Ms. Indranee Rajah, the Second Minister for Finance, moved the Variable Capital Companies Bill (“the Bill”) for first reading in the Parliament on 10th September 2018.
Background of the Variable Capital Companies Bill
Variable Capital Companies Bill will serve the needs of investment fund and establish a culture for incorporation and operation of a new corporate structure in Singapore. With VCC, the fund managers in Singapore will be encouraged to set up the domicile of their investment funds within the country. This will further help the country in strengthening its position as a full-service international fund management centre.
The VCC structure shall be in line with the current suite structure that is available to the Singapore’s fund managers. Unit trusts and investment companies are the most commonly used investment fund structures. Due to the restrictions under the Companies Act (Cap. 50) (“CA”) in Singapore, the investment funds constituted as investment companies are very rare. The restrictions affect the regular functioning of the investment companies in a way that they have the lesser flexibility to pay a dividend, redeem shares, etc. In order to resolve such issues, there are specialised corporate structures for investment funds established by the international fund jurisdictions.
The VCC Bill is prepared by the Monetary Authority of Singapore (“MAS”) after conducting a public consultation about the proposed regulatory framework. The respondents were positive on the VCC structure and the proposed regulatory framework by MAS. The bill is prepared by the MAS after incorporating all the possible public feedback.
Provisions of the VCC Bill
Since the investment fund companies faced a lot of restrictions, the VCC Bill shall include the following features that will ease the operations of a VCC as an investment fund.
Variable Capital Structure
To give relief to the investment fund companies, the bill shall give permission to such companies to redeem its shares without shareholders’ approval, pay dividends using their capital and enable the investors to exit their investments whenever they wish to. On the other hand, the companies under the Companies Act can distribute dividend only out of its profits and face numerous restrictions on capital reduction.
Sub-funds with Segregated Assets and Liabilities
VCC Bill allows the companies to establish themselves as a standalone or umbrella structure with multiple sub-funds having different objectives of investment. The umbrella structure helps the companies in reducing their cost in the form of having common service providers like a custodian, fund managers, auditor, etc. Under the umbrella structure, they can also have sub-fund having the same board of directors. In addition, these companies can also consolidate its administrative functions like preparing a prospectus, holding a general meeting, etc.
The sub-funds can have its own set of investors, but it is not a separate entity in the eyes of law. The risk that assets and liabilities of one sub-fund can be merged with another sub-fund is always there. To overcome this risk, the bill necessitates each sub-fund to segregate their assets and liabilities. This is done to ensure that the assets of one sub-fund are not used to meet the liabilities of another sub-fund. Furthermore, during insolvency, each sub-fund must wound up separately.
Fund Manager under VCC Bill
According to Bill, every VCC must compulsorily appoint a fund manager who is regulated by the MAS to manage the investments. This will enable supervision of the functioning of the fund manager. In addition, it would ensure that the VCC is not using the funds for unlawful purposes or the company is not running as an offshore vehicle without any actual activity relating to managing the investment in Singapore.
Accounting and Governance
With the introduction of the VCC Bill, the scope of the accounting standards which can be used in preparing a VCC’s financial statements has considerably increased. The bill allows the companies to use the International Financial Reporting Standards and US Generally Accepted Accounting Principles apart from Singapore accounting standards and recommended accounting principles. This will give more flexibility to the investment funds and serve the needs of the global investors efficiently.
The register of VCC shareholders shall not be made public to meet the privacy needs of the investors. This practice is in line with other major jurisdiction such as Hong Kong, UK, etc. The aim of MAS is to prevent the VCC from being used for illegal purposes like money laundering, terror financing, etc. Therefore, the VCC is required to regularly update the register of the shareholders and provide the information to the regulatory authorities whenever asked for it.
The new bill shall encourage the foreign corporate fund structures which are similar to VCCs to re-domicile as VCCs in Singapore. This, in turn, will lead to fund managers in offshore jurisdictions to co-locate fund domiciliation with their fund management activities in Singapore.
A VCC Amendment Bill shall be placed in 2019 to replace the provision of the insolvency of a VCC and its sub-funds that are adapted from the Companies Act. Furthermore, the provisions under the Insolvency, Restructuring, and Dissolution Bill (“Insolvency Bill”), shall also be amended. Therefore, the VCC insolvency regime shall align with the VCC Amendment Bill with the other corporate structure in Singapore.
Administration of VCCs
The administrator of the new bill and registrar of the VCCs shall be the Accounting and Corporate Regulatory Authority (“ACRA”). However, ACRA shall not look into matters of anti-money laundering and counter-financing of terrorism obligations of VCCs, they shall be overseen by MAS.
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