SEBI issues operating guidelines for Alternative Investment Funds in International Financial Service

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SEBI issues operating guidelines for Alternative Investment Funds in International Financial Services Centres
04 December 2018

Introduction

The Securities Exchange Board of India (SEBI) through a circular dated 26 November 2018 has issued operating guidelines (AIF Guidelines) for Alternative Investment Funds (AIF) in International Financial Services Centres (IFSC).

The AIF Guidelines have been issued to provide greater clarity for setting up AIF in IFSC.
Earlier, the SEBI through a notification dated 27 March 2015 had issued SEBI (International Financial Services Centre) Guidelines, 2015 (IFSC Guidelines) for facilitating and regulating financial services relating to securities market in an IFSC set up under Section 18(1) of Special Economic Zones, 2005. The GIFT i.e., Gujarat International Finance Tec-City has been set up as India’s first IFSC.

The IFSC Guidelines, amongst others, provided for a broad framework for setting up an AIF in IFSC and the basic conditions for investment in AIF and investment by AIF, set up in IFSC.

The IFSC Guidelines further stated that the requirements/conditions for (a) appointment of trustee, custodian, manager, etc.; and (b) raising of funds in foreign currency such as minimum investment amount, minimum corpus of fund, disclosures and investments conditions, etc., would be specified by SEBI. Therefore, pursuant to this, the SEBI has now issued the AIF Guidelines to specify in detail the conditions, restrictions and compliance requirements for investments relating to AIF set up in IFSC.

AIF Guidelines

Some of the key issues addressed in the AIF Guidelines are set out below:
Registration requirement: The AIF Guidelines state that any fund established/incorporated in IFSC in the form of trust, company, limited liability partnership or body corporate can register itself as an AIF under the provisions of SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations).

Conditions for investment: Earlier an AIF operating in IFSC was permitted to invest in India only through the foreign portfolio investor (FPI) route. The SEBI, through the AIF Guidelines, has now amended this requirement.

AIFs operating in IFSC can now, in addition to the FPI route, invest in India through the foreign venture capital investor route or the foreign direct investment route.

Corpus of each scheme of AIF: Each scheme of AIF must have a corpus (i.e., the total amount of funds committed by investors to the fund) of at least US$3,000,000.

Minimum investment amount in AIF: An eligible investor investing in AIF should invest at least US$150,000. Further, for investors who are employees or directors of the AIF or employees or directors of the manager, the minimum value of investment should be US$40,000.

Continuing interest of manager or sponsor in AIF: The manager or sponsor of Category I and Category II AIFs must have a continuing interest of not less than 2.5% of the corpus or US$750,000, whichever is lower, in the form of investment in the AIF.

Further, for Category III AIF, the continuing interest must not be less than 5% of the corpus or US$1,500,000, whichever is lower.

Sponsors and managers of AIF: A sponsor/manager of an existing AIF may act as a sponsor/manager either by (a) setting up a branch in the IFSC, or (b) incorporating a company or limited liability partnership in IFSC.

Further, for AIF which are yet to be set up in IFSC, the sponsor/manger can act as a sponsor/manager only by way of incorporating a company or limited liability partnership and not by way of setting up a branch in the IFSC.

Requirement for appointment of custodian of AIF: The sponsor/manager of a Category I and II AIF must appoint a custodian registered with the SEBI if the corpus of the AIF exceeds US$7,000,000.

Further, all Category III AIF should appoint a custodian irrespective of the amount of corpus.

Requirement for investment in angel funds: An angel fund (i.e., a sub-category of a venture capital fund) must have a corpus of at least US$750,000.

An angel investor can invest in an angel fund set up in IFSC provided it satisfies the following conditions:

  • The individual angel investor should have net tangible assets of at least US$300,000 (excluding the value of principal residence).
  • A body corporate should have a net worth of at least US$1,500,000.

Further, the manager or sponsor must have a continuing interest in the angel fund of not less than 2.5% of the corpus or US$80,000, whichever is lesser.

Requirement for investment by angel funds: Angel funds can invest in venture capital undertakings (VCU) in India having a turnover which is less than US$3,750,000. Further, such an investment cannot be less than US$40,000 and cannot exceed US$1,500,000.

Applicability of AIF Regulations: The AIF Guidelines specifically state that all provisions of the AIF Regulations and guidelines issued thereunder will apply to an AIF operating in IFSC (including the investors, sponsors and managers) except the conditions relating to overseas investment by AIF

Conclusion

The AIF Guidelines provide the much-needed clarity on the registration, compliance requirements and investment restrictions relating to AIFs operating in IFSC.

The decision to permit AIFs to make investment through the foreign direct investment route and foreign venture capital investor route, will assist in making AIFs more attractive to investors.