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A new legal entity for financial corporates to drive investments
FOLLOWING the public consultation on the proposed Singapore Variable Capital Company (S-VACC) framework, which closed on April 24 last year, the Variable Capital Company Bill had its first reading in Parliament on Monday.
Singapore is viewed as an asset and wealth management gateway to Asia-Pacific, with our robust regulatory framework, stable government and ease of doing business. In a fast-changing business landscape, there is increasing pressure for Singapore to continually innovate or risk being left behind. This much awaited legislation will help Singapore become a pre-eminent asset and wealth management centre in the region.
WHY THE S-VACC?
At present, Singapore has yet to reach its growth potential in the asset and wealth management industry, largely due to the lack of a suitable corporate legal entity structure.
Asset and wealth managers have increasingly looked at Singapore as a domicile of choice in the Eastern hemisphere. However, Singapore corporations have generally been found to be inflexible, with limited leeway to be used as investment funds. Currently, asset and wealth managers in Singapore have either been using a trust structure as an investment vehicle, or were compelled to use an alternative jurisdiction to host their investment fund. As a wealth planning jurisdiction of choice in the region, Singapore managers have also been known to use trust structures as part of estate planning. However, they would invariably have a corporate structure underneath the trust to hold the asset.
The Variable Capital Company - known within the financial service industry colloquially as S-VACC (Singapore Variable Capital Company) - will fill this void.
The bill will allow for a new legal entity form that is distinct from corporations set up under The Companies Act to be established. Under the bill, the S-VACC will be a legal entity that houses investment funds, giving it a corporate stature. This legal entity form is no different from corporate form funds found in global investment fund centres, such as Société d'investissement à capital variable in Luxembourg, Irish Collective Asset-management Vehicle in Ireland, the Open-Ended Investment Company in the United Kingdom, or Investment Company in the United States of America.
Investors and product developers at asset and wealth management firms are increasingly looking for solutions in the form of investment vehicles in domiciles which confer the most advantages for them. This encompasses considerations in terms of flexibility of structures, pragmatic regulations, quality resources, as well as strength of infrastructure, marketability and tax optimisation. Currently, Singapore ticks most of the boxes. With the introduction of the S-VACC and its flexible capital structure, Singapore's position as a top domicile of choice for the asset and wealth management industry will be further solidified. The introduction of S-VACC marks Singapore's latest investment fund innovation to continue to stay ahead of the curve amid increasing global competition for investment.
Furthermore, prior to the introduction of S-VACC, there's been an increasing trend towards setting up Singapore-domiciled investment vehicles as the city-state offers a place where substantive fund management activities and investment vehicles can co-exist. With an emphasis on delivering sufficient transparency and protection, the S-VACC further serves to help asset and wealth managers address concerns over rising pressures to demonstrate substance around their structures.
Other benefits of the S-VACC include giving much needed privacy to investors as it will also specifically prohibit public access to S-VACC financial statements and shareholders' registers.
Additionally, the "variable" capital structure of this new corporate vehicle lends itself for use within asset and wealth management, as it allows for redemptions and distributions without the need for solvency tests and corporate resolutions, ensuring the seamless movement of capital.
Another useful feature of the S-VACC is the ability to compartmentalise assets and liabilities, thereby allowing different cells or sub-funds to be used to manage different strategies, and/or to achieve different purposes. This umbrella feature makes the S-VACC vehicle economically feasible even when used by a family office, thereby dispensing with the use of multiple structures and vehicles. All these features ensure a best-in-class asset and wealth management domicile.
However, one has to keep in mind that the S-VACC is only available for use by fund managers who are licenced and regulated by the Monetary Authority of Singapore (MAS). This means that the fund manager would be required to be located in the country, which invariably helps to create substance in Singapore.
Being a new form of legal entity type, it has been a herculean undertaking by the various ministries in Singapore, spearheaded by the MAS. What is encouraging is that the Singapore Budget 2018 announcement has conferred tax clarity to the S-VACC, granting them similar tax incentives and treatment to current investment funds that are domiciled in Singapore. The MAS has also indicated that there will be further clarity on the taxation aspects of S-VACC later this year.
THE NEXT BIG THING
As in any economy, there is a direct correlation to job creation with every legal entity created. S-VACC was also conceived with the intent to contribute to the Singapore economy. For example, the S-VACC must operate from a Singapore-registered office, employ Singapore-based corporate secretaries, engage Singapore-based law firms, fund administrators, fund managers and auditors (regulated by the Acra), which all constitute the extended S-VACC ecosystem.
The financial services industry has been eagerly awaiting the introduction of the S-VACC. That day is finally here.
- The writer is the Asian Investment Fund Centre and Asset and Wealth Management Market Research Leader at PwC Singapore.