Variable Capital Companies in GIFT City IFSC: Understanding the Draft VCC Framework Under the IFSCA Amendment Bill, 2026

Overview

The Ministry of Finance has put forward the draft International Financial Services Centres Authority (Amendment) Bill, 2026 (the "Bill") for public stakeholder consultation. Among its most consequential proposals is the formal introduction of the Variable Capital Company ("VCC") — a purpose-built legal entity designed exclusively for fund management operations within International Financial Services Centres ("IFSC"), with GIFT City being the primary beneficiary.

This legislative initiative addresses a structural gap that has persisted for years within the IFSC ecosystem. Fund managers operating from GIFT City have long been forced to work within the confines of trust structures, limited liability partnerships, and companies — none of which were architecturally suited to the demands of modern investment fund activity. The VCC remedies this structural deficit by introducing a comprehensive, integrated legal framework that natively supports features such as ring-fenced sub-fund liability, dynamic capital management, a well-defined governance hierarchy, and statutory confidentiality protections.

Should the Bill be enacted in its present form, GIFT City stands to emerge as a genuinely credible domicile for pooled investment vehicles, capable of competing with established fund jurisdictions such as Singapore, Luxembourg, and Mauritius.

Background: Why the VCC Was Needed

Limitations of Existing Fund Structures in the IFSC

Fund management activity in the IFSC has, until now, relied predominantly on trust-based structures, with limited liability partnerships and companies playing secondary roles. These vehicles have been adapted — through regulatory carve-outs or bespoke contractual arrangements — to approximate the features that purpose-built fund vehicles elsewhere offer as standard. The result, while functional, has been structurally cumbersome.

The specific inadequacies of the existing position are well established:

  • Trust structures lack corporate personality, creating friction in counterparty contracting and complicating cross-border investor participation.
  • Companies incorporated under the Companies Act, 2013 are poorly configured for the dynamic capital requirements of investment funds — share capital reductions require Court or Tribunal intervention, distributions to investors can only be made from distributable profits, and there is no statutory mechanism for asset ring-fencing between notional sub-portfolios.
  • None of the existing vehicles accommodates routine capital alterations — such as investor subscriptions and redemptions — without triggering cumbersome corporate approval processes.

Policy Development Timeline

The need for a dedicated fund vehicle was formally recognised by the Expert Committee chaired by Dr. KP Krishnan (report released May 2021). This was followed by the Expert Committee chaired by Dr. MS Sahoo (report released October 2022), which developed a conceptual legal framework for VCCs in the Indian context. The Finance Minister's Budget announcement for FY 2024-25 provided the political mandate for legislative action, and the present Bill is the direct outcome of that commitment.

Context: As of 31 December 2025, fund management entities operating in the IFSC had accumulated cumulative commitments of USD 32.13 billion and cumulative funds raised of USD 17.34 billion — figures that underscore the commercial imperative for a fit-for-purpose fund vehicle.

Detailed Analysis of Key Provisions

(Sections 13B and 13C)

The VCC is constituted as a body corporate with perpetual succession, separate legal personality, and limited liability for its members. These are characteristics familiar from conventional corporate law. However, the VCC's architecture diverges significantly from standard company structures in one critical respect: it operates on a mandatory two-tier model.