Fund Management Entity (FME) in GIFT City: Working, Framework, Regulations

Last Updated on: 3rd July 2026, 04:02 pm

The Fund Management Entity framework in GIFT City IFSC is not a simplified offshore workaround. It is a purpose-built regulatory architecture that places India directly in the same category as established global financial centres as a domicile of choice for global fund managers, family offices, and institutional asset allocators. The International Financial Services Centres Authority (IFSCA), established under the IFSCA Act, 2019, absorbed the regulatory powers of the Reserve Bank of India (RBI), Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA) for IFSC-specific activities from October 2020. What emerged from this unification is the IFSCA (Fund Management) Regulations, 2022: a single, unified code that governs everything from a two-person family office managing proprietary capital to a global retail asset manager running publicly offered ETFs from GIFT City. This article explains the structure of an FME, the regulatory framework it operates within, its compliance obligations, and the scheme-level mechanics that determine how a fund actually functions within GIFT IFSC.

What is a Fund Management Entity?

A Fund Management Entity is an entity registered with IFSCA in GIFT City to conduct the business of fund management. It is the asset manager: the legal person responsible for investment decisions, risk management, compliance, and investor reporting. It is not the fund itself. The fund or scheme is a separate legal vehicle, typically a trust, company, or LLP, that holds the pooled assets. The FME manages that vehicle under a management agreement.

This separation is deliberate and carries regulatory significance. Under the IFSCA (Fund Management) Regulations, 2022, IFSCA’s regulatory focus is the FME, not the fund. The fund registration (or scheme authorisation) is a downstream process that follows FME registration. This approach mirrors the structures used in mature offshore jurisdictions: the manager is the regulated entity, subject to fit-and-proper criteria, capital requirements, and ongoing filings, while the fund vehicle operates within parameters the manager is accountable for.

The practical consequence for a fund manager evaluating GIFT City is this: you cannot launch a GIFT IFSC fund without first establishing and registering the FME. The FME carries the regulatory obligations. Getting the FME structure right determines everything that follows.

How GIFT City operates as an offshore financial centre

GIFT City, formally the Gujarat International Finance-Tec City, is a Multi-Service Special Economic Zone (SEZ) spread across 886 acres on the banks of the Sabarmati River between Ahmedabad and Gandhinagar, currently being expanded to over 3,300 acres. Within this SEZ sits India’s first International Financial Services Centre (IFSC), demarcated across 261 acres. The IFSC operates as a foreign jurisdiction for transaction and tax purposes, even though it is physically located in India.

All transactions in GIFT IFSC are denominated in foreign currency, typically USD. Capital raised from investors, management fees charged by the FME, and distributions to investors all flow in foreign currency. This eliminates currency risk for global investors and removes the exchange control complexity that applies to onshore Indian fund structures. Cross-border capital flows in and out of GIFT IFSC are seamless in a way that domestic AIF or PMS structures cannot replicate.

The context for why this matters is straightforward. For decades, global investors accessing Indian assets routed capital through offshore jurisdictions, adding treaty-dependent tax structures, offshore trustee costs, and substance risks. GIFT City offers the same tax neutrality and operational ease, but within India’s legal and regulatory perimeter. There is no treaty-shopping risk, no PE exposure question, and no dependence on a bilateral tax agreement that can be renegotiated.

India’s approximately 30 million-strong diaspora, with a combined net worth of roughly USD 3 trillion, represents a large natural investor base for GIFT IFSC funds. IFSCA’s regulatory framework is explicitly designed to connect this capital to India’s growth story through a clean, compliant, and tax-efficient vehicle.

For a broader view of IFSCA-regulated structures available to Indian and global fund managers, see Treelife’s GIFT City advisory services.

The regulatory architecture: IFSCA as a unified financial regulator

The IFSCA was established under the International Financial Services Centres Authority Act, 2019 by an act of Parliament. From October 2020, it assumed the regulatory powers of four domestic regulators for IFSC-specific purposes: RBI, SEBI, IRDAI, and PFRDA. This unification means an FME in GIFT City has a single regulatory counterpart for all its fund management activities, regardless of asset class or investor type.

The IFSCA’s mandate, per Section 13 of the IFSCA Act, 2019, is to develop and regulate financial institutions, financial services, and financial products within IFSCs. The regulations it issues are benchmarked against global best practices, deliberately aligned with standards from IOSCO, FATF, and the AIFMD framework in Europe. This alignment is not coincidental: IFSCA wants institutional capital from pension funds, endowments, and sovereign wealth funds to be comfortable with the jurisdictional standards before committing capital.

The IFSCA (Fund Management) Regulations, 2022, which govern FMEs, replace the prior extraterritorial application of SEBI’s AIF Regulations, PMS Regulations, and Mutual Fund Regulations to IFSC-domiciled structures. The 2022 regulations create a single, integrated code. They also introduce ESG-specific obligations, a distinction that did not exist in the prior framework and that no competing guide has picked up. IFSCA has prescribed additional ESG-related disclosures at both the entity level (for the FME itself) and the scheme level (for each fund), a reflection of the authority’s intent to position GIFT City as a hub for sustainable finance.

Legal structure of an FME: company, LLP, or branch

Under Regulation 5 of the IFSCA (Fund Management) Regulations, 2022, an FME can be established in three legal forms.

A company (private or public limited, incorporated under the Companies Act, 2013 or equivalent for foreign companies) is available to all three FME categories. It offers the clearest corporate governance framework, separate legal personality, defined shareholder liability, and a governance structure that institutional investors find familiar. For a new Indian or foreign manager building a permanent GIFT IFSC presence, a company is the standard choice.

A Limited Liability Partnership (LLP), incorporated under the Limited Liability Partnership Act, 2008, is available to Authorised FMEs and Registered FMEs (Non-Retail). It is not available for a Registered FME (Retail). An LLP suits structures where the fund manager entity itself is held by a general partner and limited partners, as common in private equity and VC contexts where the management company economics mirror the underlying fund economics.

A branch of an existing entity is available to all three categories, but only where the applicant is already registered and regulated by a financial sector regulator in India or a foreign jurisdiction for conducting similar activities. A UK FCA-authorised fund manager, a foreign jurisdiction-licensed asset manager, or a SEBI-registered AIF manager can each register a branch in GIFT City rather than incorporating a new entity. The branch must ring-fence all its GIFT IFSC operations, per Regulation 5(2). The minimum net worth requirement for a branch must be earmarked for GIFT IFSC purposes, but can be maintained at the parent entity level.

The branch route is the fastest path for established global managers extending operations to GIFT City. A new manager building from scratch will incorporate a company or LLP.

Table 1: Legal structure eligibility by FME category

Legal structure	Authorised FME	Registered FME (Non-Retail)	Registered FME (Retail)
Company	Yes	Yes	Yes
LLP	Yes	Yes	No
Branch	Yes (if parent is regulated)	Yes (if parent is regulated)	Yes (if parent is regulated)

Source: IFSCA (Fund Management) Regulations, 2022, Regulation 5

The fund vehicle itself (the scheme) is a separate legal entity from the FME. A fund under GIFT IFSC can be structured as a trust, a company, or an LLP, depending on the scheme type. VC Schemes and Restricted Schemes typically use trusts or LLPs. Retail Schemes (mutual fund equivalents) must be structured as trusts. The fund has its own trustee, custodian, and administrator, with the FME serving as investment manager.

The three FME registration categories

Regulation 3(4) of the IFSCA (Fund Management) Regulations, 2022 provides for three registration categories, calibrated to the risk profile of the investor base and the scope of permitted activities.

Authorised FME is the lightest-touch category. It is the appropriate structure for managers who intend to invest exclusively in unlisted securities of start-ups, emerging companies, or early-stage ventures through Venture Capital Schemes (including Angel Schemes), or who are establishing a Family Investment Fund (FIF) to manage proprietary capital for a single family or multiple family offices. The minimum net worth is USD 75,000. The investor base is restricted to accredited investors and investors committing a minimum of USD 2,50,000 per scheme (reduced to USD 60,000 for the FME’s own employees, directors, or designated partners). One KMP, the Principal Officer, is the minimum staffing requirement. There is no minimum director count. Employees must have relevant experience as specified in the regulations.

Registered FME (Non-Retail) is the standard registration for institutional and high-net-worth alternative asset management. It permits launching Restricted Schemes (the IFSC equivalent of Category I, II, and III AIFs), Portfolio Management Services including multi-family office mandates, and acting as investment manager for private placement of REITs and InvITs. Minimum net worth is USD 5,00,000. Minimum investor commitment is USD 1,50,000 (USD 40,000 for FME employees and directors). Two KMPs are required: a Principal Officer and a Compliance and Risk Manager. Employees must have relevant experience.

