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IndiaRichieSanchetiandNandiniPathakNishithDesaiAssociates
Fundmanagement
1Howisfundmanagement regulatedinyourjurisdict ion?Whichauthorit ieshaveprimaryresponsibilit yforregulat ingfunds,fundmanagersandthosemarket ingfunds?
FundmanagementandmarketinginIndiaisregulatedbytheIndiansecuritiesmarketregulator,theSecuritiesandExchangeBoardofIndia(SEBI)andalso,inthecaseofoffshorefunds,bytheReserveBankofIndia(RBI).Theregulationsgoverningthevariousformsoffundactivityprimarilyincludethefollowing.
Onshorefunds
•Alternativeinvestmentfunds(AIFs)–theSEBI(AlternativeInvestmentFunds)Regulations,2012(theAIFRegulations).
•Mutualfunds–theSEBI(MutualFund)Regulations,1996(theMFRegulations).
•Collectiveinvestmentschemes–theSEBI(CollectiveInvestmentSchemes)Regulations1999(theCISRegulations).
•Portfoliomanagement–theSEBI(PortfolioManagers)Regulations1993(thePMSRegulations).
Offshorefunds
•Foreignportfolioinvestors–theSEBI(ForeignPortfolioInvestor)Regulations,2014(theFPIRegulations).
•Foreignventurecapitalinvestors–theSEBI(ForeignVentureCapitalInvestor)Regulations,2000(theFVCIRegulations).
•Foreignexchangemanagement–theRBIForeignExchangeManagement(TransferorissueofsecuritybyapersonresidentoutsideIndia)Regulations,2000(TISPRO).
2Isfundadminist rat ionregulatedinyourjurisdict ion?
TheAIFRegulationsandMFRegulationsrequirethefundsregisteredthereundertosubmittheirbooksofaccounts,whichhavetobeauditedannuallybyaqualifiedandindependentauditor.Additionally,theregulationsalsorequiresubmissionofperiodicreports(quarterlyandotherwise)toSEBI.
PursuanttotheFPIRegulations,SEBIhasthepowertoappointanauditortolookintothebooksandrecordsoftheforeignportfolioinvestor.
3What istheauthorisat ionorlicensingprocessforfunds?What arethekeyrequirementsthat applytomanagersandoperatorsofinvestment fundsinyourjurisdict ion?
TheAIFRegulations,MFRegulations,FPIRegulationsandFVCIRegulationsrequirefundstoregisterandsetouttherespectiveregistrationprocesses.Thekeyrequirementsthatapplytomanagersandoperatorsincludeaminimumprofessionalexperienceoffiveyearsinportfolioorinvestmentmanagement,meetingthe‘fitandproperperson’criteria,capitaladequacyrequirementsandinfrastructurerequirements.
4What istheterritorialscopeoffundregulat ion?Cananoverseasmanagerperformmanagement act ivit iesorprovideservicestoclientsinyourjurisdict ionwithout authorisat ion?
TherearedifferentregulatoryregimesfortheregulationoffundslocatedinIndiaandthosebasedoffshore.WhiletheAIFRegulationsdonotspecificallyprohibitanoverseasmanagerfromperformingmanagementactivitiesorprovidingservicestoclientsinIndia,suchamanagerwouldberequiredtosatisfytheadequacyrequirementsundertheAIFRegulations.Thesespecifythatthemanagershouldhavenecessaryinfrastructureandmanpowertodischargeitsactivitieseffectively.IncaseofaforeignmanagerwhoismanagingafundinIndia,SEBImaystatethatthemanagerdoesnothavethenecessaryinfrastructureonshoretodischargeitsactivitieseffectively.TheoverseasmanagermayberequiredundertheTISPRO,tosetupanofficeinIndiaforthepurposeofcarryingoutbusinessinIndia.
5Istheacquisit ionofacont rollingornon-cont rollingstakeinafundmanagerinyourjurisdict ionsubject topriorauthorisat ionbytheregulator?
