Exploring Variable Capital Companies (VCC) in Mauritius: Regulatory Landscape

Contributed by: Shammi Khanna, Shivam Gera & Jaydeep Saha

Variable Capital Companies

A Variable Capital Companies (VCC) is a body corporate that can be used for all types of investment funds, notably mutual funds, hedge funds, private funds, real estate funds and multi-family offices. The Variable Capital Companies Act (“VCC Act”) was enacted in April 2022.

How does a VCC structure work?

A VCC is a company incorporated under the Companies Act and carries its activities through its Sub-Funds (SFs) and Special Purpose Vehicles (SPVs). A VCC needs to be authorised by the Financial Services Commission, Mauritius (the “Commission”) as a VCC Fund pursuant to the Variable Capital Companies Act (“VCC Act”).

The Continuation of a Company as A VCC In the Context of a Jurisdiction Other Than Mauritius

• Articles of Continuation: When a company wishes to register by way of continuation as a VCC under section 3(3), it needs to prepare “articles of continuation.” These articles must include the following information:
• Company Information: The name of the company, the name under which it will be continued, the name of the jurisdiction where it is currently incorporated, and the date of its original incorporation.
•  Constitution Information: The articles must also contain the information required to be included in the constitution of a company as per section 42 of the Companies Act. This may include details about share capital, shareholder rights, voting procedures, etc.
• Amendments to Constitution: Any amendments to the company’s constitution (or its equivalent in the original jurisdiction) that will be effective upon registration as a VCC must be specified.

• Submission to the Registrar: The prepared articles of continuation, along with a copy of the company’s constitution (or its equivalent) and evidence proving that the company is in good standing, must be submitted to the Registrar for review and approval.

• Submission to the Registrar: The prepared articles of continuation, along with a copy of the company’s constitution (or its equivalent) and evidence proving that the company is in good standing, must be submitted to the Registrar for review and approval.

• Submission to the Registrar: The prepared articles of continuation, along with a copy of the company’s constitution (or its equivalent) and evidence proving that the company is in good standing, must be submitted to the Registrar for review and approval.

Setting Up a VCC (Section 10 of the Act)

• Legal Personality: A VCC is a body corporate with legal personality, meaning it is treated as a separate legal entity from its shareholders or members.

• Name Requirement: The name of the VCC must include either the phrase “Variable Capital Company” or the abbreviation “VCC” in accordance with section 35 of the Companies Act, 2001.

• Incorporation and Licensing: The VCC must be incorporated with the Registrar of Companies (ROC) as a VCC. Additionally, it needs to be licensed by the Financial Services Commission (FSC) as a VCC fund to operate as an investment fund.

• Sub-Funds or Special Purpose Vehicles: The VCC can operate through sub-funds or special purpose vehicles, and these entities must also be licensed by the FSC.

• Non-subsidiary Status: Although the sub-fund or SPV is incorporated separately, it is specified that it will not be considered a subsidiary of its variable capital company solely because it is a sub-fund or special purpose vehicle of that VCC. This distinction is made to avoid implications related to the usual subsidiary relationships between companies.

• Shared Directors and Registered Address: The VCC and its sub-funds or special purpose vehicles must share the same directors and registered address, which helps in streamlining administrative processes. his means that the same board of directors will oversee the operations and decision-making of the VCC and its sub-funds or SPVs, promoting consistency and coordination.

• Written Constitution: The VCC must adopt a written constitution that outlines its main objectives and key operational details.

The constitution of a VCC which shall comply with the Companies Act, 2001 must address the following specific matters:

1. Primary Object: The constitution must state that the primary object of the company is to operate as a fund. This clarifies the main purpose of the VCC as an investment fund.
2. Underlying Policy: It should state the underlying policy for establishing the sub-funds or special purpose vehicles, which helps define the investment strategies and purposes of these entities.
3. Fair Value Basis: The assets and liabilities of the VCC should be assessed on a fair value basis, which is a common method used for valuing investment assets in the financial industry.
4. Rights of Share Classes: The constitution must define the rights attached to each class of shares issued by the VCC. Different classes of shares may have varying voting rights, dividend entitlements, or other rights.
5. Share Price Calculation: If the VCC operates a sub-fund as a collective investment scheme, the constitution must specify that shares in the sub-fund will be issued, redeemed, or repurchased at a price equal to the proportion of the net asset value (NAV) of the sub-fund represented by the share. This ensures that investors buy or sell shares at a fair value based on the underlying assets’ value.

