IFSCA Proposes Greater Flexibility for Co-Investment Opportunities and Creation of Special Purpose Vehicles (SPVs)

The International Financial Services Centres Authority (IFSCA) has recently proposed a significant move aimed at providing greater flexibility for fund management entities (FMEs) to set up Special Purpose Vehicles (SPVs) for co-investment opportunities. This proposal, part of a consultation paper released by IFSCA, aims to enhance the investment landscape in the International Financial Services Centres (IFSC), particularly in the GIFT City. By allowing SPVs for co-investment, the new regulatory framework is expected to simplify the process for investors, offer enhanced transparency, and improve business opportunities for potential investors in Alternative Investment Funds (AIFs).

Understanding Co-Investment and SPVs in Investment Structures

Co-investment refers to the direct investment made by an individual or entity alongside a fund manager, typically in specific portfolio companies. This arrangement allows investors to have more control over their investment choices, as they can directly choose where to invest alongside the fund management entity. By introducing SPVs for co-investment, IFSCA is providing more options for investors who wish to tailor their investments according to their preferences.

The introduction of SPVs will enable FMEs to create vehicles through which co-investors can participate in a specific investment opportunity without the need for the fund manager to contribute capital. In other words, the fund manager may create an SPV that allows investors to pick and choose the portfolio companies they want to invest in, offering them greater flexibility and control. At the same time, this structure benefits FMEs by providing a more simplified investment process, as they do not need to contribute to every investment made by the SPV.

Flexibility for AIFs and the Role of SPVs

The proposal is expected to offer considerable benefits to Alternative Investment Funds (AIFs) operating in IFSC. AIFs, which typically pool capital from investors to make investments in diverse asset classes, will benefit from the greater flexibility the SPV framework offers. As per the proposal, the SPV framework would enable AIFs to provide investors with an opportunity to cherry-pick their preferred portfolio companies and invest through an SPV specifically designed for that investment.

Legal experts have pointed out that such a move will help enhance transparency in the investment process. Investors will have better visibility into where their capital is being allocated, and the flexibility to opt for individual investments aligned with their risk profiles and preferences. As Vinod Joseph, Partner at Economic Laws Practice, noted, the SPV framework would allow investors to make more informed decisions, and it may become a preferred choice for AIFs operating in the IFSC.

Proposed Equity Shareholding and Leverage Flexibility

One of the most noteworthy aspects of the proposal is the stipulation that the controlling scheme of the FME should hold at least 50 percent of the equity share capital, interest, or capital commitments in the SPV. This ensures that the FME maintains a significant stake in the SPV, giving them control over the investment. However, the proposal also introduces a mechanism for leveraging investments at the SPV level, which could be advantageous for investors who wish to enhance their returns.

For AIFs and their investors, leverage is an essential tool for increasing the size of their investments relative to the capital available. However, traditional fund-level leverage can be restrictive, especially when the fund holds a diverse portfolio of assets. The ability to apply leverage at the SPV level, rather than at the fund level, opens up new opportunities for increasing the potential returns of individual investments. According to Vivaik Sharma, Partner at Cyril Amarchand Mangaldas, this structure will be preferred over leveraging at the fund level, as it provides greater flexibility and allows co-investors to also use leverage.

Corporate Actions and Securities Ownership in SPVs

A unique feature of this proposal is the treatment of corporate actions and how it impacts the SPV’s ownership of securities. Under the proposed framework, an SPV under a controlling scheme would be permitted to invest in a single portfolio company. However, it would also be allowed to hold securities from multiple entities, provided these securities are acquired due to corporate actions or restructuring at the portfolio company level. Corporate actions could include events such as mergers, demergers, amalgamations, or slump sales, which could result in the SPV acquiring securities from multiple entities as a part of the restructuring process.

This flexibility in holding securities could be particularly beneficial for investors as it provides an opportunity to benefit from corporate changes and increases the overall value of the SPV. Instead of requiring a new SPV for every investment opportunity, the SPV framework allows for greater adaptability, enabling it to absorb and integrate changes arising from corporate restructuring events.

Simplification of Documentation and Regulatory Process

Another major change introduced by the proposal is the simplification of the documentation process for SPVs. Typically, a Private Placement Memorandum (PPM) is required for investment schemes, detailing the structure, risks, and terms of the investment. While this requirement remains for standard schemes, the new proposal allows SPVs to submit a simplified term sheet within 21 working days of the investment, offering a more streamlined and efficient approach.

This shortened documentation timeline will reduce the administrative burden on both investors and regulatory authorities, ensuring that investment opportunities are not delayed due to cumbersome paperwork. By allowing for a simplified term sheet, the proposal aims to expedite the investment process, giving investors a quicker and more transparent way to evaluate potential opportunities.

Regulatory Fee Waiver and Filing Exemption

Additionally, the proposal suggests waiving the regulatory fee typically associated with setting up an SPV and eliminating the requirement for filing an application with the IFSCA. The waiving of regulatory fees would lower the cost of setting up and managing SPVs, making them more accessible to investors and fund managers. The removal of the filing requirement with IFSCA further streamlines the process, reducing the time and resources needed to navigate regulatory hurdles.

These changes are expected to encourage greater participation in the investment space, especially among foreign investors or those unfamiliar with India’s regulatory framework. By simplifying the process, IFSCA hopes to attract a broader range of investors and ensure that India’s financial ecosystem remains competitive and accessible on the global stage.