BY ANANYASHREE JAISWAL AND SHUBHANJALI KUSHWAHA, FIFTH- YEAR STUDENTS AT GNLU, GANDHINAGAR
INTRODUCTION
Alternative Investment Funds (‘AIFs’) in the Gujarat International Finance Tec-City International Financial Services Centre (‘GIFT-IFSC’) have emerged as a preferred vehicle for cross-border capital flow into India, offering an environment designed to compete with offshore jurisdictions. The governance architecture of GIFT-IFSC is crucial for attracting capital, along with tax and regulatory incentives. At the heart of this architecture sits an entity called the fiduciary, which is responsible for independent oversight of fund operations and investor protection.
Independence is meaningful only if it is structurally protected from commercial overlap. In GIFT-IFSC, the same service groups acting as fiduciaries have, in some instances, simultaneously served as the fund administrator to the schemes it oversees. To address the issue of whether the watchdog can be a vendor, the International Financial Services Centres Authority (‘IFSCA’) issued a circular on 10th April, 2026 (‘the Circular’) prohibiting fiduciaries and their associates from providing services including that of fund administration, valuation, audit, and lending or financing services. The Circular is meant to resolve conflicts of interest. However, this piece argues that while the Circular resolves one problem, it leaves behind a cluster of structural, definitional, and market-level questions unanswered, raising the question of whether prohibition alone is sufficient governance.
STRUCTURAL ISSUE ADDRESSED BY THE CIRCULAR
The fund management framework of the GIFT-IFSC is governed by the IFSCA (Fund Management) Regulations, 2025 (‘FM Regulations’), which places the Fund Management Entities (‘FMEs’) and the fund managers at the centre of the operations. FMEs are entities that are registered with the IFSCA under the definition in Regulation 2(n) of the FM Regulations; whereas a fund manager is an individual who is appointed by FMEs to manage investments. The fiduciaries are meant to provide independent oversight over the FMEs. Regulation 17(5) of the FM Regulations mandates the fiduciaries to follow the Code of Conduct in Part B of the Third Schedule, which necessitates following high standards of service, due diligence, proper care, and independent professional judgment. They are, in other words, important for the independent oversight of the investor’s interest.
The problem that the Circular seeks to address is that the GIFT- IFSC, which is the same professional services group offering the trusteeship services, is also offering fund administration, valuation and other services. The issue arising from this is that when the same entity offers both fiduciary and trusteeship services, it could result in fiduciary governance being vitiated. This is now prohibited under Paragraph 3 of the Circular.
A CRITICAL EXAMINATION OF EXISTING FLAWS
The SEBI has, under Regulation 23(4) of the SEBI (Alternative Investment Funds) Regulations, 2012, made it a mandate that an independent valuer must carry out the valuation of investments. Further, such an independent valuer should not be an associate of the manager, sponsor or trustee of the AIF, in accordance with Chapter 22 (22.3.1) of the Master Circular for AIFs. This demonstrates that the regulator did not intend for the entity responsible for oversight to also have skin in the game, thus making the judgment of these independent overseers fair. Yet in extending this principle to the administrators, auditors and lenders, the execution of the Circular suffers from three significant gaps undermining its objective.
PART I: THE GAPS IN EXECUTION
- The Absence of a Positive Compliance Framework for Replacement Service Providers
The issue that lies in the present case is that the Circular merely prohibits without having a certain framework for governing it. Regulation 26 of the FM Regulations, for instance, requires that the valuation of the assets of a scheme be done by an independent service provider, such as a fund administrator, custodian or credit rating agency registered with the IFSCA. While the Circular strengthens independence by eliminating the fiduciary from the pool of eligible valuers, it fails to clarify the standards the replacement service provider is supposed to satisfy, or the mechanism through which the FMEs could ensure that the independent valuer is truly independent.