TheAIFRegulationsrequirethatifthereisachangeincontrolofthemanagerorsponsoroftheAIFortheAIFitself,priorapprovaloftheregulator(ie,SEBI)mustbeobtained.TheincomingmanagerofanAIFmustalsosatisfytheadequacyrequirementssetoutintheAIFRegulations(seequestion27).
6Arethereanyregulatoryrest rict ionsonthest ructuringofthefundmanager’scompensat ionandprofit -sharingarrangements?
No,therearenoregulatoryrestrictionsonthestructuringofafundmanager ’scompensationandprofit-sharingarrangement.However,SEBIrequiresAIFstodisclosetheproposedfeestobeprovidedbytheAIFtothesponsorormanagertoSEBIalongwithdetailedtabularexamplesofhowfeeandotherchargesarecalculated,howthedistributionwaterfallisstructuredandhowcertainidentified‘keyman’eventsaretobehandled.
Fundmarketing
7Doesthemarket ingofinvestment fundsinyourjurisdict ionrequireauthorisat ion?
Therearenospecificauthorisationrequirementsinthisregard.However,marketingofaretailfundrequirestheintermediarytosatisfycertaincriteriasetoutinquestion14.Additionally,marketingofAIFshastobeonaprivateplacementbasisandcannotbemarketedtothepublic.
8What market ingact ivit iesrequireauthorisat ion?
Ifapublicplacementisbeingconsideredbyaninvestmentfund,thenpriorauthorisationfromSEBImayberequired.
9What istheterritorialscopeofyourregulat ion?Mayanoverseasent ityperformfundmarket ingact ivit iesinyourjurisdict ionwithout authorisat ion?
SEBImonitorsthesaleandplacementofIndiansecuritiesonly.Currently,IndiadoesnothaveanyspecificregulatoryregimegoverningthesaleofoffshorefundsonanunsolicitedbasistoIndianinvestors.Therefore,thesaleofsharesorunitsofanoffshorefundonanunsolicitedbasistoaresidentofIndiashouldnottriggermanager-licensingissuesorfund-registrationissuesunderthelawsofIndia.ItisadvisabletoengageinreversesolicitationformarketingactivitiesinIndia.
However,priorapprovalmustbesoughtfromtheRBIforoffshorefundsthataremarketedbyIndianbanksorforeignbanksinIndiatoIndianresidentseitherforthepurposesofsolicitingforeigncurrencydepositsinoverseasbranches,orforactingasagentsofoverseasmutualfundsoranyotherforeignfinancialservicescompany.
10Ifalocalent itymust beinvolvedinthefundmarket ingprocess,howisthisrulesat isfiedinpract ice?
IndianorforeignbanksmustobtainapprovalfromtheRBIbeforemarketinganoffshorefundinIndia.Nevertheless,themarketingentityshouldalwaysadheretotherulesofprivateplacementasanabundantmeasureofcaution.
Retailfunds
11What arethemainlegalvehiclesusedtoset uparetailfund?Howaretheyformed?
AspertheMFRegulations,onlytrustscanbeusedaslegalvehiclesforsettingupamutualfund.In1964,theUnitTrustofIndia(astatebodythatusedtobethesolevehicleforretailinvestmentsinIndiancapitalmarkets),launcheditsfirstopen-endedequityscheme,Unit64.Thisturnedouttobeoneofthemostpopularmutualfundschemesinthecountry.In1987,thegovernmentpermittedotherpublicsectorbanksandinsurancecompaniestopromotemutualfundschemes.In1993,SEBIintroducedtheMFRegulations,whichpavedthewayfortheentryofprivatesectorplayersinthemutualfundindustry.
Theentryofprivatesectormutualfundscreatedcompetitiveefficienciesintheindustryandhelpedinvestorstochoosefromschemeswithdifferentmaturityperiodsanddifferentrisk–returnprofiles.ThemutualfundindustryinIndiaishighlyregulatedbySEBIthroughtheMFRegulations.Inadditiontodