FME Registration and Infrastructure Quiz

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Questions and Answers

What infrastructure is necessary for an FME to effectively operate in IFSC?

Only a minimum number of employees

High-end technology and unlimited office space

Temporary office space and limited equipment

Adequate office space, equipment, and manpower (correct)

What happens if the information provided to the Authority is misleading?

The FME will be given a warning only

The FME may lose its operational license

The FME is required to inform the Authority immediately (correct)

There are no repercussions

Under what conditions can an FME change its category of registration?

Without needing any permission

With the prior approval of the Authority (correct)

If it qualifies under new regulations

Automatically after a year of registration

What must an applicant do if the Authority requires further clarification?

Furnish the required information Signup and view all the answers

What can the Authority do before granting a certificate of registration?

Conduct an inspection of the applicant's office Signup and view all the answers

What is the timeframe given to an applicant to rectify deficiencies communicated by the Authority?

30 days Signup and view all the answers

Which of the following is a requirement for registration granted to a FME?

The FME must comply with the regulations Signup and view all the answers

What is required for an office designated for FME operations?

It must be accessible only to authorized personnel Signup and view all the answers

What percentage of the investors in a venture capital scheme must approve an investment in its associate?

75% Signup and view all the answers

What is the minimum percentage of Assets Under Management (AUM) that a venture capital scheme must invest in companies incorporated for less than ten years?

80% Signup and view all the answers

How often must the Net Asset Value (NAV) be disclosed to investors?

Yearly Signup and view all the answers

What portion of investor consent is required for any deviation in the leverage exercised by a venture capital scheme?

Two-thirds Signup and view all the answers

Who must ensure compliance with investment valuation norms in a venture capital scheme?

The FME and fiduciaries Signup and view all the answers

What is required in the placement memorandum regarding the maximum leverage by the scheme?

It must be disclosed Signup and view all the answers

What type of firm must value the assets of the scheme according to the investment valuation norms?

An independent third-party service provider Signup and view all the answers

Disclosures about the investment objective, fees, and risk management practices must be included in which document?

Placement Memorandum Signup and view all the answers

What is the maximum period for which the extension of tenure of close-ended schemes can be permitted?

Two years Signup and view all the answers

What type of entities can retail schemes be structured as under applicable laws of India?

Companies or Trusts Signup and view all the answers

Which of the following are permissible investments for a retail scheme?

Various financial instruments including stocks, derivatives, and debt securities Signup and view all the answers

Which type of scheme may be launched specifically for investing in sectors like social ventures and ESG?

Thematic schemes Signup and view all the answers

What is one condition for retail schemes investing in derivatives?

Derivatives can only be used for hedging purposes Signup and view all the answers

When can money collected under a retail scheme be temporarily invested in certificate of deposits?

Pending deployment of money Signup and view all the answers

What must be ensured when making an investment under the regulations?

Investments must follow the relevant scheme's investment objective and disclosures Signup and view all the answers

Which of the following types of schemes is focused on children’s education and retirement planning?

Solution-oriented schemes Signup and view all the answers

What percentage of AUM must be invested in Silver or bullion instruments for a Silver ETF?

90% Signup and view all the answers

What is the maximum allowable exposure to ETCDs in a Silver ETF?

10% Signup and view all the answers

How frequently must physical verification of gold underlying Gold ETF units be reported?

Half yearly Signup and view all the answers

What standard must a refiner comply with for physical Silver investment in Silver ETFs?

OECD Due Diligence Guidance Signup and view all the answers

Which of the following statements is true about actively managed ETFs?

The FME has discretion over the portfolio's composition. Signup and view all the answers

What must Silver ETFs be benchmarked against?

The price of spot Silver Signup and view all the answers

What is one requirement for physical Silver storage in a Silver ETF?

It must be stored with a vault registered with the Authority. Signup and view all the answers

What must actively managed ETFs disclose in their offer documents?

They are actively managed ETFs. Signup and view all the answers

What happens if the Applicant fails to rectify deficiencies to the satisfaction of the Authority within the specified time?

The Authority may refuse to grant registration and communicate the refusal. Signup and view all the answers

For how long is the certificate of registration of a FME valid?

For a period specified by the Authority unless suspended or cancelled. Signup and view all the answers

What must a FME do prior to filing a scheme document?

Appoint fiduciaries as specified by regulations. Signup and view all the answers

What are Venture Capital Schemes primarily focused on investing in?

Start-ups and emerging venture capital undertakings. Signup and view all the answers

Which of the following is included in the responsibilities of fiduciaries appointed by a FME?

To meet the fit and proper requirements specified in regulations. Signup and view all the answers

What approval is required for a FME intending to launch retail schemes?

Prior approval of the Authority to appoint fiduciaries. Signup and view all the answers

What does the term 'fiduciaries' collectively refer to in the context of FMEs?

Board of Directors, Designated Partners, and Trustees. Signup and view all the answers

What type of fund does a Venture Capital Scheme fall under?

Category I Alternative Investment Fund. Signup and view all the answers

Study Notes

Infrastructure and Licensing

The entity must have adequate office space, equipment, communication facilities, and manpower to manage its business.
Infrastructure requirements should be proportionate to the entity's size and operations in the IFSC.
The office space must be dedicated, secure, and only accessible to authorized personnel.
The regulator may request information about the entity, the fund's nature, fund management activities, or any relevant matters.
The entity must provide the required information and may be asked to appear before the regulator for a personal representation.
The regulator may conduct an inspection of the entity's office before granting a certificate of registration.
Upon receiving all information and being satisfied, the regulator may grant the entity a Certificate of Registration as an FME, subject to payment of the applicable registration fee.

Terms and Conditions of Registration

Registered FMEs must comply with all regulations and circulars.
FMEs must immediately inform the regulator if any information provided to the regulator is misleading or false.
FMEs must immediately inform the regulator of any material changes in information that impact their registration.
Registered FMEs cannot change their category without the regulator's prior approval.

Rejection of Application

If the regulator believes a registration should not be granted, it must communicate the reasons to the applicant within 30 days for them to rectify them.
If the applicant fails to address the deficiencies within the specified time, the regulator may refuse registration and provide reasons for the refusal.

Validity of Certificate

The certificate of registration for an FME is valid for the period the regulator specifies.
The certificate may be suspended or cancelled by the regulator or voluntarily surrendered by the FME and accepted by the regulator.

Constitution of the Fund

An FME may launch various schemes as outlined in the regulations.
Before launching a scheme, an FME must appoint appropriate fiduciaries, including the Board of Directors for companies, Designated Partners for LLPs, and Trustees or the Board for Trust companies.
All fiduciaries must meet the specified 'fit and proper' requirements to operate in the domain.
An FME intending to launch retail schemes requires prior approval from the regulator for the appointments of the fiduciaries.
The fiduciaries must adhere to the Code of Conduct and obligations stated in the regulations.

Venture Capital Schemes

Venture capital schemes are invested in unlisted securities of startups, emerging or early-stage ventures, primarily involved in new products, services, technology, intellectual property, new business models, or other schemes that invest in similar entities and shall include an angel fund.
Venture capital schemes are categorized as Category I Alternative Investment Funds and are subject to regulatory oversight.
Venture capital schemes can invest in related entities with prior approval from 75% investors by value.
These schemes must allocate at least 80% of their AUM to investee companies incorporated for less than 10 years or other venture capital schemes.

Disclosures to Investors

Venture capital schemes' placement memorandums must clearly disclose the investment objective, targeted investors, proposed corpus, investment style or strategy, methodology, proposed tenure, fees and expenses, risk management procedures, key management personnel, and other relevant details of the FME and the scheme.
FMEs and fiduciaries must comply with the specific disclosure requirements outlined by the regulator.
The FME should disclose the scheme's portfolio and net asset value (NAV) to investors at least annually.
These disclosures must be made within one month of the end of each financial year.
The FME and fiduciaries should inform investors about any other material disclosures deemed necessary.