Registered FME (Retail) carries the highest eligibility bar. It permits everything a Non-Retail FME can do, plus launching retail mutual fund-equivalent schemes open to all investors, Exchange Traded Funds (ETFs), and public offer of Investment Trusts (REITs and InvITs). Minimum net worth is USD 10,00,000. Three KMPs are required: a Principal Officer, a Compliance and Risk Manager, and a KMP specifically responsible for fund management. The FME must also have at least 4 directors, with at least 50% being independent directors. The track record requirement is the most stringent: the FME or its holding company must have at least 5 years of experience managing an AUM of USD 200 million with more than 25,000 investors, or a person in control holding more than 25% of the FME’s shareholding must have at least 5 years of experience in financial services.

Table 2: FME registration categories compared

Particulars	Authorised FME	Registered FME (Non-Retail)	Registered FME (Retail)
Minimum net worth	USD 75,000	USD 5,00,000	USD 10,00,000
Minimum KMPs	1	2	3
Minimum independent directors	Not applicable	Not applicable	4 directors, at least 50% independent
Track record	Relevant employee experience	Relevant employee experience	5 years AUM experience (USD 200 Mn, 25,000+ investors) or 5-year financial services experience for 25%+ shareholder
Investor minimum	USD 2,50,000	USD 1,50,000	None (open-ended); USD 10,000 (close-ended)
Schemes permitted	VC Schemes, Family Investment Funds	Restricted Schemes, PMS, private REITs/InvITs, VC Schemes	All, including Retail and ETFs

Source: IFSCA (Fund Management) Regulations, 2022; IFSCA Fund Management Brochure, 2024

Who must meet the fit-and-proper standard?

The fit-and-proper requirement under the IFSCA (Fund Management) Regulations, 2022 is broader than most competitors acknowledge. It does not apply only to KMPs. It applies to the FME itself, its Principal Officer, all directors and partners and designated partners, all KMPs, and all controlling shareholders. Every layer of the ownership and governance chain must independently satisfy IFSCA’s fit-and-proper criteria, which assess financial integrity, track record, competence, and absence of regulatory or criminal history.

This is a meaningful compliance checkpoint for structures where the FME’s holding company or controlling shareholders have complex ownership chains or historical regulatory actions in other jurisdictions. Those need to be surfaced and addressed before the application is filed.

KMP requirements and the substance rule

All FME categories must designate a Principal Officer responsible for overall activities of the FME, covering fund management, risk management, and compliance. Registered FMEs (Non-Retail and Retail) must additionally appoint a Compliance and Risk Manager. Registered FMEs (Retail) require a third KMP specifically assigned to fund management. Any change of KMP requires prior approval from IFSCA.

The qualification threshold for all KMPs is uniform: a professional qualification, post-graduate degree, or post-graduate diploma (minimum 2 years in duration) in finance, law, accountancy, business management, commerce, economics, capital markets, banking, insurance, or actuarial science from a recognised university or institution; or a certification from any organisation recognised or accredited by IFSCA or a financial sector regulator in India or a foreign jurisdiction. Experience required is at least 5 years in securities market or financial product-related activities.

IFSCA imposes a substance requirement that is frequently underestimated by applicants. The proposal on portfolio composition for each scheme must be initiated by a person who is physically based in the FME’s office in GIFT IFSC. This is not a letter-box compliance requirement. The investment decision originator must have a genuine and verifiable presence in GIFT City. Structures where the entire investment team sits outside GIFT City and merely teleconferences in will not satisfy this requirement.

Scheme types under the FME framework

The IFSCA (Fund Management) Regulations, 2022 provide for three broad scheme categories, each with distinct legal structures, investor parameters, and operational requirements.

Venture Capital Schemes and Angel Schemes

Venture Capital Schemes invest in start-ups, emerging companies, or early-stage venture capital undertakings involved in new products, services, technology, or intellectual property-based activities. They can also invest in entities operating a new business model. All three FME categories can manage VC Schemes. The minimum corpus is USD 5 million, the maximum USD 200 million, and the maximum investor count per scheme is 50.

Angel Schemes are a sub-category of VC Schemes structured as close-ended segregated portfolios. Each investment requires express prior consent from every angel investor who wishes to participate in that specific investment. The minimum corpus is USD 1 million and the maximum investor count is 200 per segregated portfolio. Leverage is not permitted in Angel Schemes.

A critical operational feature for VC Schemes and accredited-investor-only Restricted Schemes is the Green Channel. Under this mechanism, the scheme is immediately open for subscription upon filing the Private Placement Memorandum (PPM) with IFSCA. There is no waiting period, no IFSCA review before launch. This is available for VC Schemes (all investors) and Restricted Schemes where money is pooled exclusively from accredited investors. Green Channel is not available for Retail Schemes.

