Singapore's new norms a shot in arm for Indian offshore funds

Singapore is slated to bring in Singapore Variable Capital Company, a new legal entity which can be used as a vehicle for investment. SVACC is expected to simplify the process of redemption for open-ended funds. 

Singapore may usher in a new regime for offshore funds in the next few months, making it simpler to invest through the country.

One of the chief beneficiaries of this will be Indian offshore funds operating out of Singapore. 

This change will also be a shot in the arm for offshore funds from the recently tagged high-risk jurisdictions such as Mauritius and Cayman Islands that are looking to re-route their investments through Singapore.

The biggest change on the anvil is easier norms for investment through open-ended structures. Currently, the redemption process for open-ended funds is cumbersome. This has dissuaded entities from setting up offshore funds in Singapore.  

Open-ended funds allow investors to put in money and take it out when needed. Under the current regime, the process for redemption is inefficient as entities wanting to redeem have to draw up their accounts, get them audited, and provide a certificate stating that they are solvent. This often delays the redemption process. 

Singapore is slated to bring in Singapore Variable Capital Company, a new legal entity which can be used as a vehicle for investment. SVACC is expected to simplify the process of redemption for open-ended funds. 

“It (SVACC) has been on cards for some time and will be operational by the end of this year or early next year,” said a person familiar with the development. 

“The requirement to provide an insolvency certification for open-ended funds will be done away with under this new entity,” he added.

At present, there are three options to set up investment funds in Singapore, which includes trusts, limited partnerships or companies under Singapore’s Companies Act. All these have limitations. For instance, trust structures cannot take the benefit of the India-Singapore tax treaty under existing norms. 

The enactment of SVACC is expected to enhance Singapore’s competitiveness as a domicile for investment funds and re-domicile foreign corporate funds to the country. 

“The variable capital structure will allow entry and exit into funds and ensure privacy, allowing for easy distribution of capital and profits,” said Girish Vanvari, founder, Transaction Square, a tax consultancy. 

According to a report by PwC, the new regime will bring in a customised corporate structure that dispenses with elements of Singapore’s existing company law that is not conducive to investment funds.

A corporate form fund could be set up as an open-ended or as a close-ended fund, and used for mutual fund-type strategies meant for retail investors, or as alternative investment fund strategies for sophisticated investors. 

Today, most offshore funds opt for closed-ended structures or create a feeder fund in jurisdictions such as Cayman Islands which invests in India through Singapore special purpose vehicles, or SPVs.

In the case of the latter, the open-ended structure operates at the Cayman level, letting investors come in and go out as desired. Investments in the Singapore entity, however, remain stable, with little or no redemption. 

The key disadvantage of these feeder structures is the uncertainty surrounding their compliance from an Indian tax standpoint. 

Base erosion and profit shifting, or BEPS, refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.

Mauritius, Cyprus, Cayman Islands, UAE and China are among 25 high-risk jurisdictions recently identified by global banks and act as custodians for offshore funds. This, experts believe, may force existing offshore funds from high-risk jurisdictions to migrate to Singapore.

Photograph: Tim Chong/Reuters