THE VARIABLE CAPITAL COMPANIES ACT 2022
INTRODUCTION
The National Assembly of Mauritius has introduced on 05 April 2022 the Variable Capital Companies Bill (the “VCC Bill”), which was previously announced in the National Budget Speech 2020–2021. THE VARIABLE CAPITAL COMPANIES ACT 2022 (the “VCC Act”) has been assented and gazetted on 14 April 2022 and 15 April 2022 respectively, but is not in force yet.
The VCC Act proposes to create a legal framework in Mauritius for the formation and operation of Variable Capital Companies (“VCC”), with the objective to improve the competitiveness of the financial services sector and broaden the product base of the Mauritius International Financial Centre.
REASONS FOR USING A VCC
The VCC is a new corporate structure that combines the benefits of limited partnerships with stand-alone companies. A VCC has the benefit of being able to be utilised as an umbrella structure (cell type structuring), allowing a single fund to contain numerous cells that segregate assets and liabilities in distinct VCC cells. This organisational structure will allow fund managers to benefit from increased cost savings through operational flexibility, which may adjust diverse investment strategies to suit the demands of investors, among other things.
Each sub-fund of the VCC in the umbrella structure can have different shareholders and investment objectives, and its assets and liabilities are totally separated from those of other sub-funds, preventing any contagion matters. Sub-funds can own shares in other VCC sub-funds, allowing investors or family members to invest in different areas of the structure as they see fit.
This sub-fund structure allows a single VCC to replace many companies and trusts seen in a normal group structure. A board of directors, a fund manager, auditors, and other administrative agents can all be shared by the VCC, resulting in significant cost savings. The VCC can start as a solo fund with a single pool of investors and assets, with additional sub-funds created subsequently.
Fund managers can create VCCs for standard and alternative investing methods, as well as open-ended and closed-end funds. Open-ended funds, which are commonly used by hedge funds, allow investors to redeem their investments at their discretion. Closed-end funds, which are commonly used by private equity funds, limit an investor’s ability to redeem its shares during the fund’s existence.
The VCC is known for its versatility, and it can be utilised both as a classic fund structure and in new and creative ways. It is a hybrid of a legal company and a fund structure that may be utilised for hedge funds, mutual funds, private equity, private funds, and real estate funds.
FEATURES OF THE VCC
- Incorporated under the Companies Act
- Incorporated in a jurisdiction other than Mauritius and then registered as a VCC in Mauritius by way of continuation
- An existing Mauritian company can apply to be converted into a VCC
- A VCC’s name must clearly include the terms “VCC” or “Variable Capital Company” after it.
- A company set up under foreign law and continued as a VCC may use the name specified in the articles of continuation, with the word “VCC” added.
- Each umbrella VCC’s sub-Fund or special purpose sub-Fund (“SPC”) may have its own distinct name.
A VCC or umbrella VCC’s main aim is to operate as a Fund with sub-Funds or SPCs.
- A VCC shall not carry on, or enter into any partnership, joint venture, or other arrangement with any person to carry on, any business that is inconsistent with the object of subsection 8(2) of the VCC Act, whether in Mauritius or elsewhere.
- No VCC may function as a Fund unless the Financial Services Commission has given it permission to do so under the relevant Acts.
- A VCC can be set up as a single fund structure or as an umbrella VCC that includes (or will include) one or more sub-Funds.
A VCC must have a documented constitution at all times that complies with the Companies Act and the constitution must specify, at a least:
- that the company’s primary purpose is to function as a Fund;
- that the VCC’s assets and liabilities must be valued at fair market value;
- the rights that come with each type of shares of the company;
- shares of a particular Fund, or specific sub-Funds, that are collective investment schemes, are to be issued, redeemed, or repurchased at a price equal to the proportion of the Fund’s or sub-Fund’s net asset value represented by each share, subject to any applicable fees and charges provided in the constitution;
- the provisions of paragraph (d) do not apply to any shares issued during the first offer period and that are related to a closed-end fund and are listed for quotation on a securities exchange; and
- the VCC’s policy on creating a sub-Fund or SPC.
A VCC can issue shares of different amounts in its sub-fund or SPCs.
