IFSCA Introduces Co-Investment Framework for Venture Capital and Restricted Schemes in GIFT IFSC

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The International Financial Services Centres Authority (IFSCA) has unveiled a new framework facilitating co-investments by Venture Capital and Restricted Schemes (classified as Category I, II, or III Alternative Investment Funds – AIFs) through Special Purpose Vehicles (SPVs) under the recently updated Fund Management Regulations, 2025. This move aims to provide greater flexibility and structure for fund managers and investors operating within the GIFT IFSC.

The framework outlines a clear co-investment structure where a Fund Management Entity (FME) can establish a “Special Scheme” to co-invest alongside an existing Venture Capital Scheme or Restricted Scheme (referred to as “Existing Scheme”). Investment by the FME in the Special Scheme is optional.

Permissible Co-investment Structure

The co-investment structure involves an AIF (the Existing Scheme) and a Special Scheme, which is also to be registered as the same category of AIF. The Special Scheme then invests in an Investee Company.

Key Conditions and Provisions of the Framework

• Who can launch a Special Scheme? Only FMEs registered with IFSCA that currently manage an operational Venture Capital Scheme or Restricted Scheme are eligible to launch a Special Scheme.
• Structure of Special Scheme: The Special Scheme can be constituted as a Company, Limited Liability Partnership (LLP), or Trust.
• AIF Category Classification: The Special Scheme must be classified under the same AIF category (I, II, or III) as that of its Existing Scheme.
• Minimum Contribution by Existing Scheme: The Existing Scheme must contribute at least 25% of the equity share capital, interest, or capital contribution (as applicable) in the Special Scheme.
• Investment Objective: The co-investment strategy of the Special Scheme must be aligned with the investment strategy of the Existing Scheme. Importantly, the Special Scheme can invest only in one portfolio company, with exceptions allowed for restructuring purposes.
• Tenure: The tenure of the Special Scheme will be co-terminus with that of the Existing Scheme, or earlier if the Existing Scheme is liquidated.
• Eligible Investors: Any person is eligible to invest in the Special Scheme, subject to the minimum contribution norms stipulated under the FME Regulations.
• Leverage Conditions: Any leverage undertaken by the Special Scheme must remain within the overall limits specified in the Placement Memorandum of the Existing Scheme. Encumbrances are permitted for the purpose of leverage.
• FME Contribution: The FME has the discretion to contribute to the Special Scheme.
• Control and Decision-making: The sole control and decision-making authority for the Special Scheme rests with the FME. Investors in the Special Scheme cannot interfere with the regulatory compliance of the Existing Scheme.
• KYC Requirements: For existing investors, no fresh Know Your Customer (KYC) procedures are required. However, new investors must undergo KYC as per IFSCA’s AML-CTF & KYC Guidelines, 2022.
• Term Sheet Filing: A term sheet must be filed within 45 days of the investment. This term sheet will be treated as a constitutional document for the purpose of bank account opening.
• Investor Disclosures: Investors in the Existing Scheme must be informed before capital is raised for the Special Scheme. The term sheet itself must include all necessary disclosures as per the FME Regulations.
• Reporting to IFSCA: Reporting requirements for the Special Scheme are to be consolidated with those of the Existing Scheme.
• SEZ Approval Requirement: The Special Scheme must obtain a separate SEZ (Special Economic Zone) approval under the SEZ Act, 2005, before filing the term sheet.
• Fee Payment: Applicable fees will be payable as per the IFSCA Circular dated April 8, 2025.

This new co-investment framework is expected to provide greater operational flexibility and attract more fund management activity to GIFT IFSC, solidifying its position as a competitive global financial hub.

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Dhairya Chaniyara

Senior Associate | Financial Advisory | dhairya.c@treelife.in

Focuses on direct tax and regulatory services with a specialization in GIFT IFSC. Brings experience from various industries, including manufacturing, FMCG, IT-ITES, and healthcare, to deliver impactful tax solutions.