IFSCA considers greater flexibility for co-investment opportunities

Proposes allowing creation of special purpose vehicles by fund management entities

A recent proposal by the International Financial Services Centres Authority (IFSCA) on allowing fund management entities (FMEs) to set up special purpose vehicles (SPVs) for co-investment will enable investors in GIFT City to choose their preferred portfolio companies, bring ease of business, and enhance transparency, said legal players.

 

The unified financial regulator last week floated a consultation paper allowing SPVs co-investment opportunities in FMEs.

 

Legal players feel that the proposed changes will provide more flexibility to alternative investment funds (AIFs) and enhance transparency.

 

“It is likely that the SPV framework will encourage potential investors in AIFs in IFSC to cherry pick their preferred portfolio companies and invest in them through an SPV. FMEs may also prefer this approach since they would not be required to make any contribution to such an SPV,” said Vinod Joseph, partner, Economic Laws Practice.

 

Co-investment refers to direct investments by an entity or individual alongside the fund manager. 

 

IFSCA has proposed that a minimum 50 per cent of the equity share capital or interest or capital commitments to such an SPV be held by the controlling scheme of the FME.

 

The proposal adds that leverage at the SPV level will be within the overall leverage limits specified in the private placement memorandum (PPM) of the controlling scheme.

 

“This may be preferred over seeking leverage at fund level if the fund holds multiple assets or if co-investors also wish to avail leverage through the SPV. Interestingly, it is proposed that the IFSC fund should hold a minimum 50 per cent of any SPV's equity interest and the balance may be held by co-investors,” said Vivaik Sharma, partner, Cyril Amarchand Mangaldas.

 

Sharma added that co-investors of SPVs need not only be investors of the IFSC fund which grants higher flexibility.

 

Additionally, he suggests that waiving off the regulatory fee and the requirement of filing application with IFSCA would be good.

 

According to the proposal, the SPV will be formed for making investments into a single portfolio company. It can also be used for undertaking leverage or ring-fencing investments of the controlling scheme.

 

“While an SPV under a controlling scheme will only be permitted to invest in a single portfolio company, it would be permissible for the SPV to hold securities of more than one entity. That is, if such securities are owned by the SPV due to one or more corporate actions or restructuring at such portfolio company level (including amalgamations, demerger and slump sale etc.),” states the discussion paper.

 

While a PPM is mandated for standard schemes, SPVs will be able to submit a simplified term sheet within 21 working days of the investment.