The International Financial Services Centres Authority (IFSCA) has released a detailed framework for Portfolio Management Services operating within GIFT City IFSC. This comprehensive set of guidelines aims to streamline operations, ensure regulatory compliance, and enhance investor protection. This article outlines the key components of the framework, covering eligible entities, advisory services, net worth requirements, staff qualifications, code of conduct, investment restrictions, and tax benefits.
Eligible Fund Management Entities (FME) and Clients
Under the new framework, Registered FMEs are authorized to offer Portfolio Management Services (PMS) to a range of clients, including:
Persons resident outside India
Non-resident Indians (NRIs)
Non-individual residents in India eligible to invest offshore under FEMA
Individual residents in India eligible to invest offshore under the liberalized remittance scheme (LRS) of the Reserve Bank of India
Investment Scope:
FMEs operating as portfolio managers in an IFSC are allowed to invest in securities and financial products across IFSC, India, or foreign jurisdictions. For discretionary portfolio management services, investments are restricted to securities listed or to be listed, money market instruments, investment schemes, and other specified financial products.
Structure of Eligible Entities
Eligible entities must register as Fund Management Entities (FMEs) under either retail or non-retail categories. These entities can be companies, LLPs, body corporates, partnership firms, or their existing unit branches in India.
Advisory Services
Regulations for Providing Advisory Services:
FMEs must enter into agreements with prospective clients.
Compliance with IFSCA (Capital Market Intermediaries) Regulations, 2021, specifically Regulations 43 to 50.
The minimum portfolio size for advisory services is set at USD 150,000.
Net Worth Requirement
Minimum Net Worth:
Indian Units: USD 500,000
Foreign Entities: USD 500,000
Fee Structure for Portfolio Management Services
Fee Structure for Registered FMEs:
Non-Retail FMEs: Application Fee: USD 2,500 Authorization Fee: USD 7,500 Recurring Fee: USD 5,000
Retail FMEs: Application Fee: USD 2,500 Authorization Fee: USD 10,000 Recurring Fee: USD 5,000
Staff Requirements
Qualifications for Principal Officers:
Professional or post-graduate degree in finance, law, accountancy, economics, or related fields from a recognized institution.
Minimum of five years of experience in the securities market or related financial services.
Employee Requirements:
All staff involved in distribution activities must hold at least a graduation degree. Existing employees meeting the eligibility criteria can continue their roles if there is no conflict of interest.
Code of Conduct and Client Interactions
Mandatory Disclosures:
FMEs must provide a disclosure document to clients before entering into agreements. The document should be available on the FME’s website and contain comprehensive details about the services offered, risk factors, financial performance, client representation, and more.
Portfolio Management Agreement and Client Reporting
Agreement Terms:
Written agreements must clearly define the relationship and obligations of both the FME and the client. Clients can withdraw funds before contract maturity under specified conditions such as termination of services, suspension of FME registration, or FME bankruptcy.
Client Reporting:
Periodic reports detailing portfolio composition, transactions, beneficial interests, and expenses must be provided to clients, with online access available for each client.
Dealing with Client Funds and Investment Restrictions
Client Fund Management:
Minimum investment threshold: USD 150,000 (not applicable to accredited investors).
Funds and securities must be segregated for each client.
FMEs must act in a fiduciary capacity, ensuring no direct or indirect benefit is derived from client funds.
Borrowing on behalf of clients is prohibited.
Investment Restrictions:
Investments must align with the portfolio management agreement.
Speculative transactions are prohibited without client consent.
Each client’s funds and securities must be kept separate from the FME’s own assets.
General Obligations
Performance and Reporting:
FMEs must charge agreed fees without guaranteeing returns.
Discretionary managers must manage funds according to client needs, while non-discretionary managers follow client directions.
All distribution activities must comply with regulations, and performance reporting must be consistent and transparent.
Annual audits of portfolio accounts are mandatory.
Code of Conduct for Portfolio Managers
Portfolio Manager Responsibilities:
Prompt deployment of client funds for investment.
Avoiding conflicts of interest.
Acting in the client’s best interests regarding corporate actions.
Providing accurate and comprehensive information to clients.
Advertisement Code
Advertisement Standards:
Advertisements must be truthful, clear, and not misleading.
Avoid false, exaggerated, or deceptive claims.
Ensure consistency with scheme document disclosures.
Avoid exploiting the lack of investor experience or knowledge.
Tax Benefits
Entities in GIFT City IFSC enjoy substantial tax incentives:
100% Tax Exemption: Business profits are fully exempt for 10 years out of the first 15 years of operation.
Minimum Alternate Tax (MAT): Reduced MAT rate of 9% for IFSC units.
For more details, you can refer to Gaurav Kanudawala's LinkedIn article on tax benefits in GIFT IFSC.
Conclusion
The IFSCA's comprehensive framework for depository participants in GIFT City IFSC is a significant step towards creating a robust and secure environment for financial activities. By establishing clear guidelines for eligibility, advisory services, staff qualifications, and client fund management, the framework ensures a high level of compliance and investor protection, making GIFT City a highly attractive destination for global financial services.
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Disclaimer: This post is for general informational purposes only and not a substitute for professional advice. We do not guarantee the accuracy, completeness, or reliability of the information. Use at your own risk. We are not liable for any loss or damage arising from its use. Consult professionals for your specific situation.
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