Summary: The International Financial Services Centres Authority (“IFSCA”) has proposed a new regulatory framework allowing Alternative Investment Funds (“AIFs”) in GIFT IFSC to create multiple unit classes with differential return profiles. The proposal facilitates AIFs with enhanced flexibility to raise capital from investors with varying risk appetites while also enabling blended finance structures that combine commercial, concessional, and philanthropic capital for sustainable investments. IFSCA’s proposed approach offers notably greater flexibility compared to SEBI’s domestic regulations, thereby enabling broader investor participation while maintaining robust investor protection measures.
The International Financial Services Centres Authority (“IFSCA”) published a consultation paper on October 22, 2025[1] (“Consultation Paper”), proposing a regulatory framework for differential distribution in Alternative Investment Funds (“AIFs”) established in the GIFT International Financial Services Centre (“IFSC”).
The proposal aims to enhance the regulatory landscape for blended finance structures permitting fund managers to create multiple classes of units with differential return profile, commonly referred to as senior and junior (or subordinate) unit classes, enabling capital raising from diverse investor profiles while also aligning with sustainable finance objectives.
The Consultation Paper provides AIFs with flexibility to raise funds from investors with varied risk appetites while enabling blended finance options for sustainable and climate-related projects by combining concessional, philanthropic, and commercial capital.
Eligible Schemes under the IFSCA Proposal
As per the proposed framework, only venture capital schemes and restricted schemes (non-retail) shall be permissible categories of AIFs under the Fund Management Regulations, 2025, authorised to provide differential distribution to investors.
Within the stated AIF categories, the draft framework further distinguishes schemes based on their ESG (Environmental, Social, and Governance) orientation:
- ESG Schemes[2]: These schemes explicitly align their investment objectives with United Nations Sustainable Development Goals (“SDGs”) and focus on social impact-driven investments. The regulatory proposal aims to permit ESG schemes to accept up to 20% of their corpus in the form of grants or concessional capital.
The FME of such ESG Schemes shall disclose how the scheme’s investments are expected to align with the United Nations SDGs.
- Non-ESG Schemes: These schemes do not integrate formal sustainability or impact criteria in their investment objectives. For such schemes, investments must come predominantly from commercial capital.
Non-ESG Schemes shall be permitted to issue multiple classes of units with differential distribution, provided that not more than 25% of the corpus of the scheme is invested in any single investee company and its associates. Such portfolio diversification may be achieved by these schemes within two years of first close.
CAM Inputs:
By differentiating between ESG and non-ESG schemes, the IFSCA’s proposed framework provides tailored flexibilities and safeguards that reflect the differing risks, return, and impact profiles of these categories, thereby enabling appropriately calibrated regulatory treatment, aligned with the unique characteristics of each scheme type.
Legal and Regulatory Features of the IFSCA Proposal
1. Structure: Multiple Classes of Units with Differential Rights
The framework’s core innovation permits eligible schemes to issue multiple classes of units with differential rights, effectively creating a senior-subordinate structure:
- Senior Units: Typically subscribed by commercial and institutional investors seeking priority in distributions with limited risk exposure.
- Junior/ Subordinate Units: Usually subscribed by concessional capital providers such as Development Finance Institutions (DFIs), philanthropic entities, impact investors, and ESG-aligned funds, willing to accept higher risks or lower returns to provide downside protection to senior investors.
CAM Inputs:
This structural layering enables the creation of investment vehicles that reconcile financial sustainability with developmental impact, offering adequate risk-adjusted returns across diverse investor profiles.
2. Minimum Investment Thresholds and Investor Eligibility
To maintain investor sophistication standards and safeguard less experienced investors, the framework establishes the following minimum investment requirements:
- USD 2 million minimum investment requirement for junior unit class subscribers.
- A reduced minimum threshold of USD 1 million for junior unit class subscribers who are accredited investors.
CAM Inputs:
These thresholds ensure that investors accepting subordinated risks possess the requisite financial capacity and risk tolerance, thereby addressing regulatory concerns regarding investor protection.
3. ESG Considerations and Grants Participation
Notably, the proposal recognises the unique capital needs of ESG schemes, by permitting acceptance of grants constituting up to 20% of the scheme’s corpus — a provision exclusively available to ESG schemes — subject to full disclosure and alignment with United Nations Sustainable Development Goals (SDGs). This feature explicitly facilitates philanthropic participation within blended finance structures, providing a distinct advantage compared to many conventional frameworks.
