IFSCA Fund Management Regulations amended again: “associate” set at a 20% test, pre-first-close money ring-fenced, differential distribution enabled
The IFSCA (Fund Management) (Second Amendment) Regulations, 2026 redefine “associate” on a 20 per cent holding test, require money received before first close to be parked only in liquid, capital-preserving investments, let Venture Capital schemes make follow-on investments in companies older than ten years, enable senior and junior units, and reset NAV disclosure and FME contribution rules.
Key facts
- In force
- On publication in the Official Gazette (notification dated 31 August 2026)
- Who it affects
- Fund Management Entities in the IFSC, their associates and fiduciaries, investors in Venture Capital, Restricted and Retail schemes, fund administrators and valuers
- What it is
- Rule change
- Section
- FEMA & RBI
- Published
- 31 August 2026
In 30 seconds
- Notification IFSCA/GN/2026/015 is dated 31 August 2026; in force from publication in the Official Gazette. It amends the Fund Management Regulations, 2025.
- “Associate” now turns on holding 20% or more of paid-up equity, partnership interest or equivalent direct economic interest.
- Money received from contributors before first close can go only into permissible investments that preserve capital and liquidity, as disclosed in the placement memorandum.
- A Venture Capital scheme may invest in later funding rounds of investee companies more than ten years old, subject to three conditions.
- Differential distribution through senior and junior or subordinate units is enabled for Venture Capital and Restricted schemes, under a framework to be specified.
- FME contribution: at least 2.5% of corpus or USD 750,000, whichever is lower, capped at 10% of corpus (5% or USD 1,500,000 for open-ended Restricted schemes).
हिंदी में सार
IFSCA ने 31 अगस्त 2026 की अधिसूचना से Fund Management Regulations, 2025 में दूसरा संशोधन किया है। “Associate” की परिभाषा अब 20% हिस्सेदारी की कसौटी पर है; first close से पहले मिला पैसा सिर्फ़ ऐसे निवेश में रखा जा सकेगा जो पूँजी सुरक्षित और तरल रखे, जैसे समय-पूर्व निकासी वाले बैंक जमा और overnight funds। Venture Capital योजनाएँ दस साल से पुरानी investee कंपनियों के अगले दौर में शर्तों के साथ निवेश कर सकेंगी, और senior तथा junior units के ज़रिए differential distribution का रास्ता खोला गया है।
What has been notified
By notification IFSCA/GN/2026/015 dated 31 August 2026, the International Financial Services Centres Authority has made the IFSCA (Fund Management) (Second Amendment) Regulations, 2026, amending the IFSCA (Fund Management) Regulations, 2025. The amendments come into force on publication in the Official Gazette.
“Associate” redefined
An associate of a Fund Management Entity (FME) is now:
- a person in which the FME, its director, partner or trustee, or the scheme’s fiduciaries, individually or collectively, hold 20% or more of the paid-up equity share capital, partnership interest or equivalent direct economic interest;
- a person who holds 20% or more of such interest in the FME; or
- any other person in which that holder has 20% or more.
A fiduciary of a scheme is not treated as an associate of the FME unless it holds a direct economic interest or control in the FME.
Money received before first close
Monies received from contributors before the first close or minimum size of a scheme (or, for an open-ended scheme, before raising USD 1 million) can be deployed only in permissible investments that support preservation of capital and adequate liquidity — such as bank deposits with an option for premature withdrawal and overnight funds — as disclosed in the placement memorandum or offer document. NAV and portfolio disclosure now run from the period in which the scheme commences investment activities, excluding these parking investments.
Venture Capital schemes: follow-on investments
A Venture Capital scheme may invest in subsequent funding rounds of investee companies where ten years have elapsed since incorporation, provided that:
- the investment fits the scheme’s objectives, strategy, placement memorandum and the FME’s internal policies;
- an investor excluded from an investee company does not take part in later rounds in that company; and
- the scheme’s post-issue beneficial interest (fully diluted) does not exceed its pre-issue beneficial interest.
Key figures after the amendment
| Item | Provision as amended |
|---|---|
| FME / associate contribution — Venture Capital scheme and close-ended Restricted scheme | At least 2.5% of corpus or USD 750,000, whichever is lower; not more than 10% of corpus |
| FME / associate contribution — open-ended Restricted scheme | At least 5% of corpus or USD 1,500,000, whichever is lower; not more than 10% of corpus |
| When the 10% ceiling does not apply | FME and associate are non-residents with no resident Indian ultimate beneficial owner, and not more than one-third of corpus is in one investee company and its associates; or they are resident-linked, the scheme invests only in the IFSC or foreign jurisdictions, and the contribution does not exceed 25% of corpus |
| Contribution not mandatory | Relocated schemes; under regulation 52 also specified fund of funds schemes and index schemes |
| NAV disclosure — Restricted scheme | Monthly if open-ended; half-yearly if close-ended, extendable to yearly with prior approval of 75% of investors by value |
| NAV disclosure — Retail scheme | Daily if open-ended; at least weekly if close-ended |
| Extending a placement memorandum (regulation 31) | Six months per extension, applied for while the memorandum is still valid; fee 25% of the fresh-filing fee for the first extension and 50% for each later one |
Differential distribution
New regulations 23(5) and 35(6) require that differential distribution rights given through senior and junior or subordinate units in a Venture Capital scheme or Restricted scheme follow the framework specified by the Authority. Senior units have superior rights over distribution proceeds; junior or subordinate units rank below them.
Before signing up investors
- Before executing an agreement with any investor, the fiduciary must ensure that auditors, a fund administrator (or in-house capability), an independent valuer and, where applicable, a custodian are in place.
What FMEs should do
Re-map associates on the 20% test, review placement memoranda for the pre-first-close deployment disclosure, and check contribution levels and NAV disclosure cycles against the amended text.
Questions and answers
How is “associate” defined after the Second Amendment?
On a 20 per cent test: a person in which the FME, its director, partner, trustee or the scheme fiduciaries hold 20% or more of paid-up equity, partnership interest or equivalent direct economic interest; a person holding 20% or more in the FME; and any other person in which that holder has 20% or more.
Where can an FME park money received before first close?
Only in permissible investments that support preservation of capital and adequate liquidity, such as bank deposits with an option for premature withdrawal and overnight funds, as disclosed in the placement memorandum or offer document.
Can a Venture Capital scheme invest in a company older than ten years?
It may invest in subsequent rounds of fund raising of its investee companies where ten years have elapsed since incorporation, if the investment is in line with the scheme documents and FME policies, excluded investors do not participate, and the scheme’s post-issue beneficial interest does not exceed its pre-issue beneficial interest.
How much must the FME contribute to a scheme?
For a Venture Capital scheme or a close-ended Restricted scheme, at least 2.5% of the corpus or USD 750,000, whichever is lower; for an open-ended Restricted scheme, at least 5% or USD 1,500,000, whichever is lower. In each case the contribution is not to exceed 10% of the corpus, with two stated exceptions to that ceiling.
Published 31 August 2026. Updated 5 October 2026. This report is for general information and is not professional advice. Read the source document before acting on it.