The government will enable pooled private equity fund structures as variable capital companies (VCCs) — a structure more popular in financial hubs such as Singapore and Mauritius — in a bid to attract overseas investors. In this evolving financial market of India, business lawyers believe that the adoption of the VCC framework has helped Singapore become the hub for international fund management, and a similar move for India will be beneficial.
In a recent article by Thinking Legal titled “Variable Capital Company: Basic Structure and Its Evolving Framework In India,” Vaneesa Agrawal highlighted a significant development in the Indian investment landscape that is capturing the attention of business lawyers nationwide. The ability of VCCs to issue and redeem shares without extensive regulatory filings or shareholder approvals sets them apart from traditional corporate structures, necessitating a fresh approach to legal advisory services in the realm of investment funds.
This guide, from a business lawyer’s perspective, aims to provide a comprehensive understanding of VCCs, their structure, advantages, regulatory considerations, and potential challenges in the Indian context.
Understanding VCCs: Legal Implications and Structures
Business lawyers understand that a Variable Capital Company (VCC) is essentially a business structure created to enable pooled investments and offer owners limited liability. The key distinction between the VCC and conventional corporate structures is the latter’s inability to issue and redeem shares without requiring onerous shareholder approvals or regulatory filings.
Business lawyers emphasise the significance of elucidating the notion of an umbrella structure, which can have several sub-funds, to their clients when providing VCC structure advice. As Vannesa Agrawal, in her Thinking Legal article points out, each sub-fund may have unique investing goals and tactics, enabling customised methods to satisfy a range of investor demands. This flexibility is the key reason why VCCs are gaining traction in the financial markets of Singapore and Mauritius, and now according to the business lawyers, India is following suit.
Legal Considerations in Setting Up VCCs
Business lawyers will be essential in helping clients through the establishment process as India adopts the VCC framework. To provide comprehensive counsel, seasoned business lawyers need to be well-versed in both models.
“ VCCs can be established in India as Limited Liability Partnerships (LLPs) or as companies.”
– Vaneesa Agrawal, Thinking Legal
The two main setups that business lawyers typically talk about are:
- Umbrella VCC
Business lawyers clarify that the umbrella VCC structure permits the establishment of many sub-funds that have the flexibility to invest in diverse asset classes or strategies while upholding the legal separation of assets and liabilities.
- Standalone VCC
According to Vaneesa Agrawal, an expert business lawyer, this is a more straightforward organisation that handles its investments directly without the intricacy of several sub-funds.
Legal Challenges and Opportunities in VCC Regulations
Business lawyers feel that understanding the constantly changing regulatory landscape is one of the most important parts of working with VCCs. Vaneesa Agrawal highlights that, according to Indian legislation, VCCs are categorised as Alternative Investment Funds (AIFs), necessitating an AIF licence from the Securities and Exchange Board of India (SEBI). It is imperative for business lawyers to remain up to date with the latest debates regarding the ways in which this new structure will interact with current laws, like the LLP Act of 2008 and the Companies Act of 2013.
Key regulatory considerations that business lawyers focus on include:
- Taxation: Business lawyers provide guidance on the tax ramifications of VCCs, including how to best take advantage of India’s tax treaties by acquiring tax residency certificates and treating each sub-fund separately for tax purposes.
- Compliance: By stressing the regulatory segregation of risks between sub-funds, business lawyers make sure their clients are aware of and abide by the streamlined compliance standards for VCCs.
- Management Structure: Business lawyers point out that VCC structures, as opposed to typical AIFs, permit different managers across sub-funds without necessitating new registrations. Business lawyers think about how this flexibility may affect governance and fund management.
Advantages and Challenges: Legal Guidance in the VCC Ecosystem
It is therefore important that business lawyers equipped with the knowledge to help the client brace up for the forthcoming hurdles in the process, these include:
- Regulatory Ambiguities: Given that this is a new structure within the financial space of India, a lot of things about the VCC law and regulations, for instance, are not clear. Business lawyers will have to keep their eyes open and advise their clients on how to deal with the grey areas of the law.
- Client Education: Business lawyers appreciate that there may be some hesitation amongst local investors who are not conversant with VCCs. This is where the business lawyer assists in creating confidence through information on the advantages and disadvantages of this investment option.
- External Factors: Competition especially from countries like Singapore and the UAE which already have a working VCC structure means Indian business lawyers have to assist their clients’ VCCs in attaining a competitive edge.
In Conclusion
In the context of business law and financial regulation of the country, the introduction of Variable Capital Companies in India is a landmark event. With the VCC market booming, the intervention of business lawyers will be critical for the success of this novel investment vehicle in the country.
And, as Vaneesa Agrawal, founder of Thinking Legal highlights, “The VCC business structure has been a welcome evolution in the way funds can be structured and managed.”
It is well-known that both limited liability and unlimited groups of members can exist and operate in the form of a company. Moreover, it is a legal lung that is extremely flexible from an investment perspective and in many instances, can accommodate highly tailored requirements that commercial law has failed to capture thus far. VCC-like structures have been around for some time in the Private Equity investment sector as they address some of the rigidities associated with conventional means of pooling capital for investment into several operating companies and providing them with growth capital.