Borrowing for Venture Capital Schemes

Venture capital schemes can borrow funds or leverage their investments, subject to specific conditions:
- The maximum permissible leverage, including how it's calculated, must be disclosed in the placement memorandum.
- Leveraging must align with the disclosures in the placement memorandum, and any deviations require a two-thirds majority vote by value of the investors.
- FMEs using leverage must establish a comprehensive risk management framework appropriate to the scheme's size, complexity, and risk profile.

Valuation for Venture Capital Schemes

FMEs and fiduciaries must comply with the investment valuation norms specified in the regulations.
Assets may be valued by a registered fund administrator, custodian, valuer, or any other entity the regulator deems fit to conduct valuations..

NAV Computation

An extension of the tenure of the close ended schemes may be permitted up to two (2) years subject to the approval of two-thirds (2/3rd) of the investors by value of their investment in the scheme and the approval of the Authority.
Retail schemes shall be constituted in IFSC as Company or Trust under the applicable laws of India.
Retail schemes may be launched for various investment strategies including for investment in Social Ventures, Infrastructure, ESG sectors (ESG schemes), specific sectors (sectoral schemes), certain themes such as infrastructure (thematic schemes), certain asset class (equity schemes, debt schemes, etc.) or a combination thereof or towards certain solution (retirement schemes, schemes for children education, etc.) subject to such terms and conditions as may be specified by the Authority.

Permissible Investments for Retail Schemes

Retail schemes can invest in the following:
- Securities listed or to be listed or traded on stock exchanges in the IFSC, India, or foreign jurisdictions.
- Securities issued by unlisted entities.
- Money market instruments.
- Debt securities.
- Securitized debt instruments, backed by assets or mortgages.
- Other investment schemes set up in the IFSC, India, or foreign jurisdictions, subject to appropriate disclosures.
- Derivatives, including commodity derivatives for hedging purposes, with relevant disclosures.
- Units of mutual funds and alternative investment funds in India and foreign jurisdictions.
- Other securities or financial instruments as specified by the regulator.
While deploying funds, FMEs can invest in certificates of deposit, liquid or money market schemes, money market instruments, or other securities or financial assets as specified by the regulator.

Gold ETFs

Gold ETFs must invest at least 90% of their AUM in gold or bullion instruments like depository receipts with underlying gold.
Physical gold must be stored in a regulator-approved vault.
Physical verification of the gold underlying the Gold ETF units must be performed by an independent agency and reported to the FME board and fiduciaries semi-annually.

Silver ETFs

Silver ETFs require 90% of their AUM to be invested in silver or bullion instruments, including depository receipts backed by silver, and exchange-traded commodity derivatives with silver as the underlying.
Silver ETF exposure to silver-based exchange-traded commodity derivatives should not surpass 10% of the scheme's AUM.
The 10% limit doesn't apply to Silver ETFs where the intention is to hold physical silver rather than rolling over the position to the next contract cycle.
Silver ETFs should track the spot price of silver on a recognized stock exchange or another benchmark price designated by the regulator, aiming for minimal tracking error.
FMEs must source silver from refiners who adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas.
Physical silver should be stored in a vault registered with the regulator.
An independent agency should conduct physical verification of the silver underpinning the Silver ETF units, with reports to the FME board and fiduciaries every six months.

Actively Managed ETFs

Actively managed ETFs allow the FME discretion to select the portfolio's composition within the stated investment objectives and policies.
Actively managed ETFs must disclose in their offer document and all advertising materials that they are actively managed ETFs and outline their approach to meeting their stated investment policy, including any intentions to outperform an index.

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Description

This quiz covers the essential requirements for registered Financial Market Entities (FMEs) regarding infrastructure and compliance with regulatory terms. Test your knowledge on office space, equipment, communication facilities, and the registration process for FMEs within the International Financial Services Centre (IFSC).