4. Investment Concentration and Risk Diversification
While ESG Schemes are governed by specific alignment requirements with SDGs rather than concentration limits, non-ESG Schemes are subject to a maximum exposure cap of 25% of the scheme’s corpus per single investee company and its associates. This prudential norm mitigates excessive concentration risk while maintaining strategic portfolio flexibility, thereby safeguarding both senior and junior investors through appropriate diversification.
5. Transparency: Valuation, Disclosure, and Waterfall Mechanics
To ensure transparency and investor protection, the following requirements are mentioned:
- Independent valuation of each unit class to ensure accurate and fair Net Asset Value (NAV) reporting across different investor categories.
- Comprehensive disclosure in the Placement Memorandum (PPM), including detailed numerical illustrations of the distribution waterfall mechanism, clearly articulating priority allocations and subordinated loss absorption arrangements for prospective investors.
These transparency requirements are designed to eliminate information asymmetries, facilitate informed investor decision-making, and maintain market discipline within the differential distribution framework.
6. Anti-Evergreening Provisions
A critical anti-evergreening provision has also been proposed, which mandates FMEs to ensure that funds invested by the scheme are not utilised by an investee company, directly or indirectly, to discharge any obligations or liabilities owed to the scheme’s investors or their associates.
Comparative Analysis between the IFSCA and the SEBI’s Provisions Relating to Differential Distribution
SEBI’s circular in November 2024[3] reinforced the pro-rata and pari-passu regime as the general principle, ensuring that investors receive returns strictly in proportion to their invested capital while maintaining equal rights within the investors of the same unit classes. Limited exceptions permit junior units only for sponsors, managers, multilateral or bilateral development financial institutions (“DFIs’), state development corporations and Indian and foreign government-affiliated investors, including sovereign wealth funds.
In contrast, the IFSCA’s approach is designed to actively facilitate blended finance and sustainable investment by incorporating grants acceptance, a broader junior-unit investor base, and flexible waterfall structures aligned with global best practices in IFSC jurisdictions.
Key Differences: IFSCA vs. SEBI AIF Differential Distribution
| Aspect | IFSCA Proposal (2025) | SEBI Domestic AIF (2024-25) |
| Feasibility | Venture Capital Schemes and Restricted Schemes (non-retail). | Restricted for all AIF categories (except as provided below). |
| Differential Unit Classes | Flexible subscription of Senior and Junior/ Subordinate units by contributors based on defined minimum investment thresholds. | Junior/ Subordinate units may only be subscribed by managers, sponsors, Indian/ foreign government entities, and multilateral or bilateral DFIs, and state development corporations. |
| Minimum Investment Thresholds (Junior/ Subordinate Units) | USD 2 million and USD 1 million (for accredited investors). | Not explicitly prescribed; but investor eligibility is limited (as listed above). |
| Grants Participation | Permitted (up to 20% of corpus) for ESG Schemes; but not permitted for Non-ESG Schemes. | Permitted only for Social Impact Funds. |
| Valuation Requirements | Independent valuation for each class of units. | Independent valuation is calculated at scheme level. |
Juxtaposing the regulatory stance between SEBI and IFSCA
The IFSCA’s proposed framework on differential distribution represents a notably less restrictive regulatory stance compared to the SEBI’s domestic approach, while maintaining robust investor protection principles. By permitting flexibility in structuring multiple classes of units with differentiated rights, including provisions for grants participation exclusively in ESG schemes, and mandating independent valuation of each class of units alongside comprehensive anti-evergreening safeguards that prevent investee companies from using scheme funds to discharge obligations to scheme investors or their associates, the IFSCA strikes an effective balance between regulatory innovation and prudential oversight.
[1] IFSCA Consultation Paper dated October 22, 2025 titled “Consultation paper on Regulatory Framework for differential distribution in Restricted Schemes and Venture Capital Schemes to facilitate blended finance and other fund structures ”.
[2] Schemes filed with IFSCA pursuant to the Circular no. F. No. 756/IFSCA/ESG Schemes/2022-23 dated January 18, 2023, titled “Disclosures by Fund Management Entities for Environmental, Social or Governance (ESG) Schemes”
[3] SEBI Circular no. SEBI/HO/AFD/AFD-POD-1/P/CIR/2024/175 dated December 13, 2024.