VCC in Mauritius

Fund management is an important component of global business activities in Mauritius. Considered as high value incorporations for management companies, fund investment vehicles have fuelled the overall financial services system of countries like Luxembourg, Netherlands, Ireland, Singapore and Mauritius amongst others. Through decades, fund structures have changed thereby adapting to the various legal frameworks of countries, essentially to increase the marketability of these funds in different jurisdictions as well as crafting tax efficient special purpose vehicles for the benefit of shareholders and the community of investors at large. Mauritius positioned itself as an ultimate recipient of these investments for the region and is known as a proven and excellent conduit of investment activities within jurisdictions. As a matter of fact, established funds in Mauritius crossing the mark of one thousand is considered a well-crafted mature plan for the financial sector of the country. In recent years, we have seen interests around PCC, SPF, SPAC and now VCC is being strongly contemplated to close the loop to a stronger inter-country fund ecosystem, designed to bolster the efficiency of funds in a world where flexibility is akin to enhanced performance. WHAT’S TRENDING IN THE FUND FUNNELS Since 2015, a myriad of regulatory reforms in India pertaining to foreign investors has rekindled investors’ appetite to consider the country as a dynamic and robust emerging market for allocation of funds. The relaxation of FDI norms for investment in Alternative Investment Funds in late 2015 has been a fantastic opportunity to international hedge funds and other innovative structures looking to have a share of the Indian market. The Securities and Exchange Board of India (SEBI) during the same period formed the Alternative Investment Policy Advisory Committee (AIPAC) to cater for the development of the alternative investment regimes and slowly came up with liberalised rules for segregated portfolios thereby promoting PCCs. Now that the fiduciary rules of the fund ecosystem across sophisticated jurisdictions were under scrutiny, it would have been quite a dissonance for an emerging country like India not to seize the rising interest of fresh fund commitments from abroad. Two other major continents have gone through changes which are directly related to the fund industry in Mauritius, and by design, emerging markets such as the Indian one. The U.S market which is a major source of fund providers has seen the roll out of a few legislations since the credit crunch which were presumably meant to deter another financial crisis and speed up the economic recovery in the aftermath of the crisis of 2008. The Dodd-Frank Act, the Foreign Account Tax Compliance Act and the the Jumpstart Our Business Startups Act in the United States committed investors to increased limitations and disclosure requirements, ultimately having a parallel impact on jurisdictions where citizens of USA were funnelling their funds. The European Commission followed with the same trend in introducing the Alternative Investment Fund Managers Directive (AIFMD) in 2013 aiming to regulate fund managers within the European Union. The AIFMD also looked at the aspect of outbound fund managers who were seeking to promote a fund on the EU territory and safeguarding the interests of investors in the EU at the same time. Henceforward, EU-oriented investors with due consideration to AIFMD would meet with tighter compliance measures towards conflict of interest, liquidity profiles and independent valuation of assets. Moreover, to rule out any systemic risks funds can pose for the EU zone, risk-taking would be kept in check, financial leverage and remuneration policies will be actively monitored. To this end, the impending de-listing of Mauritius from the EU blacklist evidently will provide added serenity to EU investors funding their corporate entities through the island's global business sector. REVISITING PROTECTED CELL COMPANIES (PCC) With these landmark regulations hitting the US and EU, investment destinations like Mauritius doing structured interests into funds for emerging markets, had expectation gaps that needed to be addressed. And this is where the Protected Cell Companies for Mauritius had to be revisited as a facilitator for varied objectives including and involving trusts, limited liability partnerships, limited partnerships, limited liability companies. PCC are companies made up of several cells which are in turn made up of assets and liabilities and are stand-alone legal entities. There is a main core cell and other secondary cells, each with their own investment objectives, shareholding structures and solvency tests. This type of structure offers an enhanced degree of protection ruling out the risk of contagion to other cells. PCCs are favourites for fund vehicles, because they are ring fenced, paying out dividends separately based on their individual performances and cost efficient as forming part of an umbrella cost allocation. PCCs are found in several high-end jurisdictions for the same main benefits as described above, albeit some distinctive features which are tailored made to cater for specific needs of fund managers or legal frameworks that mould the PCCs to the advantage of investors and authorities altogether. The Mauritian PCC has undoubtedly been reshaped to serve the investment requirements of fund managers overseeing the India markets or other nascent fund ecosystems. In contrast to normal multi-class funds, the Mauritian PCCs will allocate each share class to a cell, apply separately for example for their Tax Account Number, bank account, Permanent