Fund management business is growing in GIFT City. Many PMS and AIFs are starting their business in GIFT City. But, on closer inspection, it is found that the growth of this segment is very low. This also includes retail schemes of mutual funds. Currently, there are 139 fund management entities (FMEs) in GIFT IFSC. Out of these, 123 are registered as non-retail schemes. There are only 8 retail schemes. The rest are authorized FME schemes.
Reasons for low interest in retail fund schemes
Experts believe that the reason for this may be regulatory uncertainty. There is a ban on selling retail schemes to NRIs. Apart from this, there is not much tax benefit on selecting retail schemes in GIFT City. Retail schemes were allowed in IFSC in 2022 under the IFSC Fund Management Regulation. But, there is a situation of uncertainty as they do not get the benefit of tax regime as per offshore funds. Due to this, fund managers do not show interest in retail schemes.
CBDT issued circular in January
In January this year, the Central Board of Direct Taxes (CBDT) issued a circular. It included some conditions. Suresh Swamy, partner at Pricewaterhouse & Co., said that the conditions included in the circular also included a limit on investment in unlisted securities and associate entities. This condition is quite difficult for retail schemes. Due to this, there has not been much interest in retail schemes in IFSC.
The position is not clear on many issues in the circular
An official said that there is a lack of clarity in the CBDT circular on some issues. Especially the situation is not clear about what is meant by passive breach. The timeline for correcting this breach has also not been mentioned. The official said that this can be understood with the help of an example. The maximum weightage of a stock in a retail scheme can be 25 percent. But, if this limit is crossed due to increase in valuation, then it is not mentioned in the circular that within how much time the fund manager will have to bring it within the prescribed limit.
Operation of retail scheme is difficult due to difficult conditions
Similarly, a fund must have at least 20 clients. If 1 or 2 clients exit the fund, the CBDT circular does not state what the fund manager should do in such a situation. Due to lack of clarity on such issues, it does not seem beneficial to start the operation of a retail scheme in GIFT City.
FEMA rules also increased the difficulty
Vinod Joseph, partner, Economic Laws Practice, said the question is who would want to invest in a GIFT City-based mutual fund. "If you start a retail fund in GIFT City with the aim of investing in India, such a retail fund cannot raise a certain portion of its funds from more Indian investors. This is because of FEMA rules," he said.
