IFSCA allows senior and junior units in GIFT IFSC VC and restricted funds

What has changed

On 25 September 2026 the International Financial Services Centres Authority (IFSCA) issued a circular titled Regulatory Framework for Differential Distribution, which took effect immediately. It lets Fund Management Entities (FMEs) in GIFT IFSC launch Venture Capital Schemes and Restricted Schemes with senior units and junior or subordinate units that carry different distribution rights.

The circular is issued under sections 12 and 13 of the IFSCA Act, 2019, read with regulation 23(5) and regulation 35(6) of the IFSCA (Fund Management) Regulations, 2025. Those provisions were introduced by the IFSCA (Fund Management) (Second Amendment) Regulations, 2026, effective from 10 September 2026. They require any differential distribution rights to follow the framework the Authority specifies.

IFSCA links the framework to recommendations of its Expert Committee on Sustainable Finance on blended finance, and to representations from the industry.

Key features of the framework

• Unit classes. An eligible scheme may have only one class of senior units, and senior units must not differ among themselves in risk, priority of returns or loss absorption.
• What junior investors may accept. Investors in junior or subordinate units may bear losses above their pro-rata share, accept lower returns than their pro-rata share or no financial return, or, for ESG Schemes, provide grants.
• Minimum investment. The minimum investment in junior or subordinate units is USD 2 million, or USD 1 million for an accredited investor.
• Grants in ESG Schemes. An ESG Scheme’s total grants cannot exceed 49% of the scheme’s corpus. Grants must be shown separately in audited financial statements, do not count as corpus when fees and expenses are calculated, and must comply with the Foreign Contribution (Regulation) Act, 2010 where applicable.
• Disclosure. The placement memorandum must disclose the unit classes and their distribution rights, distribution scenarios including illustrations of capital loss, risks by class, and any investment by the FME or its associates, with the class of units held.
• Due diligence and valuation. FMEs must ensure the structure is not used to get around Indian laws or regulators’ directions, and that the NAV of each class of units is computed by an independent valuer.

Other changes in the Second Amendment

The consolidated Fund Management Regulations published by IFSCA, as amended up to 10 September 2026, show other changes made by the Second Amendment. These include a revised definition of “associate”, limits on how money received before first close may be deployed, a proviso allowing Venture Capital Schemes to make follow-on investments in investee companies more than ten years after incorporation (subject to conditions), and changes to NAV disclosure frequency. FMEs should read the consolidated text for the exact wording that applies to their schemes.

Who is affected

• FMEs registered with IFSCA, or planning to register, that run Venture Capital or Restricted Schemes
• Sponsors of blended-finance, impact and ESG funds seeking first-loss or concessional capital from development finance institutions, foundations or family offices
• Investors considering junior or subordinate units, and the valuers, trustees and auditors of such schemes

What FMEs should do

1. Assess structure fit. Decide whether a senior/junior structure suits the scheme’s investor base and strategy, and check that each junior investor meets the minimum investment.
2. Update placement memorandum disclosures. Draft the class-wise rights, loss illustrations and risk factors the circular requires.
3. Appoint an independent valuer able to compute class-wise NAV under the relevant Fund Management Regulations.
4. Check grant sources. For ESG Schemes, track grants against the 49% cap and confirm FCRA applicability.
5. Review the Second Amendment for its effect on existing schemes, such as pre-first-close deployment and NAV disclosure.

New managers can start with IFSCA FME registration and the wider IFSC unit set-up process. The GIFT City services page gives an overview of related approvals.

Expertvuw’s team can help you assess whether the differential distribution framework suits your fund. Valuation, audit and certification are carried out by independent licensed professionals.

Sources

• IFSCA – Circular F. No. IFSCA-DSF0SFHB/1/2025-Capital Markets dated 25 September 2026, Regulatory Framework for Differential Distribution
• IFSCA – IFSCA (Fund Management) Regulations, 2025, as amended up to 10 September 2026 (consolidated)
• IFSCA – Fund Management regulations and circulars page