IFSCA issues differential distribution framework for Venture Capital and Restricted Schemes: one senior class, junior units from USD 2 million, grants up to 49% for ESG schemes

What IFSCA has done

By a circular dated 25 September 2026, the International Financial Services Centres Authority has issued the “Framework for differential distribution in Venture Capital Schemes and Restricted Schemes to facilitate blended finance and other fund structures”. It comes into force with immediate effect and is issued under regulations 23(5) and 35(6) of the IFSCA (Fund Management) Regulations, 2025.

The circular explains that blended finance combines concessional or philanthropic capital with commercial capital to fund projects that are socially desirable but may be commercially unviable. An Expert Committee on Sustainable Finance set up by the Authority had recommended facilitating it in the IFSC to attract concessional financing from Multilateral Development Banks and Development Financial Institutions.

Who it applies to

Fund Management Entities (FMEs) launching Venture Capital Schemes or Restricted Schemes with multiple classes of units — senior units and junior or subordinate units carrying differential distribution rights. The circular calls these “Eligible Schemes”.

The structure allowed

• There can be only one class of senior units. Senior units cannot differ in risk, priority of returns or loss absorption, though they may differ in fees, currency and other operational aspects.
• Junior or subordinate units may be converted into a superior class, if the milestones, methodology, triggers, formulae and conditions are expressly disclosed in the placement memorandum (PPM).
• Junior or subordinate investors may, in any one or a combination: bear portfolio losses beyond their pro-rata share; accept a lower return than their pro-rata share; accept zero financial return; or provide a grant to an ESG Scheme.

Disclosures in the placement memorandum

• The classes of units and their distribution rights — on an ongoing basis, on redemption and on winding up.
• Examples in tabular form illustrating the distribution waterfall under various scenarios, including loss of capital to junior or subordinate unit holders.
• The risks of the structure, highlighting additional risks to each class.
• The class of units to be allotted against the FME’s or its associate’s own contribution.

Extra conditions for ESG Schemes

An Eligible Scheme filed as an ESG Scheme must disclose how its investment strategy is expected to align with one or more United Nations Sustainable Development Goals. Grants may be taken against a separate class called “social units” or without issuing units, as disclosed in the PPM. Grants from foreign sources must comply with the Foreign Contribution (Regulation) Act, 2010 to the extent applicable. Grants do not form part of the corpus for computing fees and expenses payable to the FME, and the independent valuer must certify this. Grants are to be separately accounted for in the audited annual financial statements, and unutilised grants returned to the contributors on winding up. The FME needs a written policy on acceptance, administration and deployment of grants.

Safeguards the FME must check

The FME and its key managerial personnel must undertake due diligence to ensure that money invested by the scheme in debt instruments is not used by the investee company to repay debt it owes to the scheme’s regulated investors (such as banks, finance companies and insurance companies) or their associates, or to the FME or its associates. This condition does not apply where each investor’s contribution, with its associates, does not exceed 20% of corpus. The scheme must also not facilitate circumvention of any law or direction.