Besides angel tax abolition, the startup industry is also looking forward to the introduction of a variable capital company (VCC) structure to boost capital flow. Finance Minister Nirmala Sitharaman said in her Budget speech that the government will seek the required legislative approval for providing an efficient and flexible mode for financing the leasing of aircrafts and ships, and pooled funds of private equity through a ‘variable company structure’.
The VCC structure is prevalent in financial centres like Singapore, Luxembourg and Mauritius and offers flexibility, efficiency and ease of doing business.
Startup stakeholders say that the success of GIFT City coupled with the proposed introduction of a VCC framework is a step in the right direction for India to become an attractive fund management destination globally in the near future.
“VCC is a globally recognised and accepted vehicle for investment funds. Trusts were not conceived for the complex operations of venture capital and PE funds and the VCC structure will make GIFT IFSC even more attractive,” said Siddarth Pai, founding partner, 3one4 Capital and co-chair, regulatory affairs committee, IVCA.
PE funds in India have been traditionally structured as trusts. A VCC structure will bring in a flexible corporate vehicle. “This will help with the implementation of multiple strategies within the same structure while also providing for clear legal segregation of assets and liabilities among the various cells in such VCCs,” Vivek Mimani, partner, Khaitan & co said.
While there is not much clarity on whether the VCC structure will be implemented only in the Gift City or also for the onshore markets, experts say that there is no reason to restrict this legislation to the GIFT City and given its benefits, it should be implemented at a pan-India level. “The domestic fund industry regulated by Sebi is a large industry which is also attracting large foreign investments and global talent. The features of a VCC may also pave way in the future for public funds to be structured as VCCs,” Mimani added.
The umbrella holding structure allows a VCC to consist of multiple sub-funds, thereby providing more flexibility in capital raising and investing for fund managers. Ratna Mehta, CEO and managing partner, Fundalogical Ventures says that one can play different stages of investing for a certain sector, or can play different sectors. “This will help match the investor requirements to the investment philosophy. For instance, some investors are over-exposed in the seed/pre-seed stage and would not want to invest in a fund with that strategy, even if they like the sector/thesis and fund manager. With VCC, you can invest in say supply chain, but divide it as early stage and growth stage through different vehicles,” she said.
Industry experts, however, say that the policy stability around it and simplicity of governance will hold utmost importance. “Today for AIFs (alternate investment funds), governance is quite overbearing and if VCCs add more layers of complexity, adoption will be limited,” added Mehta.
However, Rajesh Gandhi, partner, Deloitte India is optimistic that the structure will significantly reduce compliance requirements compared to traditional corporate structures. Further, it also combines the benefits of both traditional trust and corporate structures. “A VCC enables funds to operate within a globally preferred corporate framework, while at the same time offering effective segregation and ring-fencing of different asset pools,” he said.