Account Number in India, Tax Residency Certificate in Mauritius, and even apply as a separate Foreign Portfolio Investment (FPI) account, in line with SEBI recommendations. THE UPCOMING VARIABLE CAPITAL COMPANIES (VCC) The PCC came as a bridge to close certain gaps in the fund management industry, intuitively targeted but certainly not enough to address the peculiarities of a changing landscape of investment strategies and risk profiles. By contrast, the VCC is made up of several single legal entities, namely sub-funds having segregated assets and liabilities, easy to incorporate, manage, redomicile or to wind up. The VCC demarcates from existing structures as they steer clear of overregulation in terms of prudential reporting or shareholders’ interference whilst performing efficiently on operational deliveries and provides for the domiciliation of a larger range of funds than the PCC. Recently, there has been a rise to the implementation of Variable Capital Companies (VCCs), an enterprising effort from jurisdictions to lure away fund managers from existing domiciles, all to their credits with kudos to their client centric outlooks or successful tracking of clients’ needs in respect of their funds’ future. Other jurisdictions simply want to be prepared for VCCs related structures and catch opportunities as they happen. For instance, the government of India is currently pondering on its own version of VCC, as a strong signal for flexibility of fund structures to grab opportunities for fund of funds from its new Gujarat International Financial Tech City. Some of the key interests for fund managers to look for other jurisdictions are the considerations of economic substance in their current jurisdictions, cost, flexibility and of course overall stability for an ongoing concern of their funds. Moreover, giant powerhouses of funds in places like Luxembourg, Cayman Islands, Singapore have undoubtedly been preferred locations for HNWI investor-based activities and as rolling stones gather no moss, fund managers travel the world in search of new destinations for fund ventures. Therefore, Mauritius stands good chances to have a small piece of a bigger cake through VCCs, considering the fact that commonalities in the interests of fund managers structuring abroad have in the recent past decades viewed Mauritius as an eminent place of domicile for Africa, India and Asia Pacific. Conclusively, Mauritius can again be the strategic alternative given the right frameworks are in place. EXPECTATIONS FROM THE UPCOMING VCC ACT Recently in 2021, Mauritius released a draft version of the VCC bill, which intends to garner interest from stakeholders and is open to amendments before its final enactment by the government, presumably in the first half of 2022. Internationally, the VCC is considered as a game-changer for Singapore’s asset management and wealth management industries as the structure has various advantages that can be easily adapted to the Mauritian fund’s space. It is anticipated that this specific transfer of knowledge about funds through the VCC brings modernity and serenity to the way forward for sophisticated investors. Concurrently, investors having similar interest for Singapore may also view Mauritius as an alternative jurisdiction or simply co-invest as both countries will have accommodated frameworks towards its formation or migration. The VCC bill in the first stance promotes the ease of registering VCCs and wish to adapt to foreign laws for the migration of VCCs to Mauritius. Whilst VCCs cut across the inflexibilities and constraints of asset management firms, asset light structures for collective investment schemes and close-end funds can bring a certain competitive edge to this part of the world. VCC will be expected also to enable the introduction of mutual funds, hedge funds, private funds, private equity and real estate funds, stand-alone, tax-exempt and legal structures like their sub-funds, shielding against common ailments of conventional funds. VCCs, on the international front, address some loopholes in typical corporate vehicles regarding subscription and redemption of shares, capital structure requirements, legal entity considerations and DTAs benefits for limited partnerships amongst others. One interesting feature from European funds is the popularity of Société d’investissement à Capital Variable (SICAV) and RAIF, which bears some similitude to the VCC. SICAVs and RAIFs are known to be investment companies with variable capital, famous for the flexibility they represent for the redemption and transaction proceeds for its investors at operational levels and basically without shareholders’ approval. They also favour an umbrella structure of insulated sub-funds and befit the concept of reduced costs under same board of directors, fund administrators and custodians. Whilst SICAV as collective investment schemes have all the characteristics to weld into new digitalised platforms of processing transactions and disclosures, it seems also capable to rise about conventional fund structures and give a specific boost to re-domiciliation or conversion of SICAVs into VCCs for the Eastern emerging markets. In other words, investment structures like these when they exist in different markets represent ultimate roadmaps for birds of the same feathers as they expect Asean and African markets to implement VCCs based on the success of SICAV for EU member states. DTOS intend to explore further on the VCC when enacted as we strongly believe that this new corporate structure will increase the competitiveness of Mauritius for alternative and flexible fund structures and propel the country to be an equivalent jurisdiction for incorporating funds.