Is Singapore VCC Going to Change the Game for FDI in India?

Singapore’s VCC (Variable Capital Company) framework has been a major development for investment fund industry looking for investing in India and also in whole of Asia-Pacific. Especially from India’s point view, the VCC regime can be a game-changer.

Singapore ranks as a significant global hub particularly for the asset management industry, due to its AUM (Assets under Management) shooting up to $2.4 trillion. It has also become one of the countries who are investing the most in India, with its cumulative FDI gong over$73 billion and its portfolio investment crossing $37 billion.

However, most of the funds handled by managers based out of Singapore are pooled or domiciled out of Singapore because of there is no flexible corporate vehicle available. To tackle this, Singapore is launching a corporate vehicle named the Variable Capital Company (VCC). The good news is that the VCC framework is cleared by the Singapore Parliament and would be operational early this year.

The corporate framework

The VCC framework is intended just for fund industry as it’s compulsory to appoint a Singapore-regulated fund manager along with an independent custodian.

A VCC is typically alike a conventional business in terms of a board of directors, share capital with limited liability, and other features. In addition, to aid investors’ entry and exit, the VCC framework offers additional flexibility:

• It can distribute out of its capital to shareholders in case it makes no profits or has reserves;
• Its shares are allowed to be redeemed regularly or even bought back without having to seek shareholder approval every time;
• Its paid-up capital’s value is always considered equivalent to its NAV and its shares should be issued, redeemed and even repurchased at such NAV; and
• Other than various classes of shares, VCCs are allowed to issue bonds and debentures listed on stock exchanges;

VCCs could be established either as a single standalone fund or it could be an umbrella fund. A standalone fund gets to enjoy all the features of the VCC framework, however, an umbrella fund has an advantage of making two or higher sub-funds where the assets and liabilities are totally segregated, that is, losses of a sub-fund would not impact other sub-fund’s NAV.

The structure of an umbrella fund helps a big fund manager gain through economies of scale as they save operational and other compliance costs connected to establishing multiple corporate vehicles.

The taxation framework

A VCC is treated as a single entity for tax purposes. If it’s an umbrella VCC, the sub-funds are not needed to assume different tax compliance. Also, a VCC should be made eligible to utilize Singapore’s tax treaty network wherever it is taken as a Singapore tax resident who has based the ‘control and management’ in Singapore.

Regarding incentives, a VCC is entitled to apply for all tax exemptions offered to other funds handled by a fund manager based in Singapore. The exempt VCCs would also be entitled for GST remissions thus decreasing the Singapore GST incidence particularly on management fees to a tiny fraction. Fund managers are qualified to request for 10% concession of tax rate in terms of their fees from VCCs.

Re-domiciliation of current overseas funds operating in Singapore

The current offshore funds which have a framework like VCC would be allowed to be re-domiciled in Singapore. In case the overseas fund is not similarly structured as a VCC, in that case, restructuring could be explored before re-domiciliation.

This is likely to provide enhancement to local domiciliation of the investment funds in Singapore.

VCCs in Indian context

India-Singapore tax treaty was recently revised to remove the tax exemption of capital gains particularly on Indian company’s sale of shares. The treaty continues to offer grandfathered exemption especially for cash equity investments that were made till March 31, 2017. It also still exempts the profits from other financial instruments like bonds, derivatives instruments, debentures, etc.

The VCC framework offers an efficient method to deal with so many challenges posed to investment funds. After the framework is successful, fund managers can pool funds in Singapore only. In addition, the VCC would also have an investment manager, administrator and custodian based in Singapore, which will majorly reinforce the commercial substance for investment funds and support the case for treaty entry in this post-BEPS age.