Creation of Sub-Funds

The process of Creation of sub-funds within a Variable Capital Company (VCC) in accordance with Section 8 of the Act and its constitution:

• Sub-Funds: A VCC has the option to create one or more sub-funds under its structure. Each sub-fund can have distinct investment objectives and policies to cater to different investment strategies or target markets. A sub-fund of a VCC Fund, subject to the approval of the Commission, will operate as a Collective Investment Scheme (“CIS”) or a Closed-End Fund (“CEF”) of any category.

• Sub-Fund with Separate Legal Personality: A sub-fund may elect to have a separate legal personality from that of the VCC fund. For example, a sub-fund can be approved to operate as a CIS and an Expert Fund. A sub-fund of a VCC Fund can also act as a feeder fund or a master fund.  The sub-fund needs to be incorporated in accordance with Section 10 (Incorporation of sub-fund or special purpose vehicle) of the Act. It must also comply with the specific requirements set out in: a. Regulations: Regulations made under the Act. b. FSC Rules: The sub-fund shall comply with all requirements under the Financial Services Act (the “FSA”), Securities Act, Securities (Collective Investment Schemes and Closed-end Funds) Regulations 2008, relevant Financial Services Commission (FSC) Rules and Guidelines applicable to a/an CIS/Expert Fund. c. Constitution: Requirements specified in the VCC’s constitution.

• Prior Approval of the Commission: Before creating a sub-fund, the VCC must obtain the prior approval of the Commission. This means that the VCC needs to submit an application seeking approval for the creation of the sub-fund.

• Application Process: The application for the creation of a sub-fund should be made in a form and manner specified by the Commission. Additionally, it should be accompanied by the relevant application fee, which would be specified in the FSC Rules.

• Approval Number: Upon approval of the application, the Commission may assign an approval number to the sub-fund. This number helps in uniquely identifying and tracking the sub-fund within the VCC’s structure.

Creation of Special Purpose Vehicles

The process for creating special purpose vehicles (SPVs) within a Variable Capital Company (VCC) in accordance with Section 9 of the Act and its constitution:

• Special Purpose Vehicles: A VCC has the option to create one or more special purpose vehicles under its structure. An SPV of a VCC shall operate as a vehicle ancillary to a sub-fund or the VCC and, may elect to have a separate legal personality from that of the VCC.

• Purpose of Special Purpose Vehicles: SPVs cannot operate as independent funds on their own. Instead, they serve as vehicles ancillary to either the VCC itself or one of its sub-funds. The primary purpose of SPVs is to engage in specific activities or transactions that complement the operations of the VCC or its sub-funds.

• Separate Legal Personality: If an SPV elects to have a separate legal personality from the VCC, it must be incorporated in accordance with Section 10 of the Act. Additionally, the SPV needs to comply with the specific requirements set out in: a. Regulations: Regulations made under the Act. b. FSC Rules: Rules and guidelines issued by the Financial Services Commission (FSC). c. Constitution: Requirements specified in the VCC’s constitution.

• Prior Approval of the Commission: The creation of an SPV requires the prior approval of the Commission. Therefore, the VCC needs to submit an application seeking approval for the establishment of the SPV.

• Application Process: The application for creating an SPV should be submitted in a form and manner specified by the Commission. Additionally, it must be accompanied by the relevant application fee, which would be specified in the FSC Rules.

• Approval Number: Upon approval of the application, the Commission may assign an approval number to the SPV. This number helps uniquely identify and track the SPV within the VCC’s structure.

Global Business Licence

VCC Fund hold on a Global Business Licence?

A VCC Fund which meets the criteria provided under section 71 of the FSA, will be required to hold a Global Business Licence (“GBL”). A single GBL will be required by the VCC Fund irrespective of whether its sub-funds or SPVs have separate legal personality. On the other hand, the Commission expects a VCC Fund to appoint the same Company Secretary (Management Company in case it holds a GBL) for all of its incorporated sub-funds/SPVs.

Authorisation of a VCC Fund and Applicable Fees

• An application for authorisation as a VCC Fund under Section 7 of the VCC Act shall be submitted online through the FSC One Platform.

