IFSCA Proposes Differential Distribution for Restricted Schemes and Venture Capital Schemes to Aid Blended Finance

The International Financial Services Centres Authority (IFSCA), vide consultation paper dated October 22, 2025, has proposed a framework for differential distribution in alternative investment funds (AIFs) established in Gujarat International Finance Tec-City International Financial Services Centre (GIFT City IFSC). The proposal permits venture capital schemes and restricted (non‑retail) schemes to issue multiple classes of units with differential distribution rights, thereby enabling blended finance structures. By facilitating the use of concessional or philanthropic capital alongside private investment, the framework seeks to channel funds into socially desirable but commercially challenging projects aligned with India’s net‑zero 2070 commitment and sustainable development goals.

The Consultation Paper is open for public comments until November 11, 2025.

Key proposals made by IFSCA in the Consultation Paper are outlined below:

1. Eligible schemes and structural flexibility: 

1. 1. Under the proposed framework, venture capital schemes and restricted (non-retail) schemes under Part A and Part B, of Chapter III of the IFSCA (Fund Management) Regulations, 2025 (FM Regulations), respectively, shall be permitted to issue multiple classes of units (e.g.  senior units and junior/subordinate units) with differential distribution rights.

1. 2. The proposal is intended to enable blended finance structures by allowing concessional and philanthropic investors to take subordinated / first‑loss positions, improving the risk–return profile for commercial investors.

1. 3. Under the proposed framework, junior or subordinate classes of units may carry returns lower than, or bear losses higher than, their pro-rata entitlement in one or more of the following forms: (I) bear higher portfolio losses than their pro-rata share; (II) accept lower financial returns than their pro-rata share; (III) accept zero financial returns from investments; and (IV) be issued in return for grants provided by contributors (applicable to ESG schemes only).

2. ESG schemes: 

1. 1. Environmental, Social or Governance (ESG) schemes filed under IFSCA’s circular titled ‘Disclosures by Fund Management Entities for ESG Schemes’ and dated January 18, 2023 dealing with, may, in addition, accept up to 20% of their corpus in the form of grants and are required to disclose how their investments align with the UN Sustainable Development Goals. 

1. 2. Differential distribution in non-ESG schemes shall be permissible subject to the condition that not more than 25% of the corpus is invested in any single investee company and its associates (to be achieved within two years of first close).

3. Minimum investor threshold and investor eligibility: The Consultation Paper proposes differentiated minimum investment requirements:

1. 1. USD 2,000,000 for non-accredited investors subscribing to Junior/Subordinate classes; and

1. 2. USD 1,000,000 for accredited investors (as defined in IFSCA’s circular titled ‘Accredited Investors in International Financial Services Centre’ and dated January 25, 2024).

4. Risk-mitigation framework:

• The Consultation Paper identifies three primary risks associated with differential distribution mechanisms and proposes safeguards:

1. 1. Risk of Ever-Greening of Loans: Differential distribution structures may be misused by regulated lenders to “ever-green” stressed loans by subscribing to the junior class, thereby avoiding recognition as non-performing assets (NPAs).

Safeguard: The proposed framework mandates that Fund Management Entities ensure the amounts invested by the scheme are not utilized by investee companies, directly or indirectly, to discharge obligations or liabilities towards the scheme’s investors or their associates.

1. 2. Valuation Challenges: The presence of multiple classes of units complicates Net Asset Value (NAV) calculation for junior/subordinated units, potentially resulting in inconsistent practices and inaccurate valuation.

Safeguard: Independent valuers, mandated under FM Regulations for valuation of securities, shall be required to compute the NAV for each class of units after taking into account the disclosures in the Private Placement Memorandum (PPM) and documented NAV calculation processes.

1. 3. Mis-Selling: Multiple classes with differential distribution may not be easily understood by all investors, potentially leading to mis-selling, particularly regarding the heightened risks borne by subordinate class investors.

Safeguard: Investments in junior or subordinate classes shall be restricted to accredited investors investing above a specified threshold. The PPM shall provide detailed disclosures with illustrations and risk warnings specific to each class of units as discussed below.

5. Disclosures and other conditions:

1. 1. The PPM shall prominently and comprehensively disclose details of all classes of units and their differential distribution rights, supplemented with tabular illustrations of distribution waterfalls under various scenarios (including scenarios involving capital loss to junior/subordinate unit holders).

1. 2. Additionally, comprehensive risk disclosures highlighting the additional risks borne by each class of investors shall also be required in order to mitigate mis-selling concerns.

Conclusion:

By enabling differential distribution mechanisms subject to robust safeguards including investment restrictions, valuation oversight, and enhanced disclosures as part of its proposals, IFSCA aims to position the IFSC as a global hub for blended finance initiatives.