Mr Speaker sir, the Variable Capital Companies Bill aims to create another option for fund managers for structuring investment funds, besides traditional entity models such as unit trusts and investment companies. In so doing, it aims to enhance the competitiveness of Singapore as a fund management hub.
For example, a Singapore Variable Capital Company or VCC will be able to issue and redeem shares without shareholders’ approval, enabling investors to exit their investments in the investment fund when they wish to, and pay dividends using capital. Another way of looking at this is that the capital of a VCC will always be equal to its net assets, offering flexibility in the distribution and reduction of capital. This is in contrast to the company structure that has restrictions on capital reduction and can only pay dividends out of profits.
The VCC will also allow for a wider variety of accounting standards to be used in preparing financial statements, which may attract more global funds to be domiciled in Singapore. VCCs will be able to use International Financial Reporting Standards and US Generally Accepted Accounting Principles, in addition to Singapore accounting standards and recommended accounting principles.
The Bill represents a step in the right direction and I do not oppose it. I do, however, pose the following questions and requests for clarification.
Firstly, it would appear that VCCs would be allowed to offer non-traditional strategies to more sophisticated investors, such as accredited investors, but will VCCs be allowed to offer products to retail investors if they pursue mutual fund-type strategies? If so, what safeguards would protect retail investors from the risk that the fund manager would deplete capital by paying dividends from capital rather than profits, a trend that has not been unknown in other jurisdictions that allow VCCs?
No doubt retail investors would receive explanations about the nature of these funds and they would have visibility of a declining net asset value (NAV), and it could thus be left to market forces. But would regulations impose a duty of care on VCC fund managers to explain this possibility to retail investors?
Secondly the VCC consultation paper did not treat the issue of tax in great detail. The MAS consultation paper issued in 2017 stated:
“MAS recognises that tax treatment is one of the considerations for deciding on the domiciliation and management of funds. In this regard, MAS is studying the tax regime for S-VACCs, including exploring the feasibility of extending the current fund vehicle tax schemes to S-VACCs, and welcomes feedback on the VCC tax regime.”
I would like to ask if VCCs would be eligible to receive the current government tax incentives available to investment companies. For example, will VCCs be eligible for Singapore fund tax incentive schemes currently provided for under sections 13R, 13X and 13Y of the Income Tax Act and the Financial Sector Incentive scheme? Another example: would stamp duty be imposed on transfers of shares in VCCs?