IFSCA Increases Oversight on FMEs for Disclosure, Valuation, and Compliance Breaches

The International Financial Services Centre Authority (IFSCA), the regulatory body overseeing GIFT City, has heightened its oversight of Fund Management Entities (FMEs), recently conducting surprise inspections to identify potential rule violations, according to sources cited by Moneycontrol under anonymity.

The scrutiny focuses on FMEs' disclosures to investors, fund valuation practices, NAV calculations, client onboarding due diligence, and adherence to the Private Placement Memorandum (PPM), a source familiar with the situation revealed.

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FMEs, which are financial institutions registered with the IFSCA and responsible for managing investments, have received warning letters from the regulator. Entities failing to address compliance concerns risk facing adjudication action, with enforcement measures already initiated in cases of severe infractions.

The issue dates back to April 2023, when IFSCA introduced the green channel route, allowing FMEs to launch non-retail schemes immediately after submitting the PPM and application form, bypassing the need for prior regulatory approval. A legal expert familiar with FMEs suggested that post-implementation, the regulator may have intensified scrutiny on PPM compliance.

IFSCA conducts two types of inspections: pre-scheduled, in-depth supervision with prior notification and surprise inspections triggered by suspected breaches. Additionally, the regulator has strengthened its monitoring of substance requirements, ensuring firms maintain a physical presence, including a mandatory minimum of two employees per FME.

Increased Regulatory Oversight and Industry Reactions

Market participants have noted that the increased scrutiny reflects the regulator’s efforts to maintain the integrity and transparency of the financial ecosystem within GIFT City. The enforcement of strict compliance measures is seen as an attempt to align with global financial standards, ensuring investor confidence in the jurisdiction.

Experts suggest that while these regulatory checks may pose short-term challenges for FMEs, they ultimately enhance the credibility of GIFT City as an international financial hub. Ensuring that FMEs follow due diligence processes, adhere to disclosure norms, and maintain a physical presence strengthens the city’s reputation and attractiveness to global investors.

A senior executive at a fund management firm operating in GIFT City stated that many FMEs are now revisiting their compliance frameworks to avoid regulatory penalties. “The IFSCA’s focus on transparency and governance is pushing firms to refine their internal controls. While it does require additional effort and resources, it ensures long-term sustainability,” the executive said.

Some industry players believe that the green channel route, though beneficial for launching schemes swiftly, requires a balanced regulatory approach. A partner at a law firm noted, “The green channel was introduced to make fundraising and investment management more efficient, but FMEs must ensure they adhere to the rules outlined in the PPM. The IFSCA’s post-facto checks indicate a shift towards tighter supervision.”

Growth of Fund Management in GIFT City

As of December 2024, GIFT IFSC hosts 139 FMEs—123 managing non-retail schemes, eight handling retail schemes, and the remainder categorized as authorized FMEs. These entities collectively raised $14.33 billion, according to IFSCA data.

In total, 198 registered schemes operate in GIFT City, with Category III Alternative Investment Funds (AIFs) leading with 116 schemes, followed by 70 under Category I and II AIFs, and 12 within the angel and venture capital segment.

GIFT City has positioned itself as a premier global financial hub, attracting international fund managers and investors. The city offers a range of incentives, including tax benefits, regulatory ease, and access to international markets. However, with growing participation comes the need for enhanced regulatory oversight.

Going forward, experts anticipate that IFSCA may introduce additional compliance measures to ensure adherence to global best practices. While some FMEs may view these actions as restrictive, many see them as essential for long-term credibility and stability in the financial sector.

Overall, the regulator’s increased vigilance signals a commitment to ensuring that GIFT City remains a robust and transparent financial ecosystem, capable of competing with established global financial centers.