Fund management business is constantly increasing in Gujarat International Finance Tech-City (Gift City). Many portfolio management services (PMS) and Alternative Investment Funds (AIFs) are setting up their operations here. However, by analyzing deeply, the growth of this segment is slower than expectation, especially in the case of retail schemes of mutual funds.
The current status of fund management enteens
Currently, there are a total of 139 fund management entities (FMSCA) registered at the Gift International Financial Service Center (IFSCA). Of these:
- 123 entities come under non-retail schemes.
- Only 8 schemes are included in the retail category.
- The remaining entities are under the authorized FME Schemes.
These figures clearly indicate that the acceptance and increase of retail schemes in Gift City remains limited.
The main reasons for low interest in retail fund schemes
1. Regulatory uncertainty and limited tax benefits
Experts believe that regulatory uncertainty is a major reason for low interest in retail schemes. For example:
- Ban on NRI investment: Retail schemes in Gift City are not allowed to sell NRI investors, leaving a large section of potential investors.
- Lack of tax benefits: Retail schemes do not get the same tax benefits as the offshore funds of Gift City, which does not make the investment attractive.
- The status of new regulations unclear: Retail schemes were allowed in 2022 under the IFSC Fund Management Regulation, but fund managers are not showing interest in them due to ambiguity in the tax policy.
2. CBDT Circular and its complexities
In January 2024, the Central Board of Direct Taxes (CBDT) issued a new circular, which set certain conditions for retail funds.
- Investment limit in Securities and Associate Entities: In the circular, the investment limit of investment in unlisted securities and associate entities was set, which became a major challenge for retail schemes.
- Ambiguity of Passive Breach: If the stock weightage of a fund crosses the 25% limit, then clear guidelines were not given on what procedure to be adopted to bring it back to the limit.
3. Operational challenges
- Number of minimum investors: At least 20 investors are required for any retail fund. If the number of investors is reduced by this, then there is no clarity on what steps the fund manager should take.
- Risk of fund operation: Regulatory instability has made it difficult to operate retail schemes, causing fund houses to move forward in this direction.
4. Strictness of FEMA rules
According to Vinod Joseph, partner of Economic Lodge Practice, the Foreign Exchange Management Act (FEMA) is becoming another obstacle for investors wishing to invest in Gift City Mutual Funds.
- If a fund is launched in a gift city for investment in the Indian market, it can gather only a limited part of its total fund from Indian investors.
- This makes this fund less attractive for Indian investors.
