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Mint
5 days ago
- Business
- Mint
New funds surge in GIFT City, but old money stays offshore
Moneybags from Mauritius, Singapore and Cayman Islands are yet to make the move to Gujarat's GIFT City given burdensome tax and compliance rules without commensurate benefits, industry executives said. While GIFT City has seen a steady rise in new funds, it has struggled to lure funds out of established offshore centres. As of March, India's financial centre had 229 funds, as per IFSCA quarterly bulletin. However, according to an official aware of the matter, a mere 13 of them, including Alchemy India Long Term Fund, Mirae Asset India Midcap Equity Fund and Artha Global Opportunities Fund have actually migrated from foreign jurisdictions. Among the reasons: Mandatory physical presence of employees, stiff compliance rules, and no added advantage for older close-ended funds making the shift. Local staff Every non-retail fund management entity in GIFT IFSC is required to have at least two individuals physically present—specifically, a principal officer and a compliance officer for managing Category I, II, and III alternative investment funds. (Retail funds must have at least three) Also, if the entity manages assets of $1 billion or more, it should appoint a third person. This is not the case in offshore financial centres, said Vinod Joseph, a partner at Economic Laws Practice. Mauritius allows funds to be set up in the form of companies and the directors of such companies are provided by local administrators, Joseph said. 'Such directors may also serve as directors for other companies, meeting regulatory requirements without needing a dedicated local team." Also read | Low-ticket Gift City funds are almost here. But what holds them back? Singapore does require full-time employees for fund management firms, but it is relatively easier to hire such personnel in Singapore and the people need to be employed locally only if assets exceed a certain size, Joseph added. 'In the case of an existing fund, the actual fund management team is often based outside India. Expecting them to relocate to GIFT IFSC solely to meet substance requirements is not easy," he added. Tax 'For certain sets of funds (Cat-I /II AIF), the fund will withhold tax and the same is available as credit in the hands of the investor, as GIFT funds are tax-transparent. This may not be the case for a Cat-III AIF and credit to the investors will be subject to their local laws," said Vivek Mimani, Partner at Khaitan & Co. 'In contrast, jurisdictions like Mauritius do not require investors to register for tax in India, as the fund itself pays tax and further distributions are tax-free," he said. An executive at a fund which recently relocated to GIFT IFSC said that even as the Indian jurisdiction is evolving and trying to align with international jurisdictions, layers of complexity remain. Artha Global Opportunities Fund, a Mauritius-headquartered and Sebi-registered fund investing in distressed assets and special situations in India said in December that it was the first foreign portfolio investor to move its domicile from Mauritius to GIFT City. Read this | Gift City sovereign green bonds face currency hurdle 'Once a fund relocates to GIFT City, it becomes subject to various domestic compliance obligations—GST registration, TDS, income tax filings, and more," said Sachin Sawrikar, managing partner, Artha Bharat Investment Managers IFSC LLP. 'For a fund which neither provides services nor sells products and typically earns passive income, the requirement to file monthly GST returns is particularly misaligned and burdensome," Sawrikar said. Sawrikar added that payments to foreign vendors, which would typically be tax-free elsewhere, attract withholding tax at GIFT City under India's Double Taxation Avoidance Agreement (DTAA) provisions. 'These additional taxes and compliance costs increase operational burden," Sawrikar added. Relocation is not for everyone For close-ended funds with a limited remaining duration—say, a 10-year fund in Mauritius that has already completed five–seven years—relocating to GIFT City often does not make financial sense. That is because the costs and efforts involved may outweigh the benefits, a person aware of the matter said. 'Relocation is also a time-consuming process that requires approvals from investors in the fund, regulators in the home jurisdiction, and the authorities at GIFT. As a result, many fund managers prefer to let existing funds run their course in their current jurisdiction and instead consider setting up new funds in GIFT City," the person said on the condition of anonymity. Also read | GIFT City isn't just for NRIs and foreigner investors—it has something for everyone Usually, one would not rock the boat if it is sailing right; only a few are willing to take that step, said Ketaki Mehta, a partner at Cyril Amarchand Mangaldas. She added that relocation requires setting up in GIFT IFSC, hiring an investment manager in GIFT City, building a team, and winding up elsewhere. What's ahead? Experts said the government has relaxed certain regulations to lure more funds to the GIFT City. 'Initially, all investors in a fund when the fund was relocating to GIFT IFSC were required to obtain a PAN. However, not every investor was comfortable with it, and recognizing that many of these investors had no other taxable income in India and were tax residents in other jurisdictions, the government relaxed the rule," said Ketaki. Now, non-resident investors who invest solely through IFSC funds and do not earn any other income in India are exempt from obtaining a PAN. 'This change, implemented in 2020, was aimed at streamlining processes and making it easier for foreign investors to participate in IFSC without facing redundant compliance obligations," she added. And read | Mauritius keen to set up shop in GIFT City