A VCC can only declare and pay dividends on sub-fund or SPC shares based on the assets and liabilities attributable to that sub-fund or SPC.
A VCC must retain separate records for the VCC, as well as each sub-Fund and SPC, if appropriate.
A VCC at any time, may elect to present separate financial statements in respect of each of its sub-Funds and SPCs in accordance with and in compliance with International Financial Reporting Standards, or any other internationally accepted accounting standards, by giving irrevocable notice in writing simultaneously to the registrar and the Director-General.
No election to present separate financial statements for the VCC, its sub-funds, and SPCs: The VCC will only have to file one tax return with the Mauritius Revenue Authority as the VCC, its sub-funds, and SPCs will be considered as one entity for tax purposes.
Election is made to present separate financial statements for the VCC, its sub-funds, and SPCs: The VCC, its sub-funds, and SPCs will have to file separate tax returns and each of them will be liable to income tax on its own revenue.
If a VCC’s Sub-Fund operates as a CIS or CEF in Mauritius, the sub-fund may benefit from the partial exemption regime if it fulfills the prescribed substance conditions in Mauritius.
A VCC may sue or be sued in connection with a sub-fund or SPC, and this will be limited to that sub-fund or SPC.
FEATURES OF A SUB-FUND AND SPC IN A VCC
- If a sub-Fund or SPC chooses to have a legal identity separate from the VCC, it must be set-up as a company under the Companies Act.
- The word “incorporated Sub–Fund” or “incorporated SPC,” as applicable, must appear in the name of an incorporated sub–Fund or SPC.
- An incorporated sub–Fund or SPC must specify in its constitution that it is a VCC sub–Fund or SPC.
- A sub-Fund of an umbrella VCC may have its own legal personality in addition to the umbrella VCC.
- No sub-Fund or SPC may be established without the Financial Services Commission’s prior consent.
A Sub-Fund can operate as a CIS or CEF whereas a SPC shall not operate as a Fund, but rather as an investment holding or special purpose company as established by its constitution.
- To avoid a financial crisis, each sub-fund or SPC’s assets must be kept separate; otherwise, the assets of one sub-fund or SPC cannot be utilized to pay off the liabilities of other sub-funds or SPCs.
Where the sub-fund is licensed as a CIS or CEF, the appointment of the CIS Manager, Custodian can be made at the VCC level, meaning that all sub-funds will have the same functionaries. However, any of the sub-funds has the authority to appoint its own functionaries.
This is not applicable for SPCs as SPCs cannot operate as CIS or CEF.
Cross Investment is allowed among sub-funds and SPCs.
A sub-Fund or SPC may not invest in another sub-Fund or SPC if the former sub-Fund or SPC is already invested in it.
Voluntary winding up should be authorised by the Financial Services Commission provided it is satisfied that the interests of the participants in that sub-fund or SPC are appropriately protected.
The Court may order the winding up of any of the sub-funds or SPCs following an order received from the:
- Financial Services Commission
- Board of the VCC or any of its sub-funds
- A creditor of the sub-fund or SPC
- CIS Management of the VCC or any of the Sub-funds
It is worth noting that during the winding up, administration, or receivership of the sub-Fund, SPC, or the VCC, the assets of the sub-Fund, SPC, or the VCC shall not be utilised to discharge any liability of the VCC or any other sub-Fund or SPC of the VCC. Regardless of whether a sub-Fund or SPC of a VCC has legal personality, any responsibility of such sub-Fund or SPC shall be discharged only from the assets of such sub-Fund or SPC, even during the winding up administration or receivership of the sub-Fund, SPC, or VCC.
Unequivocally, the VCC might be a game changer for the Mauritius IFC, as it solidifies the Mauritius IFC’s value offer for international investors. It is a legal framework that may be used to both standard and alternative investment funds. Because of its capital flexibility and cost efficiency, the VCC is expected to pique the curiosity and interest of institutional investors and individual wealth managers. It will also be guaranteed that the legal framework governing the VCC complies with anti-Money laundering and counter-terrorism financing standards.
The VCC Act can be accessed at:
https://mauritiusassembly.govmu.org/Documents/Acts/2022/act0322.pdf