Decoding the GIFT City SPV Framework: Charting the Path to Efficiency and Drawing Parallels with DIFC

[Saharsh and Shriyansh are students at Hidayatullah National Law University.]

On 9 January 2025, the International Financial Service Centre Authority (IFSCA), located in Gujarat International Finance Tech-City (GIFT), published a consultation paper on a special purpose vehicle (SPV) framework under the IFSCA (Fund Management) Regulations 2022 (Regulations). This concerns setting up an SPV for co-investment and leverage transactions under the said regulations. IFSCA was a specialized zone for promoting India as a global financial hub with feasible cross-border financial services transactions. According to the 2024 report, IFSC-GIFT City has been ranked 52 in the Global Financial Centre Index. 

As per Regulation-83(q) of the Regulations, “SPV means any company or LLP or any other structure as approved by the authority”. SPVs are legal entities created to achieve a short-term goal of the sponsoring company. They are generally created to isolate the financial risk, if the parent company goes bankrupt the SPV could continue operations and vice-versa. Different countries have different structures of SPVs; in Canada, SPVs take the form of charitable trusts; in the USA, SPVs are LLPs; in Europe, SPVs are organized as limited-purpose corporations.

This blog analyzes the technical implications of the novel GIFT City SPV framework, navigates some potential issues that may arise, and ultimately strives to propose solutions through which such issues can be avoided. Further, by comparing it in light of the Dubai International Finance Centre (DIFC) SPV framework, inspiration could be drawn for the GIFT City framework on the aspects that can be inculcated to solidify IFSC’s position in the international financial market.

Deciphering the IFSC SPV Framework

The new SPV framework aims to bring flexibility and enhance transparency in fund management within IFSC. It promotes ease of doing business by allowing investors to cream off their preferred portfolio companies and select companies that fit their unique risk appetite, investment strategy, and sectoral preferences. The framework specifically requires that every SPV shall be established by a fund management entity (FME) that is located inside an IFSC, as per the Regulations. As a result, the SPV would have to adhere to the same registration rules as schemes that apply to enterprises located within a special economic zone. This tailored arrangement would appeal to professional investors who prefer to concentrate on high-conviction stakes in particular firms rather than the diversified exposure that alternate investment funds (AIFs) often provide. This may eventually lead to FMEs preferring this approach since they would not be required to contribute to such SPV. The FME would be the decision-making and controlling authority of SPV. 

A distinct feature of an SPV is that it offers co-investment to any person and it is noteworthy that, to get a co-investment portfolio management service licence, the Securities Exchange Board of India (SEBI) requires investment managers to offer co-investment services for a charge or payment, and under the Regulations, there is no comparable requirement. By eliminating the need for a particular license for co-investment services, IFSCA hopes to ease the burden of compliance and motivate fund managers to design creative and effective co-investment plans.  

The framework also requires that a controlling scheme of the FME own a sizable portion of SPV, that is a minimum 50% equity share capital or capital commitment. Also, the constitution of the SPV should be the same as the controlling scheme. As stated in the consultation paper the controlling scheme has been given the same meaning as stated in Regulation 2(1)(h) of the Regulations. However, the said regulation only offers a traditional concept of control i.e., “control shall include the right to appoint the majority of the directors or to control the management or policy decisions”. This creates uncertainty as to what is controlling scheme is as there is no exact definition. This leads to confusion as to who shall have the minimum equity and what shall be the structure of the SPVs. Further, it can also lead to lacuna in the application part as this gives a scope of wider interpretation which may lead to exploitation keeping investors’ money at stake.

Exploring DIFC’S SPV Framework

DIFC is the leading financial centre in the world, with a 20-year track record of facilitating trade and investment flows especially in the Middle East, Africa, and South Asia region (MEASA). It has been ranked 10th in the Global Financial Centre Index. As India’s target investor market is majorly the MEASA region and specifically the South Asian region with which India has strong economic relations, this makes a common ground for comparing it with the IFSC. In addition, DIFC has been the fastest-growing international finance centre with a well-structured framework encompassing an independent judicial system, common law framework, global financial exchange, and financial regulator.

The SPV framework of the DIFC is governed by the Prescribed Company Regulations 2024. It is designed to facilitate asset holding, structured financing, and other particular financial goals under an adequate legal and regulatory framework. According to the DIFC rulebook, the SPV is “a legal entity the object and purpose of which is primarily to issue securities”. These SPVs can be incorporated as 'prescribed companies'. 

