IFSCA's Framework for Differential Distribution in Venture Capital and Restricted Schemes
Quick Answer
Fund Management Entities (FMEs) operating in India's International Financial Services Centres (IFSCs) can now issue senior units and junior or subordinate units carrying differential distribution rights in Venture Capital Schemes and Restricted Schemes. The framework was issued by the International Financial Services Centres Authority (IFSCA) on September 25, 2026 vide Circular F. No. IFSCA-DSF0SFHB/1/2025-Capital Markets, under sections 12 and 13 of the IFSCA Act, 2019, read with sub-regulation (5) of regulation 23 and sub-regulation (6) of regulation 35 of the IFSCA (Fund Management) Regulations, 2025 ("FM Regulations"). Its purpose is to enable blended finance — the combination of concessional or philanthropic capital with commercial capital — and other layered fund structures.
Participation is optional: an FME is not required to issue multiple unit classes, and single-class schemes may continue to operate as before.
At a Glance
Why This Framework Exists
Blended finance combines concessional or philanthropic capital with commercial capital to fund projects that are socially desirable but not always commercially viable on their own. The circular notes that an Expert Committee on Sustainable Finance constituted by IFSCA had recommended enabling such structures at IFSC to attract concessional financing from Multilateral Development Banks and Development Financial Institutions, reducing the risk borne by private and commercial investors. IFSCA also records that it received representations from industry associations seeking permission to issue multiple classes of units so that schemes for sophisticated investors could match differing risk-return appetites.
Who Is Affected?
The Circular applies to FMEs launching Venture Capital Schemes (Part A of Chapter III of the FM Regulations) or Restricted Schemes (Part B), where the scheme issues multiple classes of units — senior units, and junior or subordinate units — carrying differential distribution rights. Schemes meeting this description are termed "Eligible Schemes" in the Circular. FMEs running single-class schemes without differential distribution rights are outside the scope of this particular framework.
Senior units sit at the top of the repayment/loss-absorption order — they get paid first and absorb losses last. Junior (or subordinate) units sit below them, absorbing losses first and getting paid after senior investors are satisfied. This layering is what lets a fund blend concessional capital (which accepts more risk or lower returns) with commercial capital (which wants senior protection).
Structure of Unit Classes
An Eligible Scheme may issue only one class of senior units; any additional classes must be categorised as junior or subordinate units. Senior units allotted to different investors cannot differ in terms of risk, priority of returns, or loss absorption — though they may differ in fees, currency, and other operational aspects. Junior or subordinate units may be converted into a superior class of units, but only if the conversion milestones, the methodology for computing them, triggers, formulae, and conditions are expressly disclosed in the scheme's Placement Memorandum (PPM).
How Differential Distribution Can Work
Investors holding junior or subordinate units may, in any combination, agree to:
- bear portfolio losses in excess of their pro-rata share;
- accept a lower financial return than their pro-rata share;
- accept zero financial returns from their investment; or
- provide a grant to an ESG Scheme, subject to the grant conditions set out below.
Disclosure Requirements in the PPM
The PPM of an Eligible Scheme must adequately and prominently disclose the multiple classes of units and the distribution rights attached to each — covering ongoing distributions, redemption, and winding up. This disclosure must be supplemented with tabular examples illustrating the distribution waterfall under different scenarios, including scenarios involving loss of capital to junior or subordinate unit holders. The PPM must also disclose the specific risks arising from the layered structure for each class, and — where the FME or its associates invest under regulation 28 or regulation 40 — the class of units to be allotted to that investment.
Additional Conditions for ESG Schemes
Eligible Schemes that are filed with IFSCA as ESG Schemes (under the Circular "Disclosures by Fund Management Entities for Environmental, Social or Governance (ESG) Schemes," dated January 18, 2023) must additionally disclose in the PPM how the scheme's investment strategy aligns with one or more UN Sustainable Development Goals, along with the rationale. These schemes may accept grant funding, subject to the following:
Minimum Investment Amount
The minimum investment for an investor subscribing to junior or subordinate units of an Eligible Scheme is USD 2 million. This is reduced to USD 1 million for an "Accredited Investor" — defined by reference to clauses 1(c), 1(d), 1(e) and 1(f) of IFSCA's "Accredited Investors in IFSC" Circular dated January 25, 2024. The minimum investment limit does not apply to grants.
Other Conditions FMEs and KMPs Must Satisfy
The FME and Key Managerial Personnel of an Eligible Scheme offering differential distribution must undertake due diligence to ensure:
- Debt instruments funded by the scheme are not used, directly or indirectly, by the investee company to discharge existing debt owed to (i) investors regulated by a financial sector regulator (such as banks, finance companies, or insurance companies) or their associates, or (ii) the FME or its associates — unless each such investor's contribution, together with its associates, does not exceed 20% of the scheme's corpus.
- The scheme does not facilitate circumvention of any law, including directions of the Government of India, IFSCA, or other financial sector regulators.
- NAV for each class of units is computed by an independent valuer in accordance with regulations 26, 27, 38 and 39 of the FM Regulations, factoring in the PPM disclosures and the scheme's documented NAV methodology.
Compliance Checklist
Frequently Asked Questions
What did IFSCA introduce in this Circular?
A detailed operating framework allowing FMEs to issue senior and junior/subordinate units with differential distribution rights in Venture Capital Schemes and Restricted Schemes.
When did the framework take effect?
Immediately, from September 25, 2026, the date of the Circular. No transition period is specified.
Which schemes does it apply to?
Venture Capital Schemes and Restricted Schemes launched under Parts A and B of Chapter III of the FM Regulations that issue multiple unit classes with differential distribution rights.
What is the minimum investment for junior or subordinate units?
USD 2 million generally, reduced to USD 1 million for Accredited Investors as defined under IFSCA's January 25, 2024 circular. No minimum applies to grants.
How much can an ESG Scheme raise through grants?
Up to 49% of the scheme's corpus, which for this purpose includes both grant and non-grant commitments.
Can senior units differ from one another?
Not in risk, return priority, or loss absorption. They may differ only in fees, currency, and other operational terms.
Can junior units convert into senior units?
Yes, but only if the conversion milestones, computation methodology, triggers, formulae and conditions are expressly disclosed in the PPM.
Who must compute the NAV for each unit class?
An independent valuer, applying regulations 26, 27, 38 and 39 of the FM Regulations along with the scheme's PPM disclosures and documented NAV process.
Document: Circular on "Framework for differential distribution in Venture Capital Schemes and Restricted Schemes to facilitate blended finance and other fund structures." Issuing authority: International Financial Services Centres Authority (IFSCA), Department of Capital Markets. Reference: F. No. IFSCA-DSF0SFHB/1/2025-Capital Markets. Date: September 25, 2026. Signatory: Pavan Shah, Chief General Manager. Available at www.ifsca.gov.in.
This article is for informational and educational purposes only and does not constitute legal or regulatory advice. Readers should verify the applicable primary regulatory source before taking action.
