GIFT City Considers Multiple Share Classes for Retail Funds

The GIFT City regulator is currently evaluating a significant proposal that could change the landscape for retail mutual funds in India. This proposal aims to allow asset managers to implement different fee structures within the same retail fund. Currently, Indian mutual funds operate under a dual fee system: a direct plan for lower fees and a regular plan that incurs higher fees when purchased through distributors.

The International Financial Services Centres Authority (IFSCA) is preparing a consultation paper on this matter. The potential introduction of multiple share classes is seen as a step towards aligning with global practices, which can enhance the competitiveness of GIFT City as a financial hub.

Multiple share classes enable asset managers to charge varying fees based on factors like investment size or holding period, a practice already allowed for non-retail funds in GIFT City. Major financial centers worldwide, such as Luxembourg and Singapore, already utilize similar structures, creating a competitive edge for their markets.

IFSCA Executive Director Pradeep Ramakrishnan mentioned that the retail ecosystem in GIFT City is still developing. Feedback from market participants has been taken into account as the authority seeks to create a more attractive investment environment. The current regulations do not explicitly prevent fund managers from offering multiple share classes, but the IFSCA has expressed concerns regarding the differing terms attached to these shares.

For instance, an investor with a smaller amount may face a higher fee compared to someone investing a larger sum. This flexibility could encourage larger investments in GIFT City, which is essential for attracting institutional investors who typically seek lower total expense ratios.

Without competitive share classes, experts warn that investors with higher ticket sizes may look to other global markets. Shikhar Kacker from Khaitan & Co emphasizes that retail funds in GIFT City should not be compared directly to domestic mutual funds, as they risk losing their global competitiveness without diverse share class options.

Currently, GIFT City has only two retail funds that have yet to attract significant investment. The proposed changes could potentially transform GIFT City into a more appealing destination for both retail and institutional investors, aligning it with global standards and practices.