IFSCA Allows Senior and Junior Unit Classes in GIFT City Funds

India's GIFT City regulator, the International Financial Services Centres Authority (IFSCA), has permitted venture capital schemes and restricted schemes to issue senior and junior unit classes, according to a client note by law firm Cyril Amarchand Mangaldas. The move introduces differential distribution waterfalls to funds domiciled in India's international financial centre.

Until now, fund structures at GIFT City faced constraints on how returns could be split across investors within a single scheme. The IFSCA's decision changes that. A scheme may now create separate classes of units — senior units and junior units — that rank differently when the fund distributes proceeds.

What does the change enable?

The headline mechanism is the senior/junior split. Under this structure, as Cyril Amarchand Mangaldas describes it:

• Senior units sit higher in the distribution waterfall, taking priority on returns up to an agreed threshold.
• Junior units rank below them, absorbing first losses in exchange for a larger share of residual upside once senior holders have been paid.

This is the same basic architecture used in structured credit and securitisation markets globally. It lets one fund serve investors with very different risk appetites — a pension-style capital pool that wants capped, priority cash flows, and a return-seeking pool willing to take equity-like risk.

Which funds are covered?

The relief applies to two categories of schemes recognized under the IFSCA framework:

• Venture capital schemes — vehicles investing in early-stage and growth companies.
• Restricted schemes — funds offered only to sophisticated or accredited investors, subject to lighter distribution rules than retail-facing products.

Both categories operate under IFSCA's fund management regulations at GIFT City, and both may now issue the differentiated unit classes.

Why does differential distribution matter?

Differential distribution is a fund-structuring tool more than a tax or accounting one. Its practical uses include:

• Risk tiering within a single vehicle. Managers no longer need to launch parallel funds for conservative and aggressive capital.
• Loss-absorption buffers. Junior holders effectively provide first-loss protection to senior holders, a structure common in blended-finance and development-capital deals.
• Alignment in venture strategies. In venture capital, where outcome distributions are heavily skewed, junior units can capture tail upside while senior units secure priority repayment.

Cyril Amarchand Mangaldas flags the development as significant for sponsors operating from IFSCA jurisdictions, positioning GIFT City funds closer to the structural flexibility available in established fund domiciles.

What comes next for GIFT City fund structuring?

The announcement fits IFSCA's broader push to make GIFT City a competitive fund domicile, with regulatory accommodations that mirror offshore fund centres. For fund managers, the immediate task is drafting unit-class terms — waterfall priorities, thresholds and transfer restrictions — that fit the new permission.

Fund sponsors weighing India-focused strategies now have one more reason to consider an IFSCA domicile over traditional offshore routes. How quickly managers adopt senior/junior structures will test whether GIFT City's regulatory flexibility translates into genuine fund inflows.