Restricted Schemes

Restricted Schemes are non-retail funds that map broadly to the AIF categories under SEBI’s AIF Regulations, but with IFSCA-specific parameters. Only Registered FMEs (Non-Retail and Retail) can manage these.

Category I AIF-equivalent Restricted Schemes invest in start-ups, social ventures, SMEs, infrastructure, or other sectors considered socially or economically desirable. Category II AIF-equivalent schemes cover investments that do not fall within Category I or Category III. Category III AIF-equivalent schemes undertake diverse or complex trading strategies, invest in listed or unlisted derivatives, and are permitted to invest in longevity finance. The specific category drives tax treatment at the investor level (covered in the tax section below) and disclosure obligations.

A Restricted Scheme can additionally be structured as a Special Situation Fund, which is a distinct category permitted under the activities table for Registered FMEs (Non-Retail and Retail). The Special Situation Fund is designed for investments in stressed assets, distressed debt, or companies undergoing resolution under the Insolvency and Bankruptcy Code (IBC). This category is absent from every published competing guide.

The minimum corpus for a Restricted Scheme is USD 5 million. The maximum investor count is 1,000, or a higher limit as IFSCA may prescribe. Accredited-investor-only Restricted Schemes qualify for Green Channel filing.

One operational feature that competitors universally skip: Restricted Schemes (Non-Retail) have no diversification limits on investments, provided the investments are in line with the risk appetite of the investors and appropriate disclosures are made in the PPM. This is explicitly confirmed in the IFSCA Fund Management Brochure, 2024. For concentrated portfolio strategies (single-sector funds, single-country strategies, or highly concentrated private equity mandates), this absence of a diversification cap is a material structural advantage over the SEBI AIF framework.

Retail Schemes

Retail Schemes are mutual fund-equivalent structures open to all investors, including retail investors. Only Registered FMEs (Retail) can manage these. ETFs also fall under this category. The minimum corpus is USD 5 million. Open-ended retail schemes have no minimum investment per investor. Close-ended retail schemes require a minimum investment of USD 10,000 per investor, waived where the scheme invests less than 15% of corpus in unlisted securities.

Retail Schemes are the most operationally demanding in terms of ongoing compliance. Retail FMEs must receive IFSCA’s comments on the offer document and incorporate them before launch. There is no Green Channel. The offer document must be filed 21 working days before the scheme launch.

Table 3: Scheme characteristics at a glance

Particulars	VC Scheme	Angel Scheme	Restricted Scheme	Retail Scheme
Minimum corpus	USD 5 Mn	USD 1 Mn	USD 5 Mn	USD 5 Mn
Maximum corpus	USD 200 Mn	No cap	No cap	No cap
Max investors	50	200 per portfolio	1,000	No cap (min. 20)
Min. investor commitment	USD 2,50,000	USD 40,000	USD 1,50,000	USD 10,000 (close-ended)
Green Channel	Yes	Yes	Yes (accredited-only)	No
Leverage	Yes (with disclosure)	No	Yes (with disclosure)	Redemption only (20% cap, 6 months)
Co-investment	Yes (SPV or segregated portfolio)	Yes (SPV or segregated portfolio)	Yes (SPV or segregated portfolio)	Not permitted
Diversification limits	None (with disclosures)	None (with disclosures)	None (with disclosures)	Standard IFSCA norms

Source: IFSCA (Fund Management) Regulations, 2022; IFSCA Fund Management Brochure, 2024

Ongoing compliance: NAV, portfolio disclosure, and custodian requirements

These three operational areas are where an FME’s compliance team spends most of its routine effort, yet no published competing guide addresses all three with the specificity the regulations prescribe.

NAV calculation and disclosure

For VC Schemes, NAV is calculated and disclosed annually. For Restricted Schemes (open-ended), NAV is calculated at least monthly. For Restricted Schemes (close-ended), at least half-yearly. For Retail Schemes (open-ended), NAV is calculated daily. For Retail Schemes (close-ended), NAV is calculated weekly. These frequencies are regulatory minimums. The FME can choose to calculate and disclose more frequently, but cannot fall below them.

Portfolio disclosure

Portfolio disclosure to investors and IFSCA follows a separate schedule. VC Scheme managers disclose portfolio annually. Restricted Scheme and Retail Scheme managers disclose quarterly. Annual fund reports must be submitted to IFSCA within 4 months of the financial year-end.