Certain requirements must be fulfilled to create an SPV in the DIFC. For example, SPVs must be owned or controlled by Gulf Cooperation Council Persons, registered persons, or authorized firms, which include corporations subject to DIFC regulation. The DIFC's regulatory goals are ensured by limiting them to certain 'qualifying purposes', such as holding assets, issuing debt, and engaging in financial or investing operations.

The operational criteria include filing a yearly confirmation statement attesting to continuous compliance and keeping a registered office in the DIFC, either through a corporate service provider or through an affiliated organization. Administrative requirements are reduced because SPVs are not subject to employment or commercial trade. Certain SPVs, particularly those with structured financing or small-scale crowdfunding objectives, are exempt from financial requirements, such as auditing or submitting accounts. The framework forbids SPVs from providing public securities or financial services unless specifically permitted. 

Analyzing the SPV Framework: IFSC in GIFT CITY v/s DIFC

The IFSC SPV framework’s major focus revolves around co-investment and leverage transactions; this provides investment flexibility especially when there is no requirement for a separate co-investment license. This highlights it to be more of a pre-investment lucrative scheme. However, the framework should take some inspiration from the DIFC framework, where the focus should even extend to post-investment regulations which may be major lacunae with the in-hand SPV framework. The framework should also address the challenges that may arise after an investment is made such as the absence of regulations that ensure asset protection through clear rules of ownership and securitization. There is also no mention of exit options for an SPV, which can be a major setback for the whole ecosystem.

An unambiguous eligibility criterion for investors should be given in the IFSC framework as given under DIFC. SPV is a double-edged sword, although it motivates to undertake risky ventures by way of obtaining finances without diluting shareholding, transferring risk, and ring-fence investments. Nevertheless, these have been misused as off-balance sheet vehicles which help debts to be hidden, manipulate financial performance, and keep the investors of the FME in the dark. The same thing occurred in the Enron scandal of the USA, wherein it created multiple SPVs to hide billion-dollar debts and the original investors had to suffer. This is something that can be eliminated by including certain disclosure requirements as in the Companies Act 2013 and the SEBI (Listing Obligations and Disclosures Requirement) Regulations 2015. For instance, companies are required to disclose annual financial statements and also hold general meetings with all the investors, similar practices could be followed in SPVs. 

By using the DIFC model of operating exemptions for low-risk SPVs that do not raise public money or use complex financial structuring, IFSC can simultaneously eliminate needless administrative costs. For instance, IFSC might exempt private SPVs used for intra-group financing or passive holding arrangements from required audits and financial reporting. nevertheless, more stringent disclosure requirements must apply to SPVs involved in high-risk activities like securitization or outside financing. Investor confidence would be preserved by this unique compliance system, guaranteeing that IFSC continues to be a competitive international jurisdiction for SPVs.

Further, it is more economical to set up an SPV in the DIFC than in the IFSC. There is a USD 100 application charge for incorporation in DIFC, along with a USD 1,000 yearly license renewal. However, the IFSC system linking to AIFs operates at elevated prices in comparison to other systems. Even the lowest fee i.e., Category-I AIF costs USD 7,500. IFSC requires competitive pricing, as high pricing can be a major setback for small businesses and investors looking for low-cost arrangements for financing and asset holding and this adjustment will help the center to be a promising financial center. The fee should be adjusted to meet the needs of other countries and make it a more desirable place for investors.

Conclusion

IFSC looks forward to becoming the preferred choice of global investors and expanding greatly in all cutting-edge industries with a precise and adaptive SPV framework. The consultation paper will prove to be one of the most important steps for India to become a global soft power by 2047. The framework will support India’s commitment to bringing flexibility in financial services and promoting ease of doing business, which will bring a new wave of change for co-investment opportunities. 

To enhance the robustness of the existing framework, there have to be mechanisms in place to scrutinize SPV's working and incorporation. A proper mechanism for dispute resolution should also be in place. So, the pious objective of it should be facilitating investors' operations and ensuring that it is not used for hampering the interests of investors. Additionally, to make the initiative stand out from others, the requirement of regulatory fees and filing applications may be waived. By incorporating these changes, the Indian framework can encourage investors around the world to participate in the operations.