- The Ambiguous Scope of “Associate”
The most critical drafting issue in the circular is the use of the word “associate”. The prohibition covers the provision of services by the fiduciary entity either directly or through its associate. FM Regulations use the term “associate” in a broader sense, so as to cover entities linked by ownership, control, or common directorships. While the use of the word “associate” remains sound in principle, in practice, the extent of the scope of the word remains ambiguous when used in the context of multi-tiered financial groups.
For instance, stakeholders pointed out in IFSCA’s 2022 consultation paper on the draft FM Regulations that the 20% threshold in the “associate” definition varies from the 15% threshold under SEBI AIF Regulations. This was sought to cure the misalignment that could lead to the aforementioned uncertainty.
- Market Capacity Constraints and the Risk of Consolidation
Additionally, in 2024, there were 128 registered FMEs and 168 funds registered with IFSCA; however, professional trustee services are only provided by a handful of entities. The Circular fails to engage with the market structure vis-à-vis whether there are sufficient independent trustees to absorb the demand created by this circular. If a circular is unable to monetise through adjacent service revenues, risking consequences such as fewer reliable trustees. Accordingly, the Circular feels more reactive than systemic. It fails to address the lacuna created by the comprehensive fiduciary framework in GIFT-IFSC, including reporting obligations, the manner in which their independence can be demonstrated, and accountability mechanisms.
PART II: A COMPARATIVE LOOK AT THE EU’S AIFMD FRAMEWORK
Comparable jurisdictions, such as the European Union, have a more comprehensive approach. Under the EU approach, as part of the duty of an AIF Manager (‘AIFM’) to act fairly and honestly in the best interests of the AIF, they should ensure no extra fee/non-monetary benefit/commission is charged except by the AIF itself; otherwise, they are obligated to disclose such gains to investors, and such gains should be for the enhancement of the quality of services being provided. They are also required to maintain a written conflict-of-interest policy along with a procedure to be followed to prevent and manage such conflicts. The AIFM will also need to ensure that persons involved in conflict-of-interest business have a degree of independence proportionate to the size and activity of the AIFM. Authorised AIFMs are also required to record activities where a conflict-of-interest has arisen/may arise, and the senior management is required to review such records at least once a year.
None of this is to say that the Circular is without value. The Circular counters governance conflict in AIF trustees: a clash between their duty to oversee fund compliance and revenue ties to service providers that can cause overpowering of vendor interests to overpower the watchdog function of the trustee. It is indeed a step in the right direction for GIFT-IFSC’s appeal to global investors through strong principles-based regulatory governance. The authors only argue that the circular aims to take corrective steps, but stop early.
CONCLUSION: THE WORK THE CIRCULAR LEAVES UNDONE
The Circular takes an unambiguous position – a fiduciary’s watchdog role cannot coexist with commercial relationships that threaten its independence. However, the Circular’s value will remain under scrutiny till subsequent regulatory action closes the gaps it leaves. Meanwhile, three priorities stand out: First, IFSCA should issue definitional guidance on the scope of “associate”, with examples that address multi-jurisdictional group structures so that compliance is uniform and not dependent on interpretative discretion. Second, the Circular requires a positive framework, such as minimum qualification standards for replacement service providers, disclosure obligations at the time of appointment, and a certain mechanism through which the fiduciary affirms the independence of its successors. AIFMD’s requirement for a conflict-of-interest policy requires an authorised AIFM to take reasonable steps to identify conflicts of interest amongst itself, its managed AIFs and the investors or the persons linked to them. Third, IFSCA should proactively assess market capacity. With a small pool of professional trustees serving around 202 registered FMEs, structural consolidation risks undermining the very independence the circular seeks to protect. To bridge the gap, IFSCA can solve trustee bottlenecks by adopting AIFMD II’s framework and allowing conditional cross-border and third-party fiduciary oversight while maintaining strict functional segregation. A prohibition without a structural framework is, at best, a work in progress. The Circular has drawn the line; the task now is to build the road.
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