Custodian appointment

Custodian appointment rules differ significantly by scheme type. For VC Schemes, a custodian is mandatory only if the fund size exceeds USD 70 million. Below that threshold, appointment is discretionary. For Restricted Schemes (open-ended), a custodian is always mandatory. For Restricted Schemes (close-ended), a custodian is mandatory if the fund size exceeds USD 70 million. For all Retail Schemes (open-ended and close-ended), a custodian is always mandatory. The custodian must be registered with IFSCA.

Table 4: Ongoing operational compliance by scheme type

Operational obligation	VC Scheme	Restricted Scheme (open)	Restricted Scheme (closed)	Retail Scheme (open)	Retail Scheme (closed)
NAV frequency	Annual	At least monthly	At least half-yearly	Daily	Weekly
Portfolio disclosure	Annually	Quarterly	Quarterly	Quarterly	Quarterly
Custodian mandatory	If > USD 70 Mn	Always	If > USD 70 Mn	Always	Always

Source: IFSCA (Fund Management) Regulations, 2022; IFSCA Fund Management Brochure, 2024

Skin-in-the-game: the FME’s co-investment obligation

IFSCA requires the FME or an associate entity to contribute its own capital alongside investors in every scheme it manages. This alignment-of-interest requirement varies by scheme type and corpus size, and the waiver conditions are specific enough that they deserve careful attention.

For a VC Scheme with a targeted corpus below USD 30 million, the FME must contribute between 2.5% and 10% of the targeted corpus. For a VC Scheme above USD 30 million, the minimum contribution is USD 7,50,000 scaled up to 10% of corpus at the upper end. For an Angel Scheme, the contribution is at least 2.5% of the investment size or USD 20,000, whichever is less, per segregated portfolio.

For a Restricted Scheme (close-ended), the sliding scale mirrors the VC Scheme. For a Restricted Scheme (open-ended), the floor is higher: below USD 30 million corpus, contribution is 5% to 10%; above USD 30 million, USD 15,00,000 to 10%.

For Retail Schemes, the contribution is the lower of 1% of the fund corpus or USD 2,00,000.

The contribution requirement can be waived for non-retail schemes under three specific conditions: at least two-thirds of investors consent to the waiver; at least two-thirds of investors in the scheme are accredited investors; or the scheme is a fund-of-funds investing in a scheme that has an equivalent contribution requirement. For Retail Schemes, the exemption is narrower: only available if the scheme is a fund-of-funds with equivalent requirements at the underlying fund level.

Schemes relocating from offshore jurisdictions to GIFT IFSC are specifically exempted from the skin-in-the-game requirement at the time of relocation. This is a deliberate policy choice to make inbound relocation structurally easier.

Co-investment: the SPV and segregated portfolio route

For VC Schemes and Restricted Schemes, co-investment alongside the main fund is permitted through a Special Purpose Vehicle (SPV) or through a segregated portfolio within the fund structure. This allows the FME to offer specific investors the ability to participate in particular investments without creating a separate registered fund. Co-investment is subject to conditions prescribed by IFSCA, including disclosure to all investors and non-preferential treatment of the main fund relative to the co-investment vehicle.

Co-investment is not permitted for Retail Schemes. The retail investor protection framework does not accommodate differentiated access to individual investments.

ESG disclosure obligations

The IFSCA (Fund Management) Regulations, 2022 introduced ESG-specific disclosure requirements that no published competing guide addresses. IFSCA has prescribed additional disclosures at two levels.

At the entity level, the FME itself must disclose its ESG policies and practices, including how ESG considerations are integrated into its investment decision-making process, risk management, and governance.

At the scheme level, each fund that has an ESG mandate or incorporates ESG criteria must disclose the specific ESG framework being applied, the ESG metrics tracked, and how performance against those metrics is reported to investors. Funds that do not have an explicit ESG mandate are still expected to make a disclosure to that effect, rather than remaining silent.

This matters for managers targeting European institutional investors, where ESG disclosure at the fund level is increasingly a prerequisite for capital allocation. GIFT City’s ESG disclosure framework, while not yet at the granularity of the EU’s SFDR, provides a credible and IFSCA-recognised baseline.

Tax architecture for FMEs, funds, and investors

Tax benefits for the FME (manager entity)

The FME (as the manager) is eligible for a 100% corporate tax exemption on business income for 10 consecutive years out of the first 15 years of operation, under Section 80LA of the Income Tax Act, 1961. Minimum Alternate Tax (MAT) or Alternate Minimum Tax (AMT) applies at a concessional rate of 9% of book profits. MAT does not apply to companies that opt for the concessional tax rate under Section 115BAA.

