New Delhi, Aug. 17 -- On June 5, 2026, the Ministry of Finance released the draft International Financial Services Centres Authority (Amendment) Bill, 2026. The proposed law introduces a purpose-built structure for investment funds operating in GIFT City, known as a Variable Capital Company, or VCC.

If enacted close to its current form, this draft will mark the most significant upgrade to Indian pooled-investment structures since the Alternative Investment Fund (AIF) regime was first established.

Why existing fund structures fall short

Most pooled investment funds in India currently operate under legal forms originally designed for completely different purposes. The overwhelming majority of AIFs are set up as private trusts. However, trust law was historically conceived for managing private family inheritances or beneficiary arrangements rather than running sophisticated financial vehicles.

When a single trust attempts to manage multiple distinct investment strategies, keeping the assets and liabilities of those strategies separate relies on contractual terms within a trust deed rather than an overarching statutory law. Foreign institutional investors from jurisdictions like New York, London, or Singapore, who rarely encounter trust-based fund structures in their home markets, are often uncomfortable with this approach.

The alternative-the Limited Liability Partnership-introduces heavy administrative friction and rigid corporate law hurdles that make swift fund management difficult.

What the VCC framework introduces

A VCC is a corporate entity that provides limited liability to its investors and continues to exist regardless of changes in ownership. What sets it apart is its two-tier umbrella design. At the top sits the main VCC entity, while underneath it sit multiple sub-funds. Each sub-fund can execute its own investment strategy with its own distinct group of investors, yet all sub-funds share a central board of directors, a single licensed fund manager, and an administrative team. This structure closely mirrors Singapore's successful VCC Act of 2018.

Three distinct features make the VCC model uniquely powerful for fund managers.

First, it offers flexible share capital. In a traditional company, expanding or reducing share capital requires lengthy corporate processes, public notices, and formal shareholder approvals. A VCC, by contrast, can issue, redeem, or buy back shares without prior member approval, allowing investor entry and exit to track the fund's Net Asset Value in real time. Furthermore, payouts to investors can be made directly out of capital rather than strictly out of accumulated profits.

Second, it provides statutory ring-fencing. The segregation of assets and liabilities between sub-funds carries the explicit force of law rather than relying on private contracts. Under this framework, the debts incurred by one sub-fund cannot be satisfied using the assets of another sub-fund, and any single sub-fund can be liquidated independently without affecting the rest of the umbrella.

Third, it consolidates regulatory oversight under a single authority. The draft Bill places both the corporate vehicle and its fund management activities squarely under the IFSCA, removing the multi-layered approvals across different government bodies that existing fund structures currently face.

The tax questions that will decide its success

While company-law design creates the structural foundation, tax treatment will ultimately determine whether the VCC framework succeeds in attracting substantial assets under management.

A central question revolves around how sub-funds are classified for tax purposes. Because sub-funds exist under a single umbrella company rather than as standalone legal entities, the Sahoo Committee recommended that each sub-fund be recognized as a separate taxable entity with its own distinct Permanent Account Number.

Without an explicit amendment to the Income Tax Act, tax authorities might assess the entire umbrella VCC as a single consolidated entity, thereby destroying on the tax side the very separation that corporate law promises. The essential fix requires a targeted tax amendment recognizing each sub-fund as an independent taxpayer, accompanied by pass-through provisions similar to those used for existing AIFs, where tax is levied on the investors rather than at the fund level.

Foreign treaty access presents another critical challenge. The Sahoo Committee proposed issuing Tax Residency Certificates directly at the sub-fund level through a streamlined online process. This mechanism is crucial for allowing international investors to claim tax treaty benefits smoothly and avoid protracted legal disputes.

Additionally, internal reorganizations-such as merging two sub-funds or moving a foreign fund from offshore financial centres into GIFT City-require explicit tax exemptions. Without clear relief, general tax principles would treat these transitions as taxable transfers, imposing capital gains liabilities simply for shifting home jurisdictions.

Finally, while entities in GIFT City enjoy a 20-year tax holiday, uncertainty remains around how these tax exemptions apply to fund structures. Clear guidance from tax authorities will be necessary to give global managers the pricing certainty they require.

Preparing for the transition ahead

As rule-making unfolds over the coming months, fund managers should prepare for key operational changes. Pathways will need to be established for existing trust-based AIFs wishing to migrate into a VCC structure. Fund governance will also shift away from traditional trustees toward the VCC board of directors and a regulated Fund Management Entity.

A well-crafted corporate framework sitting alongside an unreformed tax code would result in a structure that the global market recognizes in theory, but cannot price with confidence in practice. Capital will only commit at scale once fiscal details match the quality of the legal framework. What regulators accomplish in the upcoming months of detailed rule-making will decide whether this reform becomes India's Singapore moment or merely another well-intentioned policy update. The VCC framework is an opportunity India should not miss.

*This article is for general informational purposes and does not constitute legal, tax or investment advice. The IFSCA (Amendment) Bill, 2026 remains in draft form and subject to change through the consultation process.*

Vishal Gada is founder and CEO and Zeel Jambuwala is co-founder and partner at Aurtus Consulting LLP

Published by HT Digital Content Services with permission from VC Circle.