Mr Ravi Menon, Managing Director of MAS, spoke on key uncertainties around the global economy and pivots for private market investment strategies in the uncertain environment.
Explanatory Brief on the Variable Capital Companies Bill on 10 September 2018
The Second Minister for Finance, Ms Indranee Rajah, today moved the Variable Capital Companies Bill (“the Bill”) for First Reading in Parliament.
2 The Bill provides for the incorporation and operation of a new corporate structure, the Variable Capital Company (“VCC”), to cater to the needs of investment funds. The introduction of the VCC structure will encourage fund managers in Singapore to establish the domicile of their investment funds in Singapore and help strengthen Singapore’s position as a full-service international fund management centre.
3 The VCC will complement the existing suite of structures available to fund managers in Singapore. Internationally, the most commonly used investment fund structures are unit trusts (constituted by way of trust deeds) and investment companies. In Singapore, investment funds constituted as investment companies are uncommon because of the restrictions under the Companies Act (Cap. 50) (“CA”). These restrictions impede the normal operations of investment funds such as the flexibility to pay dividends and redeem shares as well as the ability to consolidate certain administrative functions. To address these issues, most international fund jurisdictions have established specialised corporate structures for investment funds.
4 The Monetary Authority of Singapore (“MAS”) conducted a public consultation on the proposed regulatory framework for VCCs and the draft Bill from March to April 2017. Respondents were in favour of a VCC structure and generally supportive of MAS’ proposals on the regulatory framework. MAS has incorporated the feedback from the public consultation into the Bill where appropriate. The VCC Bill also takes into consideration key features from similar structures in other jurisdictions.
Key Provisions in the Bill
5 The Bill includes the following features which will facilitate the operations of a VCC as an investment fund.
Variable Capital Structure
6 The Bill will allow a VCC to issue and redeem shares1 without having to seek shareholders’ approval, enabling investors to exit their investments in the investment fund when they wish to, and pay dividends using its capital. In contrast, companies under the CA are subject to restrictions on capital reduction (equivalent to fund redemptions) and can only pay dividends out of profits.
Sub-funds with Segregated Assets and Liabilities
7 Unlike the company structure under the CA, the Bill provides for the establishment of a VCC as a standalone structure or an umbrella structure with multiple sub-funds that may have different investment objectives, investors as well as assets and liabilities. The umbrella structure creates economies of scale, as sub-funds can 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.
8 While sub-funds have their own set of investors, they do not have separate legal personalities. Therefore, there is a risk that the assets and liabilities of one sub-fund could be commingled with those of another sub-fund. To address this potential contagion risk, the Bill requires assets and liabilities of each sub-fund to be segregated, such that the assets of one sub-fund may not be used to discharge the liabilities of another sub-fund. Each sub-fund must be wound up separately to ensure that the ring-fencing of each sub-fund’s assets and liabilities applies during insolvency.
9 The Bill will require a VCC to appoint a fund manager that is regulated2 by MAS to manage its investments. This will facilitate supervisory oversight on the use of the VCC, including to prevent the VCC from being abused for unlawful purposes and to help ensure that it is not used as an offshore vehicle without actual investment management activities conducted in Singapore.
Accounting and Governance
10 Compared to the CA which provides for the use of accounting standards set by the Singapore Accounting Standards Council, the Bill allows for a wider scope of accounting standards to be used in preparing a VCC’s financial statements. Apart from Singapore accounting standards and recommended accounting principles3, it will also allow the use of the International Financial Reporting Standards and US Generally Accepted Accounting Principles. This will give the investment funds flexibility to serve the needs of global investors.
11 To meet legitimate privacy needs of investors, the register of VCC shareholders (i.e. the fund investors) need not be made public. This is also consistent with the practice in other major jurisdictions such as the UK and Hong Kong. Nonetheless, MAS recognises the need to prevent VCCs from being used for illicit purposes such as money laundering and terrorism financing. As such, a VCC must maintain an updated register of shareholders and disclose the information to the regulatory and law enforcement authorities upon request.
12 The Bill will provide for foreign corporate fund structures that are similar to VCCs to re-domicile as VCCs in Singapore. This will encourage fund managers with funds domiciled in offshore jurisdictions to co-locate fund domiciliation with their fund management activities in Singapore.
13 The Bill provisions relating to the insolvency of a VCC and its sub-funds are adapted from the CA. A VCC Amendment Bill will be tabled in early 2019 to replace these provisions with the provisions under the Insolvency, Restructuring and Dissolution Bill (“Insolvency Bill”), as well as to provide any necessary modifications specific to VCCs. The VCC Amendment Bill will align the VCC insolvency regime with that of other corporate structures in Singapore.
Administration of VCCs
14 The Accounting and Corporate Regulatory Authority (“ACRA”) will act as the registrar of VCCs and administer the new Bill, except for the anti-money laundering and counter-financing of terrorism obligations of VCCs which will be overseen by MAS.
1 To protect creditors, shares must be issued and redeemed at their net asset value, except during the initial offering period or for shares of closed-ended funds listed on a securities exchange which will be issued and redeemed in accordance with applicable listing requirements. Listed investment funds which are closed-end funds may need to conduct share buy-backs on the securities exchange, and in line with market practice, the price of such share purchases must be in accordance with the applicable listing requirements and need not to be priced at net asset value.
2 Generally, a VCC will have to be managed by a fund manager which is a licensed fund management company (i.e. a holder of a capital markets services licence for fund management under section 86 of the Securities and Futures Act (Cap. 289)), a registered fund management company (i.e. a corporation exempted from holding a capital markets services licence under paragraph 5(1)(i) of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations) or a person exempted under the Section 99(1)(a), (b), (c), or (d) of the Securities and Futures Act (Cap. 289) from the requirement to hold a capital markets services licence to carry on business in fund management (i.e. a bank licensed under the Banking Act (Cap. 19), a merchant bank approved under the Monetary Authority of Singapore Act (Cap. 186), a finance company licensed under the Finance Companies Act (Cap. 108), or a company or cooperative society licensed under the Insurance Act (Cap. 142)).
3 These are the Singapore Financial Reporting Standards, Singapore Financial Reporting Standards (International) and Statement of Recommended Accounting Practice 7.