Supply of fund management services by the FME to funds registered in GIFT IFSC is exempt from Goods and Services Tax (GST). Management fees earned from GIFT IFSC-domiciled funds are therefore GST-free. Dividends distributed by the FME to its shareholders may be taxable in the hands of those shareholders, depending on their residency and the applicable tax treaty.

Tax benefits for non-retail funds (Category I and II AIF-equivalent)

Category I and II AIF-equivalent Restricted Schemes enjoy pass-through status for Indian income tax purposes. Income is taxed in the hands of investors, not at the fund level. In the case of AIFs set up as trusts, surcharge and cess are not applicable on such income. Income accruing to or received by non-resident investors from offshore investments made by a GIFT IFSC fund is not taxable in India. Non-resident investors meeting specified conditions are exempt from the obligation to obtain a PAN and file a return of income in India.

Tax position for Category III AIF-equivalent funds

Category III AIF-equivalent Restricted Schemes are subject to fund-level taxation, not pass-through status. Where all investors are non-resident (other than the sponsor and/or manager), exemptions apply on income from: transfer of Indian securities other than shares of an Indian company; securities issued by non-residents with no income accrual in India; transfer of offshore securities or certain securities traded on IFSC exchanges; and income from securitisation trusts chargeable under profits and gains of business or profession.

Income on transfer of shares in an Indian company is taxable as follows: short-term capital gains at 15% (if STT is paid) or 30% (if not), plus applicable surcharge and cess; long-term capital gains at 10%, plus surcharge and cess; interest and dividend at 10% (with surcharge and cess not applicable for AIF trusts).

Exemptions on securities transactions

Transactions carried out on IFSC exchanges by registered FMEs are exempt from Securities Transaction Tax (STT), Commodities Transaction Tax (CTT), and stamp duty. Transfer of units of a scheme, Investment Trust, or ETF by non-residents on an IFSC exchange is not subject to Indian Income Tax.

Investment routes from GIFT IFSC into India

An FME investing in Indian assets through its funds can use three established routes: the Foreign Venture Capital Investment (FVCI) route (for VC and early-stage investments), the Foreign Portfolio Investor (FPI) route (for listed securities), and the Foreign Direct Investment (FDI) route (for direct equity stakes in Indian companies). Each route carries its own FEMA conditions and RBI reporting obligations. The choice of route determines both the investment universe and the repatriation mechanics. GIFT IFSC funds are treated as offshore investors for the purpose of these routes, which is the source of their structural flexibility relative to onshore SEBI-registered AIFs.

Relocation of offshore funds to GIFT IFSC

IFSCA and the Government of India introduced a specific tax-neutral relocation framework for offshore funds wishing to move to GIFT City. Under this framework, the transfer of assets from an offshore fund or its wholly owned subsidiary to a resultant GIFT IFSC fund is not treated as a transfer for Indian capital gains purposes.

The exemption also applies to non-resident shareholders of the offshore fund on transfer of units or beneficial interest in the offshore fund in exchange for units or beneficial interest in the resultant GIFT IFSC fund. Grandfathered investments retain their original cost and holding period in the resultant fund. Deemed income provisions under Indian tax law do not apply to the resultant fund on relocation. Carry-forward losses of portfolio companies are preserved through the relocation.

The sponsor and manager contribution (skin-in-the-game) at the time of relocation is made voluntary, not mandatory. This is a meaningful concession for funds that have already deployed capital and where requiring a fresh FME contribution would be operationally disruptive.

The original deadline for tax-neutral relocation was 31 March 2025. Managers considering this route should verify the current position on any extension through the IFSCA website and relevant Finance Act notifications, as this sunset date may have been extended.

The GIFT IFSC ecosystem: why the FME model works

One dimension that almost no published guide addresses is the ecosystem that makes an FME operationally viable in GIFT City. A fund manager does not operate in isolation. It needs a trustee, a custodian, a fund administrator, a legal counsel, an auditor, and access to market infrastructure. GIFT IFSC has built all of these.

GIFT City hosts Indian and foreign banks, broker-dealers, investment bankers, custodians, and depository participants. It has IFSC-recognised stock exchanges and clearing corporations where IFSC-domiciled funds can execute and settle transactions. It has international depository infrastructure. Trusteeship services are available from SEBI-registered trustees who have taken IFSCA registrations. Fund administrators operating in GIFT City are familiar with IFSCA reporting requirements.

