India to Implement Virtual Corporate Collective Regime in GIFT City

India Proposes Dedicated Legal Framework for Variable Capital Companies in GIFT City

The Indian finance ministry has submitted a draft for public consultation that proposes a dedicated legal framework for Variable Capital Companies (VCCs) in GIFT City, a move that has been under discussion for the past five years. If passed, this framework will be a chapter in the International Financial Services Centres Authority Act (2019). The proposed legislation aims to make GIFT City more attractive to private equity, venture capital, and other pooled investment funds.

Variable Capital Companies are a specialized corporate structure designed specifically for investment funds operating in GIFT City. A VCC allows multiple investment funds to operate under one umbrella structure while keeping their assets and liabilities separate. This means each fund is treated independently, so investors in one fund are not exposed to the risks, losses, or investments of another fund within the same VCC.

The Finance Ministry's draft suggests that a VCC framework could make GIFT City more competitive with jurisdictions such as Singapore, Luxembourg, Mauritius, or the United Kingdom, where similar vehicles are already being used.

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The key benefits of a VCC include its recognition as a globally accepted fund form, which gives legal recognition on the sub-fund construct and ring-fences all liabilities at the sub-fund level. This provides institutional limited partners (LPs) with the segregation comfort they expect. Furthermore, the VCC mechanism addresses the problem of schemes launched under an umbrella trust having no separate legal personality and not being statutorily ring-fenced.

Pallabi Ghosal, Partner - Corporate, Asset Management and Funds, Trilegal, notes that the trust form is the most prevalent fund structure in India, which can be unfamiliar to offshore institutional investors. The VCC mechanism positions GIFT City as a credible and familiar domicile for global capital, making India a more attractive destination for global capital.

The move to VCCs is also expected to draw capital from open-ended evergreen capital funds or funds looking to relocate and fund managers looking to raise capital from LPs who have familiarity with this mechanism. This will likely lead to an increase in the use of VCC structures in GIFT City.