IFSCA has published the complete set of stakeholder comments received on its consultation paper for a differential distribution framework in Venture Capital Schemes and Restricted Schemes — the framework that now lets GIFT City funds run blended finance structures with senior and junior classes of units. The document, placed on IFSCA’s website on 19 October 2026, is more than a formality. Read against the final circular issued on 25 September 2026, it shows precisely which industry demands changed the rules — most visibly the ceiling on grant funding for ESG schemes, which moved from 20% of corpus in the consultation draft to 49% in the final framework — and which demands IFSCA turned down.
The consultation paper, titled “Regulatory Framework for differential distribution in Restricted Schemes and Venture Capital Schemes to facilitate blended finance and other fund structures”, was issued on 22 October 2025. IFSCA records in its response, published with the comments, that the proposals were “suitably modified” based on the comments received and the recommendations of its Fund Management Advisory Committee, and that the revised proposals were placed before the Authority at its meeting on 24 July 2026. The final circular followed on 25 September 2026. What was missing until now was the consultation record itself — who asked for what. That record is now public.
In one line: Ten sets of stakeholder comments pushed IFSCA to nearly two-and-a-half times the proposed grant cap for ESG schemes and to write a detailed grant framework into the final rules — but the USD 2 million minimum ticket for junior units and class-wise NAV by an independent valuer survived industry pressure unchanged.
At a Glance
What the Consultation Had Proposed
The October 2025 draft circular proposed that Venture Capital Schemes (Part A of Chapter III of the Fund Management Regulations, 2025) and Restricted Schemes (Part B) — together, “eligible schemes” — be permitted to issue multiple classes of units carrying differential distribution rights: senior units with superior rights over distribution proceeds, and junior or subordinate units (including mezzanine units) with inferior rights. Around that core permission, the draft set guardrails that the consultation then tested:
- ESG schemes and grants: the FME of an ESG scheme had to disclose how its investments were expected to align with the UN Sustainable Development Goals, and eligible schemes could accept funds in the form of grants up to 20% of the corpus of the scheme.
- Diversification: eligible schemes other than ESG schemes could not invest more than 25% of corpus in a single investee company and its associates, with diversification to be achieved within two years of first close.
- Minimum ticket for junior capital: an investor subscribing to junior or subordinate units had to invest at least USD 2 million, reduced to USD 1 million for accredited investors.
- Anti-evergreening: the FME had to ensure that money invested by the scheme was not used by an investee company, directly or indirectly, to discharge its obligations or liabilities towards the scheme’s investors or their associates.
- Valuation: NAV for each class of units was to be computed keeping in view regulations 26, 27, 38 and 39 of the Fund Management Regulations and the disclosures in the placement memorandum, with the independent valuer in the frame.
- Disclosures: schemes had to disclose the differential structure, including units issued in return for grants.
What Stakeholders Asked For
The ten sets of comments are detailed and, in places, sharply critical. Four themes dominate.
1. Grants needed a real framework, not just a cap
Several commenters pointed out that the draft fixed a 20% grant ceiling but said almost nothing about how grants would be governed, accounted for, or treated on winding up. One submission drafted an entire grant chapter: grants to count toward the corpus cap with grants included in corpus; grants to be issued against a separate class of “social units” (drawing the parallel with SEBI’s social impact fund framework) or accepted without units; grant funds to be excluded when computing FME fees; a written grant-acceptance and conflict-of-interest policy; separate accounting in audited financial statements with certification by the independent valuer; and unutilised grants to be returned to the contributor on winding up. Another asked for the cap itself to rise to 50%, arguing that development- and environment-focused themes naturally attract more grant than return-seeking capital, and citing the RBI’s draft partial credit enhancement framework, which proposed raising that limit from 20% to 50%. Others wanted grants to be creditable to a funded loss-reserve account that the fund could draw on when pre-defined triggers occur, and flagged a structural problem the draft did not address: foreign grant money runs into FCRA, and grants routed to for-profit social enterprises raise unanswered questions under FCRA and the Income-tax Act.
2. The junior ticket was too high
Commenters pressed from three directions: lower the junior/subordinate minimum from USD 2 million to USD 1 million for all investors (subject to an FME suitability assessment), because impact investors and family offices writing catalytic cheques commonly operate at that size; cut it further to USD 500,000, with USD 250,000 for accredited investors; and widen the accredited-investor definition to expressly include charitable non-profit organisations and private foundations, since junior capital is expected to come substantially from philanthropy.
3. Valuation mechanics would raise costs
The draft’s approach to class-wise NAV drew the most technical pushback. Fund administrators, commenters argued, run the distribution waterfall and compute NAV per class as a matter of course, while an independent valuer confirming NAV for every class would raise the cost of running a blended finance vehicle. Suggestions ranged from making the valuer’s NAV role permissive (“may”) where another independent party already computes NAV, to expressly allowing separate counterparties for NAV computation and securities valuation.
4. Evergreening protection needed teeth — and structures needed recognition
On the anti-evergreening clause, one commenter argued the draft only stopped an investee from using scheme money to repay a scheme investor, without requiring any diligence before investing; it proposed a pre-investment due-diligence duty modelled on SEBI’s circular of 8 October 2024 for AIFs. Another wanted the sponsor and manager expressly covered so the clause could not be sidestepped. Beyond this, commenters asked IFSCA to expressly recognise first-loss and guarantee structures, to permit grants to sit in loss reserves, to allow junior units to convert to senior units on disclosed NAV milestones, to extend tranching to fund-level debt on the CLO model, and to add scenario-based, stress-tested waterfall illustrations to scheme disclosures. One submission questioned the consultation’s framing itself, noting that Indian AIFs operate largely on a pro-rata, pari passu basis and that blended finance domestically remains constrained because differential instruments are available only to a narrow set of investors.
ESG-specific asks ran alongside: mandatory Sustainable Financing Frameworks validated by a second-party opinion, results-based SDG disclosure with objectives, KPIs and timelines instead of intent-based disclosure, a mandatory carve-out for climate adaptation and resilience, clarity on junior investors’ voting rights, and phase-out mechanisms so concessional capital withdraws as markets mature.
The Scoreboard: Consultation Draft vs Final Circular
IFSCA’s response confirms the proposals were modified on the strength of these comments and the Fund Management Advisory Committee’s recommendations. Comparing the October 2025 draft with the circular of 25 September 2026 shows where the modifications landed:
Reading the outcome: IFSCA gave way where the ask was about making blended structures workable — a near-50% grant ceiling and a complete grant rulebook — and held the line where the ask would have diluted investor-protection plumbing: ticket sizes for first-loss capital and independent valuation of each class.
What This Means for Fund Managers
Nothing in this publication changes the law — the differential distribution framework has been in force since 25 September 2026, and our detailed breakdown of the final circular is here: IFSCA Differential Distribution Framework for VC and Restricted Schemes. The value of the comments document is practical. FMEs structuring blended schemes now know how IFSCA reasoned its way to the final text: which flexibilities were deliberate (conversion of junior units, grant headroom up to 49%), and which pressure points IFSCA examined and consciously rejected (lower junior minimums, administrator-computed NAV). For anyone preparing representations or structuring first-loss capital in GIFT City, the published record also marks the open items — express recognition of first-loss and guarantee structures, loss-reserve treatment of grants, and CLO-style debt tranching were all raised and remain unaddressed in the framework as issued.
Frequently Asked Questions
What exactly has IFSCA published?
The comments and suggestions received from stakeholders on its consultation paper of 22 October 2025 on differential distribution in Restricted Schemes and Venture Capital Schemes, together with a short response recording that the proposals were modified based on the comments and the Fund Management Advisory Committee’s recommendations, and placed before the Authority on 24 July 2026. The commenters are not named in the document.
Does this publication change any rule?
No. The operative framework is the circular dated 25 September 2026, which is already in force. This document is the consultation record behind that circular.
What was the biggest change between the consultation draft and the final rules?
The grant ceiling for ESG schemes: 20% of corpus as proposed, 49% of corpus as finally notified. A detailed grant framework — social units, exclusion of grants from the FME’s fee base, separate accounting, and return of unutilised grants on winding up — was also written into the final rules.
Which industry demands did IFSCA reject?
Lower minimum investments for junior or subordinate units (the USD 2 million / USD 1 million thresholds stand), and moving class-wise NAV computation away from the independent valuer. Express codification of first-loss and guarantee structures and CLO-style debt tranching also did not make it into the final circular.
Who can use differential distribution?
FMEs launching Venture Capital Schemes or Restricted Schemes in the IFSC. Participation is optional; single-class schemes continue as before.
Can an ESG scheme in GIFT City accept foreign grants?
Yes, under the final framework, subject to compliance with the Foreign Contribution (Regulation) Act, 2010, to the extent applicable — a concern stakeholders had expressly flagged during the consultation.
Sources
- IFSCA — Public Comments on Consultation Paper on Regulatory Framework for Differential Distribution in Restricted Schemes and Venture Capital Schemes to Facilitate Blended Finance and Other Fund Structures (comments on the consultation paper issued 22 October 2025), published 19 October 2026.
- IFSCA — Circular F. No. IFSCA-DSF0SFHB/1/2025-Capital Markets dated 25 September 2026, Framework for Differential Distribution in Venture Capital Schemes and Restricted Schemes.
- IFSCA (Fund Management) Regulations, 2025 — Chapter III, Parts A and B; regulations 26, 27, 38 and 39.
This article is for information only and is not legal or investment advice. Stakeholder comments are summarised from IFSCA’s published document; the commenters are not identified in that document, and the summary does not attribute views to any named person or firm.