This infrastructure is the difference between a regulatory framework that looks good on paper and one that functions in practice. The presence of qualified trustees, custodians, and fund administrators with IFSCA registrations means an FME launching its first scheme can source all required service providers within GIFT City rather than routing through offshore jurisdictions.

Accounting standards and financial reporting

FMEs and their funds can prepare financial statements under Indian GAAP, Ind-AS, IFRS, US GAAP, or any other accounting standard permitted by applicable law. This flexibility is deliberate and important for global managers whose investor base expects IFRS or US GAAP reporting. The choice of accounting standard must be disclosed in the PPM and applied consistently. Annual fund reports must be submitted to IFSCA within 4 months of the financial year-end.

Treelife practitioner note

In the FME structuring and scheme authorisation engagements we have run at Treelife, three structural decisions come up early that shape everything downstream: the choice of FME category, the choice of legal form, and the choice between managing a proprietary vehicle (Family Investment Fund) and a third-party pooled fund.

The Authorised FME category works well for family offices and first-time VC managers, but the moment a third-party investor commits capital above the accredited investor threshold, you are in Registered FME (Non-Retail) territory. We have seen managers try to structure around this by adding LP layers, but IFSCA looks through the structure to the economic reality of the investor base. Getting the category wrong means a re-registration process, not an amendment.

On the substance requirement, IFSCA’s expectation is practical and verifiable. An employee or partner physically present in GIFT City, initiating portfolio decisions via documented investment committee memos, satisfies the requirement. A setup where the entire investment team is in Mumbai and GIFT City is a forwarding address does not. The documentation trail from GIFT City to investment execution needs to exist and be consistent.

The ESG disclosure obligation under the 2022 Regulations is still evolving in implementation. IFSCA has not yet issued detailed ESG disclosure formats at scheme level, but the entity-level obligation is active. FMEs should prepare a statement of ESG policy and practice at registration and update it annually, even where no explicit ESG mandate exists at scheme level.

Reference: IFSCA (Fund Management) Regulations, 2022, Regulations 3, 5, 7, and the IFSCA Fund Management Brochure, 2024.

FAQs on FME in GIFT City IFSC

Q: What is a Fund Management Entity (FME) in GIFT City?
A: An FME is an entity registered with IFSCA in GIFT City to manage investment funds, provide Portfolio Management Services, and act as investment manager for Investment Trusts. It is the asset manager, not the fund itself. It operates under the IFSCA (Fund Management) Regulations, 2022 and transacts in foreign currency.

Q: What is the regulatory body for an FME in GIFT City?
A: The International Financial Services Centres Authority (IFSCA), established under the IFSCA Act, 2019. IFSCA absorbed the regulatory powers of RBI, SEBI, IRDAI, and PFRDA for IFSC-specific activities from October 2020. It is the sole regulator for all FME activities in GIFT City.

Q: Why does IFSCA regulate the FME rather than the fund?
A: The philosophy is borrowed from mature offshore jurisdictions. The manager (FME) is the regulated entity: it holds the licence, meets the capital and fit-and-proper requirements, and is accountable for all investment, risk, and compliance decisions. The fund is a vehicle the manager operates. Regulating the manager gives IFSCA a single, accountable point of supervision for each fund management operation.

Q: What is the difference between an Authorised FME and a Registered FME?
A: An Authorised FME is restricted to VC Schemes and Family Investment Funds serving accredited investors and investors committing USD 2,50,000 minimum. It requires the lowest net worth (USD 75,000) and one KMP. A Registered FME (Non-Retail) can manage Restricted Schemes (AIF-equivalent) and PMS in addition to VC Schemes, for investors committing USD 1,50,000 minimum. A Registered FME (Retail) can manage all scheme types including mutual fund-equivalent retail schemes and ETFs open to the public.

Q: Can a SEBI-registered AIF manager also operate an FME in GIFT City?
A: Yes. The two registrations are independent. A SEBI AIF manager operating domestically can establish a parallel GIFT IFSC FME to raise foreign capital or launch dollar-denominated strategies. The IFSC FME is regulated by IFSCA; the SEBI AIF is regulated by SEBI. They can co-invest, subject to conflict of interest disclosures and IFSCA’s co-investment conditions.

Q: What is the substance requirement for an FME in GIFT City?
A: Under the IFSCA (Fund Management) Regulations, 2022, the proposal on portfolio composition for each scheme must be initiated by a person physically based in the FME’s office in GIFT IFSC. The investment decision originator must have a genuine presence in GIFT City, supported by documentation showing investment memos and decisions originating from the GIFT City office.

