Context: Dr. K.P. Krishnan headed expert committee on Variable Capital Company has submitted its report to the Chairperson of the International Financial Services Centres Authority (IFSCA).

What is a VCC?

• A Variable Capital Company (VCC) is an alternative form of corporate vehicle that will soon become available for Collective Investment Schemes (CIS). 
• Presently, the organisational structures available to CIS are the company, limited partnerships, and the unit trust structures. 
• The VCC can be used for both open-ended and closed-ended alternative and traditional fund strategies. 

The following are some advantages of VCC

• Exempted from the corporate resolutions and solvency tests: There is no need for corporate resolutions and solvency tests for shares problem and redemption in a VCC. Relief from these requirements helps make sure a seamless capital movement. Also, shareholders attain more liberty and flexibility to enter into or exit a fund via easy shares’ subscription and redemption. This fluidity feature is vital in boosting the efficiency of investment funds.
• Can distribute dividends directly from capital: In contrast to companies set up under the Companies Act where dividends are distributed only from the generated revenues, a VCC can distribute their dividends from the capital.
• No disclosure of register: While VCCs need to keep a register of shareholders, they are not required to divulge the log to the public.
• Can constitute umbrella funds: The law permits VCCs to be set up as umbrella funds with several subfunds that can share a board of directors and have similar fund manager, auditor, custodian and administrative officer.

About the committee

• International Financial Services Centres Authority constituted a Committee of Experts to examine the feasibility of the Variable Capital Company (‘VCC’) in India to examine the suitability of the Variable Capital Company as a vehicle for fund management in the International Financial Services Centre in India.
• The Committee was set up to explore the potential for allowing another legal structure – popularly known as a variable capital company (VCC).
• An additional option through which asset managers could pool the investors’ funds.

Recommendations

• The relevance and adaptability of the VCC for the IFSC in India or alternative structures to attract fund business in the IFSC.

Conventionally, pooling of funds in India is undertaken through three types of entities

• Limited liability companies governed under the Companies Act, 2013;
• Limited liability partnerships under the Limited Liability Partnership Act;
• Trusts governed under the Indian Trusts Act, 1882.
• The features of a VCC or its equivalent, in other jurisdictions such as the UK, Singapore, Ireland and Luxembourg.
• The adoption of a VCC-like legal structure for the purpose of conducting fund management activity in IFSCs.
• The legal framework governing entities that undertake fund management should provide for certainty and clarity to investors, effective segregation and ring fencing of different pools of asset.