GIFT
City Express
June 30, 2025
Breaking the Substance Barrier: IFSCA Clears the
Path for Third Party Fund Managers
INTRODUCTION
At its 24th meeting held on June 24, 20251
(“Authority Meeting”),
the International Financial Services Centres Authority
(“IFSCA”) approved
a new framework for Third-Party Fund Management
Services (“TFMS Model”).
This framework commonly known in the industry as
the "platform play" is intended to be implemented
at Gujarat International Finance Tec-City, Gujarat,
India (“GIFT IFSC”).
It forms part of IFSCA’s ongoing efforts to
create a regulatory environment that aligns with
global standards.2 The proposed regulatory
framework aims to enable overseas and domestic third-party
fund managers (“External Fund Managers”)
to access India’s GIFT IFSC fund ecosystem
without setting up a physical presence in GIFT IFSC
or being registered with IFSCA, thereby enhancing
India’s competitiveness as a cross-border
fund management hub.
BACKGROUND
TFMS Model is an arrangement which allows External
Fund Managers to launch and operate a fund in a
foreign jurisdiction by partnering with an existing
licensed platform manager in that jurisdiction,
without setting up their own fund structure in that
jurisdiction. The licenses platform manager
handles regulatory approvals, compliance, and operations,
while the External Fund Manager focuses on investment
strategy and investor engagement.
TFMS Model in other Jurisdictions?
Several leading fund jurisdictions such as Singapore,
Mauritius, and Luxembourg, have embraced the TFMS
Model, offering regulatory frameworks that allow
External Fund Managers to launch funds efficiently
through licensed local fund platforms. Generally,
the External Fund Manager can partner with a locally
regulated fund manager to launch and operate a fund
without establishing a separate licensed presence.
These local platform managers assume responsibility
for regulatory authorization, governance, risk management,
and compliance, while the External Fund Manager
retains control over investment strategy and investor
relationships. Common to all three jurisdictions
is the availability of flexible fund vehicles such
as Variable Capital Companies (VCCs), umbrella structures,
and limited partnerships that accommodate both open-
and closed-ended strategies. Further, investor protection
and Anti-Money Laundering / Countering the Financing
of Terrorism compliance are embedded through requirements
for licensed fund managers, fit-and-proper criteria
for managers, and ongoing regulatory oversight.
The TFMS Model in these jurisdictions enables External
Fund Managers to efficiently access regional or
global investor markets without the time and cost
associated with becoming fully licensed, making
them attractive hubs for cross-border fund launches.
India’s Approach: GIFT
IFSC as a TFMS Model Enabler
Building on global trends, the IFSCA has recently
approved the notification of a regulatory framework
within the GIFT IFSC to facilitate third-party fund
management through fund platforms.
Regulatory
Framework
Under the extant IFSCA (Fund Management) Regulations,
2025 (“FM Regulations”),
Fund Management Entities (“FME”)
are required to maintain local infrastructure and
personnel based out of GIFT IFSC, in order to manage
funds registered with IFSCA. Specifically, both
domestic and foreign fund managers are permitted
to launch funds in the GIFT IFSC provided that the
fund manager meets the substance requirements under
the FM Regulations by incorporating an FME in the
GIFT IFSC, hiring requisite staff and ensuring that
the proposal on the portfolio composition of the
fund is initiated by a person based in the FME’s
GIFT IFSC office (“Substance Requirements”).
On August 17, 2024, IFSCA issued a consultation
paper proposing a regulatory framework to operationalize
TFMS Model (“Consultation Paper”).3
The Consultation Paper sets out key proposals to
enable Registered Fund Management Entity in GIFT
IFSC (“Registered FME”)
to launch and manage Restricted Scheme (ie. non-retail
funds) on behalf of External Fund Managers without
requiring such managers to meet the Substance Requirement.
Following the public consultation process, IFSCA,
approved amendments to the FM Regulations to operationalize
TFMS Model within GIFT IFSC on June 24, 2025.
Under TFMS Model approved by IFSCA, an External
Fund Manager may partner with a Registered FME to
launch and manage a Restricted Scheme under the
FM regulations. In this arrangement, the External
Fund Manager is responsible for sourcing investors
and devising the investment strategy, while the
Registered FME, being registered with IFSCA, assumes
full regulatory and supervisory responsibility for
the fund, including compliance, governance, risk
management, administration, reporting obligations
and ensuring adequate supervision of all fiduciaries
involved. Importantly, the External Fund Manager
is not intended to fulfill the Substance Requirements,4
thereby significantly reducing its operational and
regulatory burden. While the Consultation Paper
permitted any FME to offer TFMS Model , the IFSCA’s
final position, as reflected in the meeting minutes,
restricts it to only Registered FMEs under the Regulations.
Moreover, not all FMEs are automatically permitted
to offer TFMS Model. A Registered FME seeking to
act as a platform must obtain specific authorization
from IFSCA for providing such service. To strengthen
financial credibility, such Registered FMEs are
also required to maintain an additional net worth
of USD 500,000, a requirement introduced in the
Authority Meeting, departing from the earlier consultation
paper, which had not proposed any specific capital
threshold.
The framework approved in the Authority Meeting
caps the corpus of each fund at USD 50 million.
It is important to note that the consultation paper
proposed a lower threshold of USD 10 million, beyond
which the External Fund Manager would be required
to establish its own FME to directly manage the
fund. Each fund under the TFMS Model must have a
dedicated Principal Officer, ensuring independent
governance and regulatory accountability at the
fund level.5 TPMS arrangements must be
clearly disclosed in the offer documents, including
the nature of services, roles of involved parties,
potential conflicts of interest, and fund specific
strategy disclosures in the PPM.6 The
Registered FME is also required to implement a comprehensive
risk management framework and conduct regular internal
audits to ensure adherence to regulatory standards
and internal controls.7 Each fund must
maintain operational independence from other strategies
managed under the platform to prevent conflicts
of interest and ensure clear fiduciary accountability.8
A robust mechanism for investor grievance redressal
must also be in place to ensure timely and effective
resolution of complaints.9
ANALYSIS
TFMS Model presents several advantages from both
a regulatory and commercial perspective. One of
the most significant benefits is the lower entry
barrier it offers to fund managers, particularly
emerging managers, foreign GPs, and potentially
even family offices. By enabling External Fund Managers
to manage funds without the need to fulfill Substance
Requirements or obtain a separate fund management
registration in the GIFT IFSC, the TFMS Model effectively
removes the traditional Substance Requirement that
has often acted as a barrier to entry in GIFT IFSC.
The TFMS Model approved in the Authority Meeting
seems to largely align with the framework for third
party fund management platforms globally; however,
we will need to wait for the final set of amendments
to the FM Regulations. Until the final regulations
are released, some key concerns remain:
Fund
Level Cap of USD 50 million
The Authority Meeting prescribes a cap of USD
50 million total corpus for each fund launched under
TFMS Model. In most international fund jurisdictions
fund level thresholds of this kind are not imposed,
and investor Sprotection is typically ensured through
disclosure, governance, and compliance frameworks
rather than rigid monetary limits.
By imposing an artificial ceiling on fund size,
the framework approved in the Authority Meeting
risks limiting the commercial viability and investor
appeal of these platforms, particularly for fund
managers targeting institutional or cross-border
capital. Moreover, while one of the objectives of
the TFMS Model is to allow fund managers to test
GIFT IFSC as a credible jurisdiction, both in terms
of investor confidence and operational comfort,
such a low cap may deter precisely those participants
the regime seeks to attract.
Accordingly, while the cap seems to have been
introduced to limit risk associated with larger
funds, such cap may ultimately undermine the TFMS
Model’s adoption.