Q: What is the Green Channel for scheme filings?
A: The Green Channel is a mechanism under which a VC Scheme or an accredited-investor-only Restricted Scheme is immediately open for subscription upon filing the PPM with IFSCA. There is no waiting period and no pre-launch IFSCA approval. This accelerates launch timelines for non-retail strategies targeting sophisticated investors.

Q: What are the ESG disclosure obligations for an FME?
A: The IFSCA (Fund Management) Regulations, 2022 require additional ESG-related disclosures at entity level (the FME’s own policies and practices) and at scheme level (ESG framework, metrics, and investor reporting for funds with an ESG mandate). FMEs without an explicit ESG mandate are still expected to make a disclosure to that effect rather than remaining silent on ESG.

Q: What accounting standards can an FME use?
A: Indian GAAP, Ind-AS, IFRS, US GAAP, or any other legally permitted standard. The choice must be disclosed in the PPM and consistently applied. Annual fund reports must be filed with IFSCA within 4 months of the financial year-end.

Q: How does a Restricted Scheme (Category III AIF-equivalent) differ in tax treatment from Category I and II?
A: Category I and II equivalent Restricted Schemes enjoy pass-through tax status: income is taxed in investor hands, not at fund level. Category III equivalent Restricted Schemes are subject to fund-level taxation. For non-resident-only investor pools, exemptions apply on most income other than gains from shares of Indian companies, which are taxed at 15% (short-term, STT paid), 30% (short-term, no STT), or 10% (long-term), plus applicable surcharge and cess.

Q: Are there diversification limits for non-retail GIFT IFSC funds?
A: No. Registered FMEs (Non-Retail) managing Restricted Schemes face no diversification limits on investments, provided investments are in line with the stated risk appetite of investors and appropriate disclosures are made in the PPM. This is a structural advantage over the SEBI AIF framework for concentrated or single-strategy fund managers.

Q: What is a Special Situation Fund under IFSCA regulations?
A: A Special Situation Fund is a distinct permitted activity for Registered FMEs (Non-Retail and Retail) under the IFSCA activities table. It is designed for investments in stressed assets, distressed debt, or companies undergoing resolution processes. It operates as a Restricted Scheme category.

Q: What routes can a GIFT IFSC fund use to invest into India?
A: A GIFT IFSC fund can invest in Indian assets through three established FEMA routes: the Foreign Venture Capital Investment (FVCI) route for start-up and early-stage investments, the Foreign Portfolio Investor (FPI) route for listed securities, and the Foreign Direct Investment (FDI) route for direct equity stakes in Indian companies. The choice of route determines the eligible investment universe and reporting obligations.

Q: What are the conditions for waiving the skin-in-the-game contribution?
A: For non-retail schemes, the contribution can be waived where: at least two-thirds of investors consent to the waiver; at least two-thirds of investors are accredited investors; or the scheme is a fund-of-funds investing in a scheme with equivalent contribution requirements. Relocation schemes are unconditionally exempt from the contribution requirement. Retail Schemes can only be exempted if the fund-of-funds condition is met.

Q: How does GIFT IFSC compare to other offshore fund jurisdictions?
A: GIFT City offers equivalent tax neutrality (0% capital gains on specified transactions, 0% STT, 0% GST on management fees, 100% corporate tax exemption for 10 of 15 years) without the treaty-shopping risk associated with offshore jurisdictions or the substance costs of foreign financial centres. It is physically within India, which eliminates PE exposure questions and provides proximity to the Indian market and regulatory ecosystem. The FVCI, FPI, and FDI routes are accessible directly without additional treaty analysis.

Regulatory references

• IFSCA Act, 2019
• IFSCA (Fund Management) Regulations, 2022: Regulations 3, 5, 7, and activity/scheme schedules
• Income Tax Act, 1961: Section 80LA (tax holiday), Section 115BAA (concessional tax rate), Section 112A (LTCG)
• Finance Act, 2023: STT/CTT exemption for IFSC transactions
• FEMA regulations: FVCI, FPI, FDI routes applicable to IFSC funds
• IFSCA Fund Management Brochure, 2024 (official publication)
• SEZ Act, 2005 (applicable to GIFT SEZ units)

External sources

• IFSCA
• Income Tax India
• Reserve Bank of India
• Ministry of Corporate Affairs
• Securities and Exchange Board of India