What Singapore must do to be a premier investment fund centre

This article was contributed and first published in Singapore Business Review on 20 February 2013.

Over the past decade, Southeast Asia has become an area of interest for many investment houses. The widening of the middle income class, outstanding talent and abundant natural resources have contributed to this growth.

What is of striking importance is that the region is not only being eyed as an investee destination but countries like Singapore, Hong Kong, Taiwan, and Japan have also firmed up their infrastructure to cater to this upswing.

The question now is, what should Singapore do, to be considered a premier investment-fund centre destination, comparing to the likes of Luxembourg and Dublin, among others.

In recent years, there has been an increasing trend towards setting up Singapore-domiciled investment vehicles.

This is primarily driven by the fact that Singapore offers a place where substantive fund management activities and investment vehicles can co-exist.

Singapore also boasts of having a large network of tax treaties that provides an additional sweetener. It has treaties with China, Australia, Indonesia and India, all of which are popular investment destinations.

These treaties have favourable provisions that help in reducing withholding and capital gains tax.

In a recent Fund Domicile Matrix report issued by PwC, Singapore rated very highly together with the other established investment fund jurisdictions in many aspects.

In addition to the tax treaty benefits, Singapore also offers an unparalleled location where fund managers, investment banks and capital introducers can mingle in a business friendly environment, a highly respected regulator who is pragmatic, world-class infrastructure for travel and internet coupled with a large selection of securities services providers and professional services firms.

Nevertheless, Singapore lacks a fundamental feature which prevents it from being called an “investment fund centre” in comparison to the likes of Luxembourg and Dublin.

Today, Singapore does not have an investment fund platform which caters to the specific needs of hedge funds, private equity, securitisation or cross border investment funds.

One of the primary criteria to access the double tax treaties is that the investment vehicle needs to be set up as a body corporate. The current regulatory framework in Singapore caters mainly to investment funds set up as a unit trust only, which cannot access the privileges offered in the double tax treaties.

Due to the existing lack of investment fund platforms, the current fund structures are set up in Singapore as trading subsidiaries with pooling outside of Singapore.

This will also in the medium term have limited potential for growth, primarily because the days of having anti avoidance provisions in tax treaties are not far and the only way to ensure compliance with the substance of the rules would be to have management of assets and pooling of investors in the same jurisdiction coupled with physical substance or presence.

Currently, the trading subsidiaries are typically set up as private limited companies which would have fixed capital. Typically, an investment fund should offer the ability to invest in and out of the structure by way of subscriptions and redemptions, thereby calling for the need to have an open-ended nature.

The Companies Act in Singapore at present requires that any redemption out of such companies would need a solvency test to be performed by the directors of the Company which if were to be performed frequently i.e. daily or even weekly, would prove to be an administrative burden on the management.

The Companies Act in Singapore also requires a company to declare dividends from profits and not capital. This again is not conducive, as in a typical investment fund structure, redemptions would be funded at the net asset value which incorporates accumulated profits and capital.

As a result, there is limited or rather no other option available in Singapore at present for frequent subscribing-redeeming structures i.e. an open ended investment company, apart from the collective investment scheme which again is set up for primarily trust purposes.

This is one of the reasons why most of the alternative investment funds today are set up as private limited companies in Singapore, with feeder funds in Cayman Islands.

There are several other downsides to setting up an investment vehicle in corporate form, e.g. the financial reporting framework in Singapore which is convergent to the International Financial Reporting Standards, is not most conducive to the investment fund industry as it could lead to financial instruments being classified as debt instead of equity which creates serious implications on the solvency test.

Another anomaly of such a reporting framework would be to consolidate the underlying portfolios if certain thresholds are met.

Most investment centres that have specific investment fund laws have a financial reporting framework tailored for the investment fund industry which rids itself of the anomalies of the international framework which is not built to be industry specific.

In reality, Singapore currently has an investment fund reporting framework known as the Recommended Accounting Practice 7 “Reporting Framework for Unit Trusts” (RAP 7) which has been revised in 2012 to eliminate some of these inconsistencies with the global investment fund reporting frameworks.

However, the RAP 7 is only applicable to unit trusts and any investment vehicle incorporated under the Companies Act would need to comply with Singapore Financial Reporting Standards.

Last but not the least, and what could be viewed as a deal breaker for most investment houses and investors would be that shareholder’s register and financial statements have to be filed with the accounting authority of Singapore (ACRA), which is available to the public through paid searches.
In the alternative investments world, privacy remains a key currency especially with regards to investor and investment portfolio information, and access to the fund financial statements and shareholders’ registers would be unacceptable.

International investors into alternative fund vehicles are also more familiar with corporate entity structures where a board of directors is present, rather than unit trust structures which requires a manager and a trustee, thus adding to more costs.

To come to par or even compete with investment centres like Luxembourg and Dublin, Singapore must be able to offer a variety of investment fund platforms beyond the current structures, such as open-ended companies, segregated portfolio companies and even segregated sub-funds.

To manage funds in Singapore, the Monetary Authority of Singapore (“MAS”) requires that the investment managers have physical substance in Singapore, and can avail themselves to the tax incentive schemes for investment funds.

This means the investment managers must be physically present in Singapore with the talent and infrastructure to manage the assets, which prevents Singapore from being labelled as a post-box investment subsidiary centre

As discussions around an Asian cross-border investment fund recognition regime start to take pace, Singapore should ensure that it has the bandwidth to allow alternative investment structures to fit both regulator and investor preferences, so that it stands a good chance of becoming the preferred centre to domicile and launch funds for Asian distribution.

So in a nutshell, what should Singapore do? The creation and introduction of a new investment fund law separate from the existing Companies Act or common law trust environment would be ideal.

This could be wrapped around either a trust or a company granting it variable capital structure, along with tax exemptions and free from all the above drawbacks emanating from existing trading subsidiary structures among other criteria and features.

If the above can be achieved, there is no reason that Singapore cannot be the Luxembourg or Dublin of Asia, with the added bonus of having substance of managers and other capital market players within its jurisdiction.