Payal Agarwal l payal@vinodkothari.com

The Union Budget 2024 refers to permitting a flexible mode for financing leasing of aircrafts and ships, and pooled funds of private equity through a variable capital company (VCC) structure. Variable Capital Companies (VCCs), as the name suggests, are companies in which the capital is not static, that is to say, the investor has the option to withdraw capital based on the satisfaction of certain conditions. In a traditional company form of entity, the capital is static, and any reduction in capital (except buyback upto a specified extent), attracts specific procedure, including most importantly, approval from NCLT and other regulatory/ statutory authorities. 

Read more: Variable Capital Companies 

Globally, similar structures exist in various countries, known by different names, such as – Variable Capital Companies in Singapore and Mauritius, Open Ended Investment Companies (OEIC) in the UK, and a specific form of collective asset management companies in Ireland and Luxembourg. 

In the context of India, the discussions around VCC are not new, the IFSCA has been exploring opportunities to bring a legislative framework for incorporation of the VCC form of entity. In fact, an Expert Committee, under the Chairmanship of Mr M S Sahoo, had released a report providing recommendations for bringing a legal framework for VCCs in IFSC in October, 2022. 

What are VCCs?

VCCs are a relatively new form of corporate structure, an investment vehicle housing multiple funds under one entity, while ringfencing the asset pools of each sub-fund distinctly – like a Protected Cell Company (PCC).

In jurisdictions such as Mauritius, the VCC has an option to elect to have a separate legal identity for each of its sub-fund, however, the same would require each sub-fund to be incorporated as a separate company. Even if the sub-funds are not incorporated as separate legal entities, their properties remain distinct from the umbrella fund (VCC) and any liability attributable to a specific fund is discharged solely from the assets of such a sub-fund. 

Most importantly, as the name suggests, these structures have a flexibility on pay-outs to the investors. Such flexibility is provided in the form of permitting redemption of the shares of the fund at any time at a price related to the net present value of the scheme property, subject to the shares being fully paid-up. 

Introduction of VCCs in IFSC 

The Report recommended VCC structure to be first introduced in IFSCs owing to the preparedness of international players in dealing with such structures since VCC structures are already existent in various other jurisdictions. Based on the functioning of the VCC-structure in IFSCs, the same may be subsequently introduced in the domestic Indian financial system too. 

Regulatory framework for VCCs in IFSC

Under the IFSC regulatory ecosystem, VCCs are proposed to be recognised under the IFSCA Act, 2019. Additionally, the activities of the VCC should be governed by the IFSCA (Fund Management) Regulations, 2022. 

The Report suggests a VCC to be incorporated as a company, and the sub-funds thereof to derive their character from the VCC instead of being recognised as separate legal persons. There is a segregation of assets and liabilities at each sub-fund level, and as such, each sub-fund is bankruptcy remote from the insolvency proceedings initiated against another sub-fund. 

Conditions w.r.t. “variability” of capital in VCC 

Unlike a company which has a fixed paid-up capital, in case of a VCC, the paid-up capital, at all times, reflects the value of the net assets of the VCC. 

The Report suggests VCCs may raise funds in both equity and debt form, issuing different classes of equity and debt securities to represent the interest of the holder in the specific sub-fund to which the securities relate to. The Report also proposes the introduction  of “management shares” and “participating shares”, similar to the concept already prevalent in Singapore.

The recommendations suggest redemption of participating shares, carrying economic rights, at the net asset value of the scheme, subject to the shares being fully paid-up. On the other hand, for management shares, containing voting rights, the same is proposed to be irredeemable, however, the VCCs should have an option to buyback such shares with requisite approvals and following due procedure. 

In view of the flexibility that VCC provides, the structure is getting increasingly popular. In Singapore, since the launch of provisions around VCCs in 2020 vide the Variable Capital Companies Act, 2018 in January, 2020, a total of 969 VCCs have been incorporated till 2022, representing around 2000 sub-funds. 

---

Read our other articles on Union Budget 2024

1. Union Budget 2024: Did it hit the mark?
2. Bye bye to Share Buybacks
3. Scaling up skilling by using CSR funds: Any takers?