Mauritius: Introduction of variable capital companies

Mauritius has recently introduced a new type of corporate vehicle - the variable capital company (VCC).

The Minister of Finance first introduced the concept of VCCs in his budget speech for the period 2020 to 2021, where he also discussed the need to enhance the competitiveness of the country’s financial services sector by introducing new vehicles such as the VCC.

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

What are VCCs?

VCCs complement the available types of fund structures in Mauritius by enabling the setting up of Sub Funds (SFs) and Special Purpose Vehicles (SPVs) within the same entity. This facilitates the segregation and ring-fencing of assets and liabilities of each of the sub-entities.

VCCs will be incorporated in the same manner as other companies incorporated under the Companies Act 2001 of Mauritius, and governed predominantly by the act. Provisions of the Companies Act will apply to VCCs only to the extent permitted by the act. VCCs will also be required to comply with the AML/CFT laws of Mauritius pursuant to their categorisation as a ‘financial institution’ in accordance with the Financial Intelligence and Anti-Money Laundering Act.

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 will require the prior approval of the Financial Services Commission of Mauritius (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 as a SF of the VCC. Further, each sub-entity created by a VCC must have the same registered address as that of its VCC and the same directors unless otherwise provided under the constitution of the VCC.

·        Dividends: the solvency test requirements to be satisfied under the Companies Act 2001 will not apply to VCCs. The board of directors of the VCC will determine its solvency prior to the 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.

·        Share Capital: A VCC may issue shares in a sub-entity or its own share capital. However, any proceeds from the issuance of shares in a sub-entity of the VCC will only be considered as assets for that particular sub-entity.

·        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 will be restricted to that sub-entity only and will 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 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. 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. As such assets of one sub-entity are protected from other creditors of the VCC, irrespective of whether a creditor is a statutory, regulatory, or government body.

·        Cross-investment: Where permitted by the constitution of a VCC, a sub-entity of such VCC (Investing SE) may invest in another sub-entity of such VCC (Invested SE), but the Invested SE is not permitted under any circumstances to invest back into the Investing SE.

Uses and benefits of a VCC

VCCs provide greater flexibility and efficiency by streamlining the 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. They are typically being used for both open ended and closed ended fund structures.

VCCs in Mauritius will 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). They provide greater flexibility in that the SFs may each have a distinct legal personality and the kind of services being provided by a VCC is not restricted by law.

Other than the efficient management of costs and streamlining of management and operations in one entity comprising separate units, VCCs also offer flexibility in respect of dividend distribution, taxation, variation of capital and management.

Further, the FSC may approve the operation of an SF as a collective investment scheme or a closed end fund. As such, fund managers will now be able to manage a collective investment scheme SF and a closed end SF under one single entity.

A VCC may appoint different directors for each sub-entity where permitted by its constitution, thereby providing a diverse and flexible management structure. Further, VCCs are permitted to conduct any activity as its business as opposed to a PCC which may only conduct such activities as provided under the Protected Cell Companies Act 2000 of Mauritius.

PCCs and VCCs

PCCs have been a part of the corporate regime of Mauritius for over two decades now. They are a structure similar to that of VCCs in the sense that they also aim to segregate the assets and liabilities of their ‘cells’ from one another to create greater flexibility in terms of the operations of each cell. The cells of a PCC are therefore akin to the SFs of a VCC that are created to segregate the assets of that fund from the others.

However, a major distinction between the already existing PCCs and the more advanced VCCs is that while both structures aim to segregate the assets and liabilities of their respective sub-entities, the SFs of a VCC may have a separate and distinct legal identity from that of the VCC.

Further, each sub-entity of a VCC may be involved in a distinct business activity, but the cells of a PCC cannot conduct a business activity different from that in respect of which the PCC is licensed and which it generally conducts.

Conclusion

Singapore is the only jurisdiction to legislate VCCs until now. With the introduction of the act, Mauritius has also entered the modern financial market and is increasing its competitiveness vis-à vis other jurisdictions.

We expect the FSC to issue regulations in respect of fees to be paid under the act and explanatory guidelines in respect of the nuances of the operation and enforcement of the act. However, we remain confident that the VCC structure will prove to be a revolutionary initiative for Mauritius and cement its reputation as a reliable and sound international financial centre.

Shianee Calcutteea is a Partner, Sahirun Subadar is an Associate, and Vartika Sahai is Legal Executive at Bowmans Mauritius