Additional
Net Worth Requirement
Additionally, a Registered FME offering TFMS
is required to maintain an additional net worth
of USD 500,000. If the requirement applies per fund
launched by such Registered FME, it would be an
unduly burdensome obligation that could undermine
the viability of the TFMS Model.
Skin
in the Game
Further, the FM Regulations currently require
the FME (or its associate) to have ‘skin in
the game’ by investing in each fund it launches.
It is not yet clear whether this obligation will
apply to funds launched under TFMS Model as well.
If it does, an important question arises: who is
expected to contribute this investment, the Registered
FME, which has no control over the investment strategy,
or the External Fund Manager, who actually manages
the portfolio? Clarity on this point will be critical
for assessing the commercial feasibility of TFMS
Model.
Clearly
Defined Eligibility Criteria for External Fund Managers
The Authority Meeting state that there will be
clearly defined eligibility criteria for External
Fund Managers. In Luxembourg, delegation of functions
is permitted only to entities that are qualified
and capable of undertaking the delegated functions.10
It remains to be seen how the amended FM Regulations
will define these eligibility requirements.
Flexibility
in structuring the commercial terms
Further, while the introduction of TFMS Model
is a welcomed development, the long-term success
of the platform model will depend significantly
on the flexibility FMEs have in structuring their
commercial arrangements with External Fund Managers.
Key terms such as fee-sharing, carried interest,
delegation of operational functions, and branding
rights will need to be negotiated on a case-by-case
basis, and the amendments to the FM Regulations
must allow sufficient room for commercial innovation.
Uncertainty
Around Standalone TFMS Model
The Consultation Paper explains TFMS Model where
FMEs manage both their own funds and funds for external
clients. However, under this approach, an FME cannot
act only as a platform for External Fund Managers.
It is still required to launch at least one fund
of its own. We will need to wait and see if the
final FM Regulations allow FMEs to operate purely
as fund-hosting platforms without managing their
own fund.
Regulatory
and Reputation Risks for FMEs
This TFMS Model creates two key risks for the
Registered FME. First, it bears full regulatory
liability and supervisory responsibility for the
fund, even though day-to-day investment decisions
are taken by the External Fund Manager. Second,
it assumes reputational risk, as investors may associate
the fund’s performance, especially in cases
where returns are poor, with the FME, even in the
absence of any real involvement in portfolio decisions.
To help mitigate these risks and provide comfort
to FMEs, the Authority Meeting have indicated that
the amended FM Regulations will introduce strong
risk management requirements, mandatory internal
audit processes, and enhanced disclosure obligations.
Nonetheless to manage these risks, it is critical
that the Registered FME has strong comfort with
the External Fund Manager, not just in terms of
experience but also investment strategy of the External
Fund Manager.
That’s why it’s essential that both
the agreement between the FME and External Fund
Manager, and the FM Regulations clearly spell the
responsibilities of each party. Ideally, the ability
of the FME to delegate its investment management
functions to the External Fund Manager should be
codified in the final regulations to ensure consistency
and legal certainty.
Conclusion:
A step in the right direction
Overall, the high level framework approved in
the Authority Meeting represents a forward-looking
evolution of the GIFT City fund management regime.
It not only broadens the utility of Registered FMEs
but also creates a viable onshore alternative to
offshore fund-hosting structures. By formalizing
a regime that allows global asset managers to “plug
and play” through GIFT IFSC without establishing
local presence, IFSCA has taken a meaningful step
towards positioning the jurisdiction as a credible
platform for cross-border fund structuring and management.
However, the full scope and effectiveness of the
platform model will ultimately depend on the final
provisions of the amended FM Regulations, which
will provide the necessary clarity and regulatory
visibility going forward.
Authors
-
Akash Shirore,
Dhairya Jain and
Radhika Parikh
You can direct your queries or comments
to the relevant member.
1https://ifsca.gov.in/Legal/Index?MId=nMTs9Q2JJYU=
2International Financial Services
Centres Authority, Authority Meeting Press Release
https://ifsca.gov.in/Legal/Index?MId=nMTs9Q2JJYU=
3International Financial Services
Centres Authority, Consultation Paper On Review
Of IFSCA (Fund Management) Regulations, 2022.
https://ifsca.gov.in/CommonDirect/GetFileView?id=6b779629d8b45e05fb13e830ae5f41d7&fileName=consultation-paper-on-review-of-ifsca-fund-management-regulations-2022_publish17082024112122.pdf&TitleName=Report%20and%20Publication
4Regulations 7, 9 of IFSCA (Fund Management)
Regulations, 2025.
5Authority Meetings Para 2.4 iii
6Consultation Paper, Section B.4
7Consultation Paper, Section B.7
8Consultation Paper, Section B.7(d)
9Consultation Paper, Section B.7(c)
10Article 13, https://eur-lex.europa.eu/eli/dir/2009/65/oj/eng
Disclaimer
The contents of this hotline should
not be construed as legal opinion. View detailed disclaimer.
This hotline does not constitute a
legal opinion and may contain information generated
using various artificial intelligence (AI) tools or
assistants, including but not limited to our in-house
tool,
NaiDA. We strive to ensure the highest quality and
accuracy of our content and services. Nishith Desai
Associates is committed to the responsible use of AI
tools, maintaining client confidentiality, and adhering
to strict data protection policies to safeguard your
information.
This hotline provides general information
existing at the time of preparation. The Hotline is
intended as a news update and Nishith Desai Associates
neither assumes nor accepts any responsibility for any
loss arising to any person acting or refraining from
acting as a result of any material contained in this
Hotline. It is recommended that professional advice
be taken based on the specific facts and circumstances.
This hotline does not substitute the need to refer to
the original pronouncements.
This is not a spam email. You have
received this email because you have either requested
for it or someone must have suggested your name. Since
India has no anti-spamming law, we refer to the US directive,
which states that a email cannot be considered spam
if it contains the sender's contact information, which
this email does. In case this email doesn't concern
you, please
unsubscribe from mailing list.
 |
|
We aspire
to build the next generation
of socially-conscious lawyers
who strive to make the world
a better place.
At NDA, there
is always room for the right
people! A platform for self-driven
intrapreneurs solving complex
problems through research, academics,
thought leadership and innovation,
we are a community of non-hierarchical,
non-siloed professionals doing
extraordinary work for the world’s
best clients.
We welcome
the industry’s best talent -
inspired, competent, proactive
and research minded- with credentials
in Corporate Law (in particular
M&A/PE Fund Formation),
International Tax , TMT and
cross-border dispute resolution.
Write to
happiness@nishithdesai.com
To learn more
about us
Click here.
|
|
Top Tier
Law Firm:
Chambers & Partners,
Legal 500, Benchmark
Litigation, Asialaw,
IFLR1000, ITR World
Tax, Who’s
Who Legal, Asian
Legal Business (Thomson
Reuters), India
Business Law Journal,
Mergermarket
Recognised
Practices:
International Tax,
Private Equity,
Corporate/M&A,
Venture Capital,
Investment Funds,
International Dispute
Resolution: Arbitration
and Litigation,
White-Collar Crime &
Corporate Investigations,
Data Compliance &
Cybersecurity, Internet &
e-Commerce, HR and
Employment Law,
Intellectual Property,
Cross-Border Capabilities,
High Net Worth and
Private Wealth Law,
Insolvency
Recognised
Sectors:
Technology and Telecommunications,
Media and Entertainment,
Life Sciences and
Healthcare, Investment
Funds, FinTech,
Financial Services,
Sports & Gaming,
Transport, Government
and Regulatory
Innovation
Leadership:
RSG Financial Times –
India’s Most
Innovative Law Firm
(2019, 2017, 2016,
2015, 2014), Legal500
Innovative Law Firm
of the Year 2025
|
|
|
|
