Variable Capital Companies – New Legislation in Singapore
Singapore's Funds Industry is changing thanks to the Variable Capital Companies Bill that was passed by the parliament on October 1, 2018. Variable Capital Companies (VCC) is a corporate identity of sorts, but it’s not founded under the Companies Act.
Rather, a VCC is founded under the VCC Act, so different laws will apply.
When a VCC is formed, it’s possible to form the entity as a:
- Standalone fund
- Umbrella fund
Standalone funds are funds that can only have one fund, but an umbrella fund can be a subset of funds, with each having its own assets.
Under the formation of a VCC, the entity will be allowed to have:
- Fund managers regulated by the MAS
- Custodian of assets (required in some circumstances)
A VCC’s board is essentially a board of directors. The board will have fiduciary duties, and it’s the responsibility of the board to act in the best interests of the company.
Why VCC’s Are Needed, and The Advantages They Offer
Traditional incorporation is limited when a fund is setup, and a main issue is the place of domicile. Restrictions on funds have led to many would-be funds to be incorporated in other jurisdictions, even when the fund is managed in Singapore.
This is a lot of extra “red tape” for a fund, but it has become a necessity under the Companies Act.
VCC funds allow for a new fund structure in Singapore, which allows for funds to be created without all of the “red tape” and limitations. This allows for the country to offer funds that are similar to other jurisdictions where funds tend to migrate to despite management remaining in Singapore.
Investors will have more choices, and funds will be able to stay in Singapore thanks to the VCC.
From an advantage standpoint, these funds also allow for:
- Cost efficiency
- Greater flexibility
Flexibility is what many funds have been lacking under the Companies Act. But under the VCC, there is far more flexibility keeping these funds within Singapore. Funds can now be open-ended or closed-end. What does this mean?
- Investors can redeem their investment in the fund (open-ended)
- Investors are restricted when trying to redeem their funds (closed-ended)
Investors will be able to invest in either fund type, and this is advantageous. When speaking of a closed-ended fund, this is a fund, such as a venture capital or private equity fund, where there are fixed shares and the ability to redeem investments has restrictions.
Shareholder approval to redeem shares is not required, depending on the issuance, so it’s possible for investors to enter and exit a fund whenever they see fit. VCCs will also be able to pay shareholders differently.
Dividends will be able to be paid out of the company’s capital rather than out of profits only.
Capital reduction restrictions are not in place with a VCC as they are with a traditional company. Fund managers will have further flexibility when dispersing dividends as a result of the capital reduction lift that VCCs offer.
Accounting Standards of a VCC
VCCs have options when it comes to accounting, so it’s possible to choose among different accounting standards. What does this mean for a fund? A few things.
- Singapore standards can be used
- International Financial Reporting Standards can be used
- US Generally Accepted Accounting Principles can be used
Recognized international accounting standards can be employed. This is of the utmost importance because it allows the fund’s accountants to use standards that they have the most experience with using.
The needs of the investor are better served as a result, too.
Fund managers will be able to view and choose an accounting standard that is best for investors or jurisdictions where assets are located. When a fund is trying to lure investors from another country into the fund, different accounting standards may offer additional benefits.
When using a VCC, it’s possible to have an advantageous accounting standard that is not possible under the Companies Act.
There are also scale and cost efficiencies that can be met thanks to the new structure.
Cost Efficiencies Realized
Cost efficiencies and savings can also be realized under a VCC that is not possible under the Companies Act. A few of the cost benefits that may be realized are:
or those that are created under an umbrella fund, can have the same:
- Fund manager
- Safeguards for all sub-fund assets from other fund liabilities
- Sub-fund wound up must be done separately
Sub-funds are safeguarded under the new Act, and this is one of the biggest potentials of a VCC. When a sub-fund goes insolvent, only the assets of the fund will be impacted. This means that other sub-funds under the umbrella cannot be used to discharge liabilities of another fund.
Safeguards protect each fund, which must be wound up separately.
Transfer of Foreign-Domiciled Funds
Foreign-domiciled funds are now able to be re-domiciled to Singapore. These funds can be put into a VCC, but there must be a regulatory framework within the jurisdiction that allows for a similar type of fund or vehicle to be created.
Under the Companies Act, funds that were of the CA-type could be re-domiciled, but no other fund had this option.
Restrictions on transferring of funds kept many funds from re-domiciling into Singapore, an option that may have been cost beneficial for the fund. Restrictions under the Companies Act also dictated the size of the fund, which would have to be “larger than a small company.” The main issue is that most funds are small in size, so this stopped a lot of foreign funds from choosing to be transferred.
The small company requirement no longer needs to be met.
The potential for the number of funds that can be transferred to Singapore has now increased as a result. It's important to realize that the new Bill will allow for similarly structured funds that are similar to a VCC will have a much easier time transferring to Singapore under the new Act.
It's also possible that a fund restructures before re-domicile so that they can enter Singapore as a VCC.
Singapore has also made provisions for assets and liabilities of a fund be transferred to a new VCC. This will allow a fund that is not structured like a VCC to transfer all of their assets and liabilities without structural issues holding the process up.
Fast and efficient, the transfer can be done through a simple registration process.
When a re-domiciliation does occur, it does allow for the fund to:
- Retain its identity
- Retain its fund history
Funds that were created outside of Singapore and that have chosen to utilize Singapore’s experienced fund managers may have more of a benefit to re-domicile the fund.
The Variable Capital Companies Act is not yet enforced, and the Act will be in force in 2019. What is beneficial about the VCC framework is that it allows for many of the same features that the Companies Act offers while catering to the needs of investment funds.
This means that:
- The MAS will be in charge of meeting the anti-laundering and countering obligations.
- The Act will be administered by the Accounting and Corporate Regulatory Authority.
- A register of shareholders will need to be kept, and the register will need to be furnished upon request. However, the register does not need to be made public unless a request is made.
Singapore’s fund ecosystem is expected to grow as a result of the VCC. The VCC helps bridge the gap that has caused many investment funds to incorporate in other jurisdictions because the framework has not been beneficial for funds.
Now, the VCC allows for a new framework where funds can be set up in Singapore.
Re-domiciliation of foreign funds is also expected to help boost the ecosystem, creating a more robust fund environment.
Several professionals that familiarize themselves with the Bill and the new VCC structure will benefit, too. These professionals include:
- Tax professionals
Accounting professionals will have increased responsibilities for their clients. These professionals will need to help their clients choose the best accounting standard as well as support their clients with their financial statements using numerous accounting standards.
Administrative burdens of fund managers in Singapore will also be alleviated.
The VCC framework is going to change the way that funds are created and re-domiciled in Singapore, and it’s important that all servicing professionals understand the benefits of the VCC and how it will change investment funds.
VCC introduction to Singapore will be a “game changer” for the fund management industry, and it will complement and expand fund structures currently available. Safeguards for investors are in place, thanks to the Monetary Authority of Singapore regulating fund managers. Gall funds will be subject to anti-money laundering and terrorist financing requirements, too.
The change is expected to boost the country’s economy, creating up to 1,000 new jobs in the next two years.
Singapore-based companies will also be able to benefit financially from the new corporate structure, so it’s a win-win for the economy, fund professionals and investment funds in Singapore.