These amendments are pivotal for strengthening India’s financial ecosystem and attracting global investments through IFSCs.
The Ministry of Finance, via the Central Board of Direct Taxes (CBDT), has introduced pivotal amendments to the Income Tax Rules, 1962. Through Notification No. 10/2025, dated January 27, 2025, the Income-tax (Second Amendment) Rules, 2025, have been brought into effect from the date of their publication in the Official Gazette. These amendments introduce fresh guidelines for venture capital funds (VCFs), finance companies, retail investment schemes, and exchange-traded funds (ETFs), specifically tailored for operations within International Financial Services Centres (IFSCs). Below is a breakdown of the significant amendments:
New Conditions for Venture Capital Funds
Rule 2DAA specifies the updated criteria for Venture Capital Funds (VCFs) as outlined in clause (23FB) of section 10 of the Income-tax Act. The following conditions apply:
- Category I AIF Establishment: The fund must be structured as a Category I Alternative Investment Fund (AIF).
- Recognition Under IFSC Authority Regulations: It should be recognized under regulation 18(2) of the International Financial Services Centres Authority (Fund Management) Regulations, 2022.
- Regulatory Oversight: The fund must comply with the International Financial Services Centres Authority (Fund Management) Regulations, 2022, established under the International Financial Services Centres Authority Act, 2019 (50 of 2019).
Conditions for Finance Companies in IFSCs
Rule 21ACA defines permissible activities and requirements for Finance Companies operating in an IFSC under section 94B of the Income-tax Act. Key highlights include:
Permitted Activities:
- Lending Operations: Includes loans, guarantees, commitments, credit enhancement, securitization, and financial leasing.
- Factoring and Forfaiting: Facilitating cash flow management through discounting of receivables or invoices.
- Corporate Treasury Services: Covers borrowing, lending, currency/commodity risk hedging, structured credit, cash management, intra-group financing, and financial budgeting, among other treasury-related functions.
Key Borrowing Requirement:
- Interest payments on funds borrowed from non-residents must be made in foreign currency.
Definitions:
- Finance Company: As defined in clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Finance Company) Regulations, 2021.
- International Financial Services Centre (IFSC): As defined under clause (q) of section 2 of the Special Economic Zones Act, 2005 (28 of 2005).
Conditions for Retail Investment Schemes
New conditions for retail schemes focus on ensuring diversified investments and limiting exposure to associated entities and unlisted securities:
- Minimum Investor Requirement:
- The scheme must have at least 20 investors.
- No single investor can contribute more than 25% of the total investment.
- Investment Restrictions:
- No more than 25% of total assets under management (AUM) can be invested in associated entities.
- A maximum of 15% of total AUM can be allocated to unlisted securities.
- Investments in a single company must not exceed 10% of total AUM.
Conditions for Exchange-Traded Funds (ETFs)
ETFs operating within IFSCs must comply with the following rules:
- Mandatory Listing:
- ETFs must be listed and traded on recognized stock exchanges.
- Regulatory Compliance:
- ETFs must adhere to the International Financial Services Centres Authority (Fund Management) Regulations, 2022, established under the International Financial Services Centres Authority Act, 2019 (50 of 2019).
Key Definitions and Explanations
- Associate: Defined under clause (e) of sub-regulation (1) of regulation 2 of the International Financial Services Centres Authority (Fund Management) Regulations, 2022.
- Fund Management Entity: As described in clause (p) of sub-regulation (1) of regulation 2 of the same regulations.
- Specified Fund: Defined under sub-clause (i) of clause (c) of the Explanation to clause (4D) of section 10 of the Income-tax Act.
Conclusion
The CBDT’s Notification No. 10/2025 introduces comprehensive amendments to regulate and enhance the transparency, accountability, and efficiency of venture capital funds, finance companies, retail schemes, and ETFs operating in IFSCs. These amendments are pivotal for strengthening India’s financial ecosystem and attracting global investments through IFSCs.
Also Read: Proceedings Against Deceased Cannot Continue Against Legal Representatives: Karnataka HC
READ MORE