultation paper, typical third party fund management fees are in the range of 10 – 30 bps on AUM with a minimum AUM fee •We provide you the math for an FME that offers third party fund management services upto a threshold of US$ 10 million •If we were to assume an average AUM of US$ 7 million and 15 bps as the management fee – the FME will earn US$ 10,500, which will not cover the costs of the FME, and hence the FME will be forced to levy a minimum fee of ~ US$ 30,000, which will take the third party management fee to ~ 50 bps, which will not be viable for a manager.IFSCA Response: During the public consultation, comments were received from various stakeholders. The proposal was suitably modified based on the comments received from the stakeholders and placed before the Authority in the meeting held on June 24, 2025. The comments received from the stakeholders were also placed before the Authority.