• The application to operate as a VCC Fund shall be accompanied by an application for the creation of at least one sub-fund under Section 8 of the VCC Act.

• An application for the creation of a new sub-fund or a new SPV of a licensed VCC Fund shall be done online through the FSC One Platform.

	Processing fees	Fixed Annual fees
VCC Fund & 1st Sub-Fund	MUR 45,000(USD 1000)	MUR 135,000 (USD 3000)
2nd sub-fund/SPV	MUR 22,500 (USD 500)	MUR 45,000 (USD 1,000)
3rd sub-fund/SPV	MUR 22,500 (USD 500)	MUR 45,000 (USD 1,000)
4th sub-fund/SPV	MUR 22,500 (USD 500)	MUR 45,000 (USD 1,000)
5th ub-fund/SPV	MUR 22,500 (USD 500)	MUR 45,000 (USD 1,000)
For each additional sub-fund/SPV	MUR 22,500 (USD 500)	MUR 87,750 (USD 1,950)
The VCC Fund will have to pay the fees related to its GBL, if applicable; The figures in USD are applicable to holders of GBL.

Reporting Obligations

• Separate Records for VCC and Sub-Funds/SPVs: The VCC must maintain separate and distinct records for itself as well as for each of its sub-funds and special purpose vehicles (SPVs). These records should provide sufficient explanations of the transactions of the VCC, sub-funds, and SPVs necessary for the preparation of true and fair financial statements for each entity. By keeping separate records, it becomes easier to track the financial performance and position of each component within the VCC structure.

• Adequate Internal Accounting Controls: The VCC is required to establish and maintain adequate internal accounting controls. These controls are put in place to ensure that the assets of the VCC and its sub-funds or SPVs are safeguarded against loss from unauthorized use or disposition. Internal accounting controls aim to prevent fraud, misappropriation, or any misuse of funds, providing greater security and accountability.

• Authorized Transactions: The transactions of the VCC, sub-funds, or SPVs must be duly authorized. This means that all financial activities and investments undertaken by these entities should be properly authorized by the relevant parties, ensuring that they comply with the VCC’s investment policies and objectives. Proper authorization helps to reduce the risk of unauthorized or inappropriate actions that could jeopardize the VCC’s operations and its investors’ interests.

The Assets and Liabilities of Sub-Funds and Special Purpose Vehicles

In relation to the assets and liabilities of sub-funds and special purpose vehicles (SPVs) within a Variable Capital Company (VCC), the following provisions are applicable:

• Segregation of Assets and Liabilities: The assets of a sub-fund or special purpose vehicle shall not be utilized to discharge any liability of the variable capital company or any other sub-fund or special purpose vehicle, even during events such as winding up, administration, or receivership of the said sub-fund, special purpose vehicle, or variable capital company.

• Protection of Assets: Assets specifically attributable to a sub-fund or special purpose vehicle shall be available solely for the creditors of the variable capital company who are creditors in relation to that specific sub-fund or special purpose vehicle. Additionally, these assets shall be protected from the creditors of the variable capital company who are not creditors in respect of that sub-fund or special purpose vehicle, which includes protection from any statutory, regulatory, or governmental body, subject to the provisions of section 48A of the Income Tax Act.

• Voidance of Inconsistent Provisions: Any provision in an agreement or the constitution of the variable capital company that conflicts with subsection (1) (related to the segregation of assets and liabilities) shall be considered void.

• Allocation of Unattributable Assets or Liabilities: The variable capital company may allocate any asset or liability that is not specifically attributable to any particular sub-fund or special purpose vehicle between its sub-funds or special purpose vehicles. This allocation should be conducted in a manner that is deemed not prejudicial to the participants in the sub-funds or special purpose vehicles.

The stated provisions ensure the proper segregation and protection of assets and liabilities between sub-funds, special purpose vehicles, and the variable capital company. Such segregation serves to safeguard the interests of creditors and participants associated with each specific sub-fund or special purpose vehicle, thereby maintaining transparency and accountability within the VCC structure. Any provision contrary to these principles shall be rendered void.

Appointment of a CIS Manager, CIS Administrator, or Custodian

The provisions regarding the appointment of a CIS manager, CIS administrator, and custodian for a sub-fund within a Variable Capital Company (VCC) are as follows:

• Appointment of Service Providers: The VCC may appoint a CIS manager, CIS administrator, custodian, or any other service provider for a sub-fund, as required by law or as directed by the Commission. These appointments are made to ensure compliance with relevant regulations and to facilitate the proper management and administration of the sub-fund.

• Sub-funds Own Appointments: However, it should be noted that this section does not prohibit a sub-fund from appointing its own CIS manager, CIS administrator, custodian, or other service provider if such an appointment is mandated or required. In situations where the law or regulations specify that a sub-fund must have its own service provider, the sub-fund is free to make such an appointment independently, irrespective of any appointments made by the VCC.

In summary, the VCC has the authority to appoint service providers, including a CIS manager, CIS administrator, and custodian, for its sub-funds, subject to legal requirements and regulatory directives. Nevertheless, if the law or regulations mandate that a sub-fund must have its own service provider, the sub-fund retains the right to make its independent appointments as well. These provisions aim to ensure that sub-funds operate in compliance with applicable laws and regulations while maintaining flexibility in appointing service providers when necessary.

Disclosures

In transactions involving a Variable Capital Company (VCC), the company is obligated to make certain disclosures. These requirements are as follows:

• General Disclosures: The VCC must inform any person with whom it transacts that it is a variable capital company.

• Disclosure in Agreements, Contracts, and Documents: The VCC is required to disclose specific information in every agreement, contract, document, or transaction that references any of its sub-funds or special purpose vehicles. The following details need to be disclosed:
• Name of the Sub-Fund or Special Purpose Vehicle: The VCC must state the name of the sub-fund or special purpose vehicle involved in the transaction.
• Legal Personality: If the sub-fund or special purpose vehicle has a separate legal personality, the VCC needs to disclose this fact and provide its registration number.
• Approval Number: The VCC must include the approval number assigned to the sub-fund or special purpose vehicle in the relevant agreement or document.
• Segregation of Assets and Liabilities: The VCC must disclose that the assets and liabilities of the sub-fund or special purpose vehicle are segregated in accordance with the Act.
• Charges on Assets of Special Purpose Vehicle: If the assets of a special purpose vehicle are subject to a charge, the deed of the charge must specify the name and registration number of that special purpose vehicle.

These disclosure requirements aim to promote transparency and provide relevant information to parties transacting with the VCC. By making these disclosures, the VCC ensures that counterparties and stakeholders are aware of the specific sub-fund or special purpose vehicle involved in the transaction, its legal status, and the segregation of assets and liabilities. Such clarity enhances confidence and facilitates better understanding during business dealings with the VCC.

Cross Sub-Fund or Special Purpose Vehicle Investment in a VCC

According to the provisions of Section 14 of the Act related to cross sub-fund or special purpose vehicle investment in a VCC, the following rules apply:

• Investment within the VCC Structure: A sub-fund or special purpose vehicle of a VCC is allowed to invest its assets into another sub-fund or special purpose vehicle of the same VCC, subject to certain conditions.

• Prohibition on Circular Investments: However, there are restrictions on circular investments within the VCC structure. Specifically:
• A sub-fund of a VCC is not permitted to invest in another sub-fund or special purpose vehicle of the same VCC if the latter sub-fund or special purpose vehicle has already invested in the former.
• Similarly, a special purpose vehicle of a VCC is prohibited from investing in another sub-fund or special purpose vehicle of the same VCC if the latter sub-fund or special purpose vehicle has already invested in the former.

These rules are intended to prevent circular investments and ensure that investments within the VCC structure are made in a manner that avoids interconnected and potentially risky investment loops. By implementing these regulations, the VCC aims to maintain proper diversification and risk management within its various sub-funds and special purpose vehicles.

Winding Up of Sub-Fund or Special Purpose Vehicle

• Voluntary Winding up of Sub-Fund or Special Purpose Vehicle: In the context of Voluntary Winding up of Sub-Fund or Special Purpose Vehicle, strict regulations are in place to ensure the protection of participants’ interests. The Commission must approve any plan for winding up a sub-fund or special purpose vehicle. However, before granting approval, the Commission thoroughly assesses whether the participants’ interests are appropriately safeguarded. If the voluntary winding up involves a separate legal personality for the sub-fund or special purpose vehicle, the relevant provisions of the Insolvency Act related to voluntary winding-up will apply, with necessary adaptations and modifications as required. This comprehensive approach aims to maintain transparency and security in the process of winding up such entities within the investment framework.

• Winding up of Sub-Fund or Special Purpose Vehicle by Court: The provision states that the Court, subject to section 102(2) of the Insolvency Act of Mauritius, has the authority to order the winding up of a sub-fund or special purpose vehicle based on an application made by various entities, such as the Commission, a creditor, the CIS manager, the Board of a VCC, or any of its sub-funds. If the application is initiated by someone other than the Commission, the Commission must be included as a party to the application. The Court may issue the winding-up order if it finds that the sub-fund or special purpose vehicle is being operated in violation of the Act, any FSC Rule, or its constitutive documents, or if winding up is necessary to protect the interests of investors or creditors associated with the sub-fund or special purpose vehicle, or if it is deemed just and equitable to grant the order. In the case of a sub-fund or special purpose vehicle with a separate legal personality from its VCC, the winding-up process must comply with the relevant provisions of the Insolvency Act.

Withdrawal of Approval of Sub-Fund or Special Purpose Vehicle

Section 18 of the Act pertains to the withdrawal of approval for a sub-fund or special purpose vehicle. The Commission is empowered to revoke the granted approval under section 8 or 9 if it finds that the sub-fund or special purpose vehicle has breached relevant Acts, directions, or approval conditions, engaged in activities threatening Mauritius’ financial system or the public interest, committed financial crimes, no longer fulfills approval criteria, ceased the approved activity, or failed to commence business within six months of approval.

In such cases, the Commission may issue directives to the variable capital company to protect investors’ interests and Mauritius’ financial reputation, which may include winding up a sub-fund or special purpose vehicle. The variable capital company must inform the Registrar of the approval withdrawal within 7 days.

Direction to Suspend Activities of Sub-Fund or Special Purpose Vehicle

Section 19 of the Act grants authority to the Chief Executive to issue a direction for the suspension of activities of a sub-fund or special purpose vehicle within a variable capital company if there are reasonable grounds to believe it is urgent and necessary. Such action may be taken to prevent or mitigate damage to the integrity of the financial services industry or protect the interests of investors or the public in general. Additionally, this direction may be implemented to safeguard Mauritius’ reputation as a financial services center. Before issuing the direction, the Chief Executive is required to provide the variable capital company with prior notice of the intention and reasons for the proposed direction. The company must also be given a reasonable opportunity to present representations regarding the proposed suspension of activities.

Share Capital and Distribution

A VCC is authorized to issue shares in its sub-funds and special purpose vehicles. The proceeds from such shares shall be considered part of the assets attributable to the respective sub-fund or special purpose vehicle. Dividends for shares of a sub-fund or special purpose vehicle may be paid based solely on the assets and liabilities of that specific sub-fund or special purpose vehicle.

• Power to Redeem and Buy Back Shares:
• A VCC can redeem or buy back its shares or those of its sub-funds and special purpose vehicles in accordance with its constitution.
• When shares in a sub-fund or special purpose vehicle are redeemed or bought back, shareholders are entitled to a refund based on the number of shares they own.

• Reduction of Share Capital:

1. A VCC may apply to the Registrar for authorization to reduce its share capital or that of its sub-funds or special purpose vehicles. Shareholders may also apply for authorization to reduce the share capital of the sub-fund or special purpose vehicle in which they hold shares.
2. A reduction may be authorized to either extinguish or reduce the liability on unpaid-up share capital or, with or without extinguishing or reducing any liability on shares, to cancel lost or unrepresented paid-up share capital or pay off any excess paid-up share capital.
3. The Registrar shall authorize the reduction of share capital if certain conditions are met, including the filing of a special resolution for reduction, providing sufficient guarantees to secure payment to creditors, ensuring no unfair prejudice to creditors, and demonstrating solvency.
4. The solvency test for a variable capital company involves its ability to pay debts as they become due in the normal course of business and having assets’ value exceeding liabilities, including contingent liabilities.
5. Various factors, including financial statements, valuations of assets and liabilities, the likelihood of contingencies, and expected claim settlements, may be considered in determining solvency.
6. Creditors prejudiced by an authorized reduction may seek redress or apply to the Court for an order to restrain or prohibit such reduction. The Court will consider relevant factors when determining such applications.