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The Variable Capital Company: A New Corporate Structure for Funds in Singapore

The Variable Capital Company (VCC) is a new corporate entity structure under which several collective investment schemes (whether open-end or closed-end) may be gathered under the umbrella of a single corporate entity and yet remain ring-fenced from each other. This update takes a look at the new structure and what is involved in establishing one.

The Variable Capital Company (VCC) is a new corporate entity structure under which several collective investment schemes (whether open-end or closed-end) may be gathered under the umbrella of a single corporate entity and yet remain ring-fenced from each other. It is similar to the open-ended investment company structure in the UK and protected cell company or segregated portfolio company structures in jurisdictions like Guernsey or the Cayman Islands. The new corporate entity structure will give funds an alternative to the existing structures available in Singapore, namely, unit trusts, limited partnerships and investment companies.

The VCC will be regulated under its own legislation, the Variable Capital Companies Act, the bill of which was tabled before Parliament on 10 September 2018. In terms of timing, the new structure will likely only be available sometime in 2019

Overview of the VCC structure

The VCC is a corporate entity in which shareholders may hold shares. However, unlike a company which is used to carry on a business, the only purpose for which a VCC may be used is as one or more collective investment schemes (CIS) in the form of a body corporate. Each share in a VCC will be analogous to a unit of a CIS, and the members in a VCC will therefore correspond to unitholders of a CIS.

Shares in a VCC will entitle members to receive profits from the VCC’s property in accordance with the rights set out in the VCC’s constitution. A VCC is therefore not restricted to paying dividends only out of profits as is currently the case with companies. Members may also redeem or sell their shares back to the VCC in order to exit their investment. There will be no capital maintenance requirements and hence whitewash approvals will not be required. The redemptions must be carried out as a proportionate amount of the VCC’s net asset value.

Umbrella VCCs

The main advantage of the VCC is the use of the umbrella structure. This allows the sub-funds to share a board of directors and have common service providers, such as the same fund manager, custodian, auditor and administrative agent. Certain administrative functions, for instance the holding of general meetings and preparation of prospectuses, can also be consolidated.

Where a VCC is set up as an umbrella fund with several sub-funds, members may hold shares that are referenced to a particular sub-fund held by the VCC.

Incorporating and establishing a VCC

A VCC may be incorporated with only one member. This is to allow VCCs to be used in fund structures with only a single member but many underlying investors (e.g., a master-feeder-fund structure or a fund with a single nominee account).

The VCC must have a manager to manage its property or to operate the collective investment scheme or schemes that comprise the VCC. The manager must be one of the following:
  • A holder of a capital markets services licence for fund management; 

  • A Registered Fund Management Company; or 

  • A person exempted from holding a capital markets services licence under the Securities and Futures Act (SFA). 

Except for VCCs consisting of Authorised Schemes (as to which please see more below), the VCC may have only one director. The director must be ordinarily resident in Singapore and be either a director of the manager of the VCC or a qualified representative of the manager. If a VCC has more than one director then each of these requirements may be met by separate persons. A director of a VCC must also be fit and proper. A test similar to that applied to directors of capital market services licence holders is likely to be applied.

The constitution of a VCC will be deemed to contain certain provisions from which it cannot derogate. These include the following:
  • The value of the paid up capital of the VCC is deemed to be at all times equal to its net asset value. 
  • The shares of the VCC must be issued, redeemed and repurchased at an amount representing its proportionate share of the VCC’s net asset value (subject to any adjustments for fees and charges provided for in the constitution). 
  • If the VCC is an umbrella fund, its assets and liabilities must be allocated to, and used to discharge the liabilities of, each of its sub-funds. 
In addition, the rights of the shareholders (for example, to participate in or receive profits) must be set out in the constitution. To ensure confidentiality, the constitution will not be publicly available although a copy must be filed with the Accounting and Corporate Regulatory Authority (ACRA).

Directors may alter the constitution for the purpose of forming a sub-fund without member approval if this right is provided for in the constitution. Accordingly, the usual requirement to obtain member approval to amend a company’s constitution will not apply to such an amendment.

The register of members of a VCC is not open to public inspection unlike that of a company. The register must, however, be open to inspection by the following persons or upon an order of court: 
  • The manager of the VCC; 
  • The custodian of the VCC’s sub-funds, but only in respect of the members of its sub-fund; and 
  • The government. 
A member of a VCC may not inspect the register of members except insofar as to request for information on itself.

As with any other company, a VCC must prepare financial statements. Except for VCCs consisting of Authorised Schemes (as to which please see more below), financial statements may be prepared in US GAAP, in addition to an ASC standard or the IFRS. Financial statements must be provided to members annually and members of a sub-fund will therefore have access to the financial information of another sub-fund in the same VCC.

Ring-fencing of sub-funds

As noted, a VCC can be established as an umbrella structure with several sub-funds. Each sub-fund must be registered with the ACRA. The VCC must keep segregated the assets and liabilities of each sub-fund and the assets of one sub-fund may not be used to discharge the liabilities of another sub-fund.

A fund manager may not wind-up a sub-fund at its own discretion but a VCC may do so using the procedures applicable under the Companies Act for the winding up of companies as applied to the sub-fund. A sub-fund will therefore be wound up singly and separately from the other sub-funds as if it were a separate legal entity. This will ensure that the ring-fencing of each sub-fund’s assets and liabilities applies.

There is a risk that the laws of other jurisdictions may not recognise the ring fencing of sub-funds. VCCs should take this into account and structure their investments accordingly. For VCCs consisting of Authorised Schemes (as to which please see more below), the Monetary Authority of Singapore (MAS) will regulate how such VCCs are to deal this issue separately.

It should also be noted that the provisions on judicial management and schemes of arrangement do not apply to the VCC or its sub-funds.

VCCs consisting of Authorised Schemes

Authorised Schemes are schemes that have been authorised by the MAS and whose units may be offered to retail investors. As such, they come under more stringent regulation. VCCs consisting of Authorised Schemes are subject to the following enhanced requirements, some of which will be dealt with in a separate amendment to the SFA or by way of notices / guidelines to be issued by the MAS:
  • A VCC consisting of Authorised Schemes must have at least three directors instead of one. At least one of the three must be an independent director. 

  • A VCC consisting of Authorised Schemes must prepare its financial statements using Recommended Accounting Practice 7 “Reporting Framework for Unit Trusts”. 

  • A VCC consisting of Authorised Schemes must appoint a custodian that is an approved trustee. 

  • As regards the ring fencing of sub-funds, the MAS has noted that it will require the directors and the fund manager of a VCC consisting of Authorised Schemes to take reasonable measures to manage cross-cell contagion risks when investing in assets located in another jurisdiction. The measures which would be considered reasonable will depend on the facts and circumstances in each case. For instance, the fund manager may seek legal advice on the risk of a foreign court refusing to uphold the segregation of assets and liabilities across sub-funds, directly or indirectly, e.g., through refusing to give effect to foreign choice of law clauses in contracts for reasons other than public policy. The fund manager may also wish to consider whether it would be appropriate to subject agreements governing the VCC’s overseas assets to laws and jurisdictions which uphold segregation of assets and liabilities across sub-funds, or to contract for terms which limit creditors to claim against relevant sub-fund(s). 

Tax matters

The Ministry of Finance has announced in its 2018 Budget Statement the following with respect to the tax treatment of a VCC:
  • A VCC will be treated as a company and a single entity for tax purposes. This means that only one set of income tax returns is required to be filed with the Inland Revenue Authority of Singapore. 
  • The tax exemptions for the income of a company incorporated and resident in Singapore arising from funds managed by a fund manager in Singapore (section 13R of the Income Tax Act) and for the income arising from funds managed by a fund manager in Singapore (section 13X of the Income Tax Act) will be extended to VCCs. 
  • The 10% concessionary tax rate under the Financial Sector Incentive – Fund Management scheme will be extended to approved fund managers managing incentivised VCCs. 
  • The existing GST remission for funds will be extended to incentivised VCCs. 

Existing Funds Converting to Singapore VCCs

The legislation provides for companies domiciled in other jurisdictions with structures similar to the VCC (e.g., protected cell companies and segregated portfolio companies) to redomicile in Singapore by transferring their registration to the ACRA. For CIS and other types of funds, conversion provisions have not been included. Such funds will need to rely on standard acquisition agreements to transfer to a VCC if they wish to convert to the new structure.