Most major global financial hubs, including Ireland and Singapore, allow similar structures An investor who is invested in GIFT City for 3 years may see a lower exit load compared to those who redeem within a year.The Gift City regulator is weighing a proposal to allow asset managers to charge investors different fee structures within the same retail fund, according to two people aware of the matter, as the industry seeks parity with global practices.
At present, in line with rules applicable to mutual funds in India, the international finance hub also allows two fee arrangements: a direct plan for buying units directly from the fund house at a lower fee, and a regular plan, where a higher fee applies if the investment is made through a distributor.
“The International Financial Services Centres Authority (IFSCA) is preparing a consultation paper on permitting multiple share classes and will take a decision after that,” one of the people cited above said on condition of anonymity.
Multiple share classes, which permit asset managers to charge investors different fees based on ticket size or holding period, are currently allowed for non-retail funds in GIFT City. Most major global financial hubs, including Luxembourg, Ireland, Singapore, Mauritius, the Cayman Islands, and the Dubai International Financial Centre, allow similar structures.
“The retail ecosystem is at its nascent stage at IFSC. We have received a few representations from market participants (on allowing multiple share classes),” said IFSCA executive director Pradeep Ramakrishnan. “The IFSCA will take a view after taking into account the views of market participants and global participants.”
The regulations do not place any explicit prohibition on the fund management entities (FMEs or fund managers) to issue multiple share classes in a retail scheme, said Shikhar Kacker, partner at Khaitan & Co. “However, we have noted the IFSCA expressing concerns over schemes issuing share classes having different terms attached to them.”
For instance, an investor putting $500 into a GIFT City retail fund may be charged a 2.5% fee, while another with a $10,000 check could pay 1.5%. Similarly, an investor who stays invested for three years may face a lower exit load compared to one who redeems within a year.
For retail funds, the regulator has capped the total expense ratio (TER), which covers all expenses. The fund decides the cap.
“The regulator can allow multiple share classes if everything is disclosed in the document while getting approval from the fund,” the first person said.
According to Shikhar, retail funds globally are permitted to offer different terms based on share classes as long as one does not adversely impact the other. These securities may be denominated in a specific currency, provide hedging options, or be tailored for specific investors, such as retail or institutional clients. Without a different fee structure, investors with higher ticket sizes may look for other global jurisdictions, experts say.
“Institutional investors won’t come to a fund at a high TER. Institutional investors will either look for a lower TER product globally or in GIFT City,” said the second person quoted earlier, also speaking on the condition of anonymity. “Unless there are competitive share classes, larger tickets won’t come.”
Non-retail funds in GIFT City are allowed to have multiple share classes, while retail funds are benchmarked to the Indian mutual funds industry.