The Variable Capital Companies (VCC) is a significant chapter in the development of Singapore as a full-service international fund management and domiciliation hub.
Singapore’s central bank, the Monetary Authority of Singapore (MAS) and the Accounting and Corporate Regulatory Authority (ACRA) launched the Variable Capital Companies (VCC) framework on 14 January 2020, to constitute investment funds across traditional and alternative strategies.
The VCC is a significant chapter in the development of Singapore as a full-service international fund management and domiciliation hub. VCCs are set to make Singapore an even more attractive fund management hub by providing fund managers with greater flexibility on the domiciliation of extensive range of investment funds. The VCC structure is tailored for collective investment schemes whether open ended or close ended, traditional as well as alternative be it private equity, hedge fund or real estate. The framework provides greater operational flexibility and cost savings and should give Singapore a distinct advantage and is expected to enable its fund management industry to leapfrog from good to great.
Overview of VCCs
VCCs are a corporate structure that can be set-up as a standalone fund or an umbrella fund with multiple sub-funds. Below are some key features of the framework:
- Regulated by MAS and ACRA
- VCCs can be incorporated with minimum of one shareholder. The shares of a VCC have no par value and actual value of the paid-up capital of the VCC is, at all times, equal to the NAV of the VCC
- Ring-fencing of sub-funds under an umbrella fund structure, i.e., assets and liabilities of each sub-fund would always be segregated
- VCC not restricted to paying dividends only out of profits as is the case with companies
- There are no capital maintenance requirements
- Every VCC must have an investment manager[1] who in turn would be regulated by the MAS in Singapore
- Flexibility to prepare financial statements as per internationally accepted methods
- Members may also redeem and sell their shares back to the VCC to exit their investment
- VCCs may only have one director subject to fulfilment of various conditions prescribed
- As per the framework, MAS would also provide information to foreign and domestic authorities in order to enable them to verify if the Anti Money Laundering (AML)/Countering Financing of Terrorism (CFT) requirements are adequately met by the VCCs
- From a tax standpoint, VCCs are considered as a single entity for Singapore tax purposes and should be eligible to access Singapore’s tax treaty network. Existing tax incentives such as remission of GST, as well as lower tax of 10% on the fund manager, will be available in the context of a VCC
Owing to the above features, the said framework would provide fund managers with a greater choice of investment fund vehicles in Singapore that cater to the needs of global investment funds and investors. Fund managers would now be encouraged to use Singapore as a master fund platform, certainly for Asian investors but also for the American and European investors who have historically preferred jurisdictions such as Cayman Islands, Luxembourg or Ireland. To the existing structures located in the above countries, VCC regime also contains provisions to re-domicile in Singapore subject to various criteria prescribed by the MAS.
The Indian context
Singapore has evolved as a prominent global hub for the asset management industry, with its assets under management (AUM) close to US$2.5 trillion[2]. It has also emerged as one of the top investing countries into India, with a cumulative foreign direct investment (FDI) exceeding US$91 billion[3] over the years and portfolio (FPI) investment currently exceeding US$43 billion[4].
The Securities and Exchange Board of India (SEBI) has recently introduced the new FPI regulations 2019 under which a foreign fund will be eligible to a Category 1 FPI license, if either the fund or the fund manager is located in a Financial Action Task Force (FATF) member country and is appropriately regulated by the securities market regulator in the home country. The slight nuance in the context of VCCs is that they are regulated by ACRA, which is the regulator for companies in Singapore. The fund manager is however regulated by MAS, which is the securities market regulator. On that basis, the SEBI should consider regarding the VCCs as eligible to a Category I FPI license.
From a tax standpoint, while the India-Singapore tax treaty has been revised to do away with the capital gains tax exemption on sale of shares of an Indian company, it continues to exempt gains from other financial instruments (i.e., bonds, debentures, derivatives instruments, etc.). Singapore always provided a compelling story for fund managers looking to establish themselves in the Asia-Pacific region, given its political and legal certainty, as well as the thriving services sector supporting the asset management industry. The VCC framework with its ability to pool monies directly from investors in Singapore should thus, significantly strengthen the basis for choice of Singapore as a location for the fund and strengthen the case for treaty access in this post-General Anti Avoidance Rules (GAAR) and post-Base Erosion Profit Shifting (BEPS) Multilateral Instruments (MLI) era.