Mint
20-05-2025
- Business
- Mint
Sebi's co-investment proposal gets fund manager backing, but lawyers flag legal gaps, tax risks
The market regulator's proposal to allow co-investments within the alternative investment funds (AIF) framework—through a new co-investment vehicle (CIV)—has received broad support from fund managers. But lawyers warn of legal ambiguities, tax risks, and rigid exit conditions that could undermine its effectiveness. The 9 May proposal by the Securities and Exchange Board of India (Sebi) seeks to replace the current portfolio management services (PMS)-based co-investment route with a more streamlined approach. Under this, CIVs will have distinct PAN, bank, and demat accounts, and be exempt from some AIF-related rules (such as sponsor commitment and diversification) when co-investing in a single company with the main AIF. Under the current setup, co-investments must route through PMS entities, requiring a separate license, duplicative compliance, and different exit and governance terms—often complicating deal execution and cap table management. By contrast, CIVs would keep co-investments within the AIF ecosystem, allowing for pooled governance, unified documentation, and faster execution. Fund managers hailed the move as long overdue. Puneet Sharma, CEO and fund manager at Whitespace Alpha, called it 'a practical and much-needed upgrade." 'It removes a lot of the operational clutter we previously had to deal with through PMS or SPV routes. This setup brings clarity for us as managers and for our investors," he added. Also read: Sebi bars Varyaa Creations from markets, halts Inventure's fresh IPO mandates Exit worries and tax trouble Despite the optimism, legal experts flag several concerns—starting with investor exits. 'Co-investors coming via CIV could not have an option of remaining invested after the tenure of the AIF ends or exiting earlier," said Vinod Joseph, partner at Economic Law Practice. He also flagged uncertainty around Sebi fees and limitations on fundraising due to the accredited investor restriction. Ketan Mukhija, senior partner at Burgeon Law, said the legal architecture of CIVs may not hold up well in conflict scenarios. 'The CIV structure legally balances segregation and pooling, but its reliance on contractual terms over statutory safeguards leaves ambiguity in enforcing co-investor rights during disputes." He warned that tax issues may arise too. 'Tax risks loom if authorities view coordinated CIV-AIF investments as an AOP, stripping pass-through benefits and triggering double taxation", he added. Also read: Why fractional real estate platform Strata surrendered its Sebi licence Compliance gains, but admin costs stay While CIVs do reduce regulatory duplication, they come with their own administrative load. 'Each CIV needs a separate PAN, demat, bank account—adding admin burden, especially for decision makers or general partners," said Brijesh Damodaran Nair, managing partner at Auxano Capital. He added that rigid lock-ins may discourage large co-investors unless some flexibility is introduced. 'GPs must be able to set allocation caps or differentiated economics." Relaxing advisory rules The proposal also opens the door for AIF managers to offer advisory services on listed securities—currently prohibited to prevent conflicts of interest. Sebi is considering relaxing this ban for actively traded stocks but warned of manipulation risks in thinly traded securities. 'This modernizes the framework but raises concerns unless Sebi mandates real-time position disclosures and stricter Chinese walls," said Mukhija. Sharma supported the move to restrict CIVs to accredited investors, noting it ensures only sophisticated investors participate in high-risk co-investments. 'Over time, as the structure matures, there may be room to revisit and make it more inclusive," said Sharma. Experts, however, noted that the current accreditation process could use reform. 'They could benefit from simplification," said Divaspati Singh, partner at Khaitan & Co. 'For the proposed co-investment framework to be truly effective and widely adopted, easing or streamlining the accreditation requirements could be a constructive step forward," Singh added. Sharma also noted that the tax environment is gradually improving. 'Category I and II funds already enjoy pass-through status. CIVs under Category III should benefit from similar treatment if structured right." Srikanth Subramanian, CEO and co-founder of Ionic Wealth, emphasied CIVs would ease operational burdens by eliminating the need for separate PMS setups. 'This approach also helps prevent conflicts of interest by synchronising timelines and decision-making between the main fund and co-investors," he said. 'It brings Indian AIFs closer to international standards." Also read: Sebi seeks to streamline QIP disclosures but experts flag legal hurdles Sebi has invited public feedback on whether CIVs should fully replace PMS-based co-investment structures, and how to address exit flexibility, governance guidelines, and taxation clarity. The deadline for public comments is 30 May.
