The International Financial Services Centres Authority (IFSCA) has issued a “Consultation Paper on the ‘Regulatory Framework for Differential Distribution in Restricted Schemes and Venture Capital Schemes to Facilitate Blended Finance and Other Fund Structures'”. This initiative is part of IFSCA’s ongoing efforts to foster a globally competitive regulatory environment and realize the vision of making GIFT IFSC a global hub for sustainable finance. The paper proposes a framework to provide flexibility for fund managers to design blended finance vehicles and other innovative fund structures.
Proposed Framework for Differential Distribution
The consultation paper proposes a framework to enable fund managers to structure and manage schemes with differentiated distribution mechanisms. This would be enabled under the existing IFSCA (Fund Management) Regulations, 2025.
The key objectives of the proposal are:
- To facilitate greater participation from diverse investor classes, including institutional, philanthropic, and impact investors.
- To mandate certain safeguards to ensure transparency and investor protection.
Key Proposals
As part of the consultation, IFSCA has released a draft framework outlining the following key proposals:
- Eligibility: The framework would permit Venture Capital Schemes and Restricted Schemes under part A and B of Chapter III of IFSCA (Fund Management) Regulation, 2025 to issue multiple classes of units with different rights to profit distribution (e.g., ‘Senior units’ and ‘Junior/Subordinate units’).
- Venture Capital Schemes: These are funds that pool money from accredited investors to invest in start-ups, emerging, or early-stage venture capital undertakings that are primarily involved in new products, services, technology, or innovative business models.
- Restricted Schemes: These are non-retail schemes offered on a private placement basis to a limited number of “accredited investors” or high-net-worth investors (e.g., those investing a minimum of USD 150,000). These funds can invest in a broad range of strategies.
- Provisions for ESG Schemes:
o Eligible schemes filed as ESG Schemes would be permitted to issue multiple classes with differential returns.
o These schemes must disclose how their investments align with the UN Sustainable Development Goals (SDGs).
o They would also be allowed to accept funds as grants, up to a limit of 20% of the scheme’s total corpus.
- Provisions for Other Schemes: Non-ESG schemes could also issue differential units, but would be subject to portfolio diversification rules, such as not investing more than 25% of the corpus in a single investee company and its associates.
- Structures for Differential Returns: The framework allows ‘Junior/Subordinate’ classes of units to absorb higher-than-pro-rata losses, or bear losses higher than their entitlement in the investment of such scheme.
- Disclosures and other Conditions
o The private Placement Memorandum (PPM) shall adequately and prominently disclose the detailed distribution waterfall, including examples of various scenarios, which inter-alia involves loss of capital to the holder of Junior/subordinate classes of units
o The PPM must also clearly highlight the additional risks associated with each class of units.
· Conditions to be complied by the FMEs of Eligible Scheme
o The minimum investment for an investor to subscribe to the Junior / Subordinate classes of units of the eligible schemes shall be USD 2 million.
o The minimum investments shall be USD 1 million if the investor is an accredited investor.
o FME to ensure that the amount invested by the scheme is not used by the investee company directly, or indirectly to discharge any of its obligation or liabilities towards investors of the schemes.
Facilitating Blended Finance for Sustainable Goals
Recognizing the substantial capital needed by India and other developing countries to meet climate and sustainable development goals with estimates for India alone in the USD 10-20 trillion range IFSCA has identified blended finance as a key policy priority. The proposed framework aims to facilitate these structures, which strategically combine public or philanthropic capital with private investment to catalyse greater private sector participation.
Invitation for Public Comments
IFSCA invites comments and suggestions on the proposed framework from stakeholders, market participants, and the general public. Feedback may be submitted to IFSCA on or before November 11, 2025
You can access the full Consultation paper here.
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