The concept of variable capital companies (VCCs) was first introduced by the Minister of Finance in his budget speech for the period 2020 to 2021. The Minister discussed the need to enhance the competitiveness of the financial services sector by introducing new vehicles such as the VCC.

The Variable Capital Companies Act (Act) was passed by the National Assembly on 12 April 2022 and received the President’s assent on 14 April 2022. The Act is to come in force on a date to be fixed by proclamation.  

What are VCCs?

VCCs are a new type of vehicle which will complement the available type of funds structuring in Mauritius. A VCC permits setting up of Sub Funds (SFs) and Special Purpose Vehicles (SPVs), within the same entity, facilitating the segregation and ring-fencing of assets and liabilities of each of the sub entities.

Further, the Financial Services Commission (FSC) may approve the operation of a sub fund as a collective investment scheme or a closed-end fund. As such under one single entity, that of the VCC, fund managers are able to manage a collective investment scheme sub-fund and a closed-end sub-fund. There is no restriction on the number of sub-entities that can be created under the VCC structure, however creation of any sub-entity requires the prior approval of the FSC. 

A VCC, although governed by the Act, shall be incorporated as per the provisions of the Companies Act of Mauritius and is also required to comply with the same, save for the provisions of the Companies Act expressly excluded under the Act.

The Act further requires that the Financial Intelligence and Anti-Money Laundering Act of Mauritius be amended to include VCCs under the definition of ‘financial institutions’, and as such VCCs shall have to be fully compliant with the AML/CFT laws of the country.

Regulation of VCCs

• Sub entities – there is no limit on the number of sub-entities that can be created by a VCC under the Act. However, the creation of any sub-entity shall require the prior approval of the FSC. An SPV established by a VCC is not permitted to operate as a fund, instead it is required to operate as an ancillary vehicle to the VCC or a sub-fund of the VCC.
• Dividends – there are solvency test requirements to be satisfied under the Companies Act 2001 which shall not apply to VCCs. The board of directors of the VCC shall determine its solvency prior to distribution of dividends and the VCC may pay dividends out of its capital
• Disclosure – A VCC is required to inform any person it transacts with that it is a VCC, along with other disclosure requirements set out under the Act.
• Reduction of share capital – A VCC requires the authorisation of the Registrar of Companies of Mauritius to be able to reduce its share capital or that of any of its sub-entities.
• Legal proceedings – Any order or judgement in respect of a sub-entity shall be restricted to that sub-entity only and shall not apply to any other sub-entity of the VCC and/or the VCC itself.
• Record keeping – A VCC is required to maintain additional records in respect of each of its sub-entities in accordance with the Act. The records must sufficiently explain the transactions and financial position of the VCC and its sub-entities.
• Segregation of assets – Setting up a VCC provides the benefit of segregation of assets and liabilities of each of its sub-entities, and the Act provides that the assets of a particular sub-entity  cannot be used to discharge the liabilities of another sub-entity. Further, every asset attributable to a sub-entity can only be made available to the creditors of the VCC who are creditors in respect of that sub-entity, and as such will be protected from other creditors of the VCC, irrespective of whether a creditor is a statutory, regulatory, or government body.

Uses of a VCC

While the conventional business structures in Mauritius have proven to be effective, VCCs provide greater flexibility and efficiency by streamlining management and operations by way of a single entity.

They have been a tremendous success in Singapore, with approximately 160 VCCs being established in the first year of the introduction of the VCC framework in Singapore. VCCs are typically being used for both open ended and closed ended fund structures.

VCCs established in Mauritius provide a lot of flexibility for various kinds of investments and can be especially useful in setting up private equity businesses, open or close ended investment funds and special funds, such as hedge funds, and venture capital funds. 

VCCs may also be used for multi-family offices, which are currently being incorporated as protected cell companies (PCCs), as they provide greater flexibility in that the sub-funds may have a distinct legal personality, and the kind of services being provided by a VCC is not restricted by law.

PCCs and VCCs

The greatest distinction between the already existing PCCs and the new VCCs is that while a PCC is a structure similar to that of a VCC in the sense that it aims to segregate the assets and liabilities of its ‘cells’ from one another to create greater flexibility in terms of the operations of each cell, the sub-funds of a VCC may have a separate and distinct legal identity from that of the VCC.

Benefits of a VCC

While conventional business structures allow for a single fund or an umbrella fund consisting of multiple sub-funds to operate, a VCC offers a palette of additional features, including efficient management costs; streamlining management and operations in one entity comprising separate units; the ability to incorporate a collective investment scheme and a closed end fund within one structure; and flexibility of dividend distribution, taxation, variation of capital, and management.

If the constitution of a VCC so permits, the VCC can appoint different directors for each sub-entity, providing a flexible management structure. Further, there is no restriction on the kinds of activities that can be conducted by a VCC, as opposed to for example, a PCC, which can only conduct such activities as provided under the Protected Cell Companies Act 2000 of Mauritius. 

Conclusion

Mauritius is one of the two jurisdictions to now legislate this vehicle - Singapore being the only other jurisdiction to do so. With the introduction of the Act, Mauritius is increasing its competitiveness vis-à vis other jurisdictions and cementing its reputation as a robust and sound international financial centre.

Regulations in respect of fees to be paid under the Act and explanatory guidelines in respect of the nuances of operation and enforcement of the Act are yet to be issued by the FSC, but we are confident that the VCC structure will prove to be a revolutionary initiative in respect of the position of Mauritius in the global financial industry.

Written by Shianee Calcutteea, Partner; Sahirun Subadar, Associate and Vartika Sahai, Legal Executive at Bowmans Mauritius