Setting Up Cat I, Cat II & Cat III Funds in Gift City

Setting up Category I, II, and III Funds  in GIFT City is an attractive option due to its regulatory advantages, tax benefits, and access to global markets. The International Financial Services Centers Authority (IFSCA), which governs GIFT City, provides a favorable regulatory framework for these funds. Here’s an overview of the process and key details for setting up these funds in GIFT City:

Overview of Fund Categories

1. Category I Fund:
   • Invests in early-stage startups, social ventures, infrastructure, and other priority sectors.
   • Funds under this category include Venture Capital Funds, Angel Funds, Infrastructure Funds, and Social Venture Funds.
   • Encouraged by the government with tax incentives and exemptions.
2. Category II Fund:
   • Includes private equity funds, debt funds, and other funds not falling under Category I or III.
   • Does not undertake leverage or borrow, except for day-to-day operational needs.
3. Category III Fund:
   • Funds that engage in diverse or complex trading strategies, including hedge funds, and can use leverage to generate returns.
   • These funds can take both long and short positions in listed or unlisted derivatives.

Key Steps for Setting up Funds in GIFT City

1. Choose the Category of Fund:
   • Determine the appropriate AIF category based on your investment strategy (venture capital, private equity, hedge fund, etc.).
2. Register with IFSCA:
   • All Funds / Scheme in GIFT City must be registered with the IFSCA, which serves as the regulatory authority for financial services within the IFSC.
   • The process involves submitting an application along with necessary documents to the IFSCA for approval.
   • IFSCA (Fund Management) Regulations, 2022, notified in April 2022, provides regulatory framework for Asset Managers and Funds.
3. Set up the Fund Entity:
   • Choose the legal structure for the fund, such as a trust, company, or limited liability partnership (LLP). Trusts are commonly used structures for Funds in India.
   • The fund manager also needs to be incorporated within GIFT City.
   • If the fund raises money from international investors, it can be denominated in foreign currency, offering flexibility in fund structuring.
4. Obtain Approvals and Register the Fund:
   • Submit the fund documents: This includes the fund’s private placement memorandum (PPM), investment strategy, fee structure, and other key details.
   • Approval process: The IFSCA reviews and approves the fund registration, typically within a shorter time frame compared to SEBI.
5. Capital Requirements and Compliance:
   • Minimum corpus: Funds in GIFT City are required to have a minimum corpus of USD 3 million.
   • Investment from sponsor/manager: The fund manager or sponsor must invest a minimum of 2.5% of the corpus or USD 750,000, whichever is lower (for Category I and II Funds), and 5% of the corpus or USD 1.5 million, whichever is lower (for Category III Funds).
   • Investor participation: Each investor is required to invest a minimum of USD 150,000 in the fund, except for angel investors, who can invest as little as USD 40,000.
6. Tax Benefits:
   • Funds set up in GIFT City are eligible for tax exemptions, including no capital gains tax, no dividend distribution tax (DDT), and no securities transaction tax (STT).
   • Income generated by the fund may also be exempt from taxation under certain conditions, making GIFT City a highly attractive jurisdiction for foreign investors.
   • Funds in GIFT City also benefit from 100% tax exemption on profit distribution for a specified period.
7. Foreign Exchange Flexibility:
   • International investors benefit from easier fund flows and repatriation of profits due to relaxed Foreign Exchange Management Act (FEMA) rules in GIFT City.
8. Compliance and Reporting:
   • Once operational, FME / Funds must comply with IFSCA regulations, including regular filing of reports, financial statements, and details of investments made by the fund.
   • Leverage limits (for Category III Funds) and other risk management norms must be adhered to.
9. Access to Global Markets:
   • GIFT City allows Funds to freely invest across geographies and asset classes. Fund managers can access a global pool of capital and explore investment opportunities worldwide without facing stringent domestic regulations.
   • Funds can also participate in cross-border mergers, acquisitions, and other international financial transactions, providing added value to investors.

Setting up Category I, II, and III Funds in GIFT City offers a strategic advantage for investors and fund managers looking to leverage India’s growing financial ecosystem while benefiting from international market access, tax incentives, and a supportive regulatory framework. The IFSCA’s pro-business approach and GIFT City’s unique position as a global financial hub make it an ideal location for alternative investment funds.

The below document provides the perspective of Setting Up Funds in GIFT City.