Summary: The IFSCA has introduced a new framework allowing Venture Capital Schemes and Restricted Schemes in GIFT IFSC to issue senior and junior (or subordinate) unit classes with differential distribution rights, facilitating blended finance structures that combine concessional and commercial capital. The framework also prescribes minimum ticket sizes for junior unit holders, enhanced PPM disclosure requirements, and safeguards against evergreening and regulatory circumvention, while easing conditions for ESG Schemes to accept grants. The framework marks a significant shift from the investor-category restrictions applicable under the domestic AIF regime, providing fund managers greater flexibility to structure funds for investors with different risk appetites.
Introduction
The International Financial Services Centres Authority (“IFSCA” or the “Authority”) has notified a differential distribution mechanism (“Framework”) for Venture Capital Schemes and Restricted Schemes to provide more flexibility in raising funds from investors with varied risk appetites and facilitate blended finance and other fund structures vide a notification dated September 25, 2026. The Framework applies to fund management entities (“FMEs”) launching Venture Capital Schemes or Restricted Schemes (“Eligible Schemes”) that wish to issue multiple classes of units, namely senior units and junior or subordinate units carrying differential distribution rights.
Blended finance combines philanthropic and commercial capital to fund projects with significant social or developmental impact that may not otherwise attract private investment. An IFSCA-constituted Expert Committee on Sustainable Finance had earlier recommended enabling this mechanism at the IFSC to draw in concessional financing from multilateral development banks and development financial institutions, lowering the risk for private co-investors, partnering with them.
Structuring the Units
Under the Framework, an Eligible Scheme shall issue only one class of senior units,[1] with all other classes being junior or subordinate.
- The senior units shall not differ on risk, priority of returns, or loss absorption, but may differ on fees, currency, or other operational or administrative matters.
- The junior or subordinate units may convert to a superior class only if the conversion milestones, calculation methodology, triggers, and governing formulae are expressly set out in the private placement memorandum (“PPM”).
The Framework specifies that the holders of junior or subordinate units may be structured, singly or in combination, to:
- bear portfolio losses in excess of their pro rata share;
- accept a lower financial return than their pro rata share;
- accept zero financial returns on their investment; or
- provide a grant to an ESG Scheme.
An investor subscribing to junior or subordinate units of an Eligible Scheme must commit a minimum of USD 2 million, or USD 1 million in the case of an Accredited Investor. These thresholds are intended to ensure that investors assuming subordinated risk have the requisite financial capacity and risk-bearing ability to do so. This minimum commitment requirement shall not apply to grants accepted by Environmental, Social, and Governance (“ESG”) Schemes but grants from foreign sources shall be regulated by the Indian statute of regulation of foreign grants.[2]
Disclosure Obligations in the PPM
To promote transparency and balance the flexibility for differential distributions, the Framework prescribes a detailed disclosure regime. In particular, the PPM must prominently disclose the multiple classes of units and the distribution rights attached to each. This must be supplemented with tabular examples showing the distribution waterfall across different scenarios, including those involving a loss of capital to junior or subordinate unit holders.
The PPM must also set out the risks specific to each class, emphasising the additional risk borne by subordinated classes, and disclose the class allotted to the FME or its associates.
Guardrails Against Misuse
To mitigate the risks of evergreening and misuse of the differential distribution model, the Framework incorporates additional safeguards. The investee company cannot use debt investments by an Eligible Scheme, directly or indirectly, to repay outstanding debt owed to financial-sector-regulated lenders (or their associates), or to the FME or its associates, unless the investor’s contribution, together with that of its associates, remains within 20 per cent of the scheme’s corpus.
Additionally, the scheme must not be structured or operated to circumvent any law or direction issued by the Government of India, the Authority, or other financial sector regulators.
Finally, the NAV must be computed independently for each class as prescribed under the FM Regulations.[3]
Together, these safeguards preserve the flexibility of differential distributions while limiting scope for regulatory arbitrage.
A Separate Track for ESG Schemes
The Framework gives additional flexibility to ESG Schemes already filed under IFSCA’s ESG disclosure circular.[4] These schemes must disclose in the PPM how their investment strategy aligns with one or more UN Sustainable Development Goals, with the rationale for that alignment, and may now accept grants subject to the following conditions:
- Cap on grants: Aggregate grants cannot exceed 49 per cent of the scheme’s corpus, with corpus including both grant and non-grant commitments.
- Social units: Grants may be issued against a separate class of “social units”, or accepted without any unit issuance, as agreed between the FME and the grant contributor and disclosed in the PPM.
- Foreign grants: Grants from foreign sources must comply with the Foreign Contribution (Regulation) Act, 2010,[5] where applicable.
- Fee treatment: Grants are excluded from the corpus for computing the FME’s fees and expenses, and the scheme’s independent valuer must certify this compliance.
- Conflict safeguards: The FME must maintain a written, PPM-disclosed policy for accepting, administering, and deploying grants and conduct due diligence on any contributor conditions to ensure consistency with the scheme’s investment thesis and the FME’s fiduciary duties to other investors.
- Accounting: Grants must be separately accounted for in the scheme’s audited annual financial statements.
- Return of unutilised grants: On winding up, any unutilised grants must be returned to the respective contributors, subject to Regulation 131 of the FM Regulations[6].
The Bigger Picture
The Framework marks a clear departure from the domestic AIF regime. Under the SEBI (Alternative Investment Funds) Regulations, 2012,[7] distributions must ordinarily follow a pro rata and pari passu basis, and the exception SEBI carves out for subordinated units is confined to a specific set of investor categories. However, the IFSCA, in its Framework, does not impose investor-category restriction. Any Eligible Scheme may issue junior or subordinate units with loss-absorption, reduced-return, or grant features, subject only to the minimum ticket size. In each case, regular investors seeking financial returns may be expected to subscribe to senior class of units, while institutional or thematic investors may be categorised as junior class investors.
The Authority has, in effect, chosen a lighter regulatory touch, giving FMEs a clear, codified way to layer concessional and commercial capital within a single scheme.
[1] IFSCA FM Regulations define “senior units” as a class of units that has superior rights over the distribution proceeds of the Venture Capital scheme or restricted scheme, while “junior units” or “subordinate units” are classes of units, including mezzanine units, the rights of which over the distribution proceeds of the scheme would be inferior to that of senior units.
[2] Foreign Contribution (Regulation) Act 2010 (FCRA)
[3] Regulation 26, Regulation 27, Regulation 38, and Regulation 39, IFSCA (Fund Management) Regulations, 2025.
[4] IFSCA Circular F. No. 756/IFSCA/ESG Schemes/2022-23 dated January 18, 2023, on “Disclosures by Fund Management Entities for Environmental, Social or Governance (ESG) Schemes”.
[5] The Foreign Contribution (Regulation) Act, 2010 (Act No. 42 of 2010), as amended.
[6] Regulation 131, IFSCA (Fund Management) Regulations, 2025.
[7] Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, notified vide SEBI/LAD-NRO/GN/2012-13/05/10880 dated May 21, 2012, as amended.
Recent Comments