The Variable Capital Companies Act 2022 (the “VCC Act”) was passed on 12 April 2022 and gazetted on 15 April 2022, with its coming into force to be proclaimed at a later date.
The VCC Act has been introduced in Mauritius with the aim to provide more flexibility to users of fund structures using the Mauritius International Financial Centre (“MIFC”) for their outbound investments.
1. Fund structuring in Mauritius
Funds can be structured as companies, trusts, limited partnerships, foundations, protected cell companies (“PCC”) or any other legal entity prescribed or approved by the Financial Services Commission (“FSC”). The new VCC structure now provides an alternative and much sought-after SPV for fund structuring.
Funds are registered in Mauritius with the approval of the FSC as collective investment schemes (“CIS”) or closed-end funds (“CEF”) and are regulated by the FSC under the Financial Services Act 2007, the Securities Act 2005, the Securities (Collective Investment Schemes and Closed-End Funds) Regulations 2008 and other relevant legislations.
2. What is a VCC?
A VCC is a body corporate that can be used for all types of investment funds, notably mutual funds, hedge funds, private funds and real estate funds.
Features of a VCC:
- The VCC is a body corporate with separate legal personality.
- The name should include “Variable Capital Company” or “VCC”.
- The VCC operates through either sub-funds or SPVs which are individually licensed by the FSC, and hence each sub-fund having its own separate legal personality. Each sub-fund can operate either as a CIS or CEF, and should also carry the appellation “Incorporated VCC Sub-Fund” in its name.
- A SPV on the other hand cannot operate as a fund but as a vehicle ancillary to the VCC or a sub-fund of the VCC. The SPV should have the following appellation together with its name “VCC Special Purpose Vehicle”.
- Unlike other structures under the Companies Act 2001, it is mandatory for a VCC to have a constitution.
3. What are the benefits of setting up a VCC?
- Flexibility: With an umbrella fund, fund managers have the flexibility to segregate investments under separate sub-funds, with each such sub-fund having different investment objectives (i.e. operate a CIS or CEF). This makes the VCC structure suitable to a wide range of investors since it allows for diversity in investments under the same umbrella fund.
- Cost Efficiency: To save costs, sub-funds and SPVs may share a common board of directors as the VCC. Similarly, a VCC may appoint the same functionary across at VCC and at sub-fund and SPV levels. In other words, the same CIS manager, CIS administrator, custodian, money laundering and reporting officer, compliance officer or other service provider as the VCC can act for all of its SPVs and sub funds. Ultimately, this leads to cost and resource efficiency for the investors.
- Relaxed Test for Dividend Payment: The payment of dividends and the authorisation of distributions under a VCC is less burdensome than other existing legal structures under the Companies Act 2001. The requirement to pay dividends out of retained earnings has been disapplied to allow VCCs to pay dividend out of its capital.
- Ring Fencing of Assets and Liabilities: The segregation of assets and liabilities of sub-funds and SPVs means that: (a) the assets of the sub-funds and SPVs are protected from the creditors of a VCC and cannot be used to discharge the liability of the VCC (liability arising out of the sub-fund must also be discharged solely out of the assets of that sub-fund); and (b) poor performing or insolvent sub-funds do not affect the other solvent sub-funds.
- Cross Holding: Members of a VCC can hold shares in the sub-funds which are separate body corporates, and are further afforded with the flexibility to redeem or buy back their shares in accordance with the constitution of the VCC.
4. What makes the VCC different to a PCC?
Although a VCC shares certain similar characteristics as a PCC, the VCC differs from the PCC and does offer certain advantages:
· Sub-funds of a VCC may have separate legal personality and will therefore be legal entities distinct from the VCC.
· The creation of a cell does not create in respect of that cell separate legal personality and hence a cell is not a legal entity separate from the PCC itself.
· Sub-funds and SPVs of a VCC can carry out activities different from those of the VCC.
· The cells of a PCC may not carry out a business activity different to that of the PCC.
· Each of the VCC, its SPVs and its sub funds own their respective assets.
· Claims may therefore be initiated against the VCC or, to the extent that a SPV or a sub-fund is incorporated with separate legal personality, against the relevant SPV or sub-fund.
· The assets of a PCC comprise of non-cellular assets and cellular assets. Although cellular assets are attributed to specific cells through record-keeping, the assets for all intents and purposes belong to the PCC itself.
· As a consequence, any claims initiated against a cell of a PCC must clearly specify which cell is being targeted.
· The respective assets of a sub-fund or SPV cannot be used to discharge any liability of another sub-fund, SPV or the VCC.
· If the cellular assets are not sufficient to discharge the liability of a PCC, creditors may have recourse to the non-cellular assets of the PCC.
· Sub-funds and SPVs of a VCC cannot be wound-up, unless a plan for the winding-up has been approved by the FSC.
· In addition, the winding-up of a sub-fund (to the extent that it has a separate legal entity) does not trigger the winding-up of a VCC as a whole.
· A PCC can be wound up by special resolution of its shareholders without requiring the prior approval of the FSC.
· The winding-up of a cell will trigger the winding-up of a PCC and implicitly of all other cells, given that a cell does not have separate legal personality from the PCC per se.
What will the new VCC Act bring to the market?
As indicated above, the introduction of VCCs is a welcome addition to the various legal forms under which a fund can be set up in Mauritius. The VCC regime provides fund managers with the opportunity to operate several sub-funds and SPVs, which can include a CIS and a CEF under an umbrella fund instead of having to set up separate structures.
Mauritius is the first African jurisdiction to adopt legislation relating to variable capital companies. With the VCC Act, Mauritius retains its competitive edge in contrast to its regional counterparts and joins the ranks of mature global fund centres like Luxembourg, Cayman Islands, Ireland and Singapore.
It is expected that the new regime will bring an increased interest from family offices, as well as institutional and corporate groups looking to establish investment vehicles in Mauritius. Together with the advantages which have made Mauritius an international financial centre of repute, the additional flexibility, efficiency and ring-fencing capabilities that the VCC Act exhibits will surely attract further investment funds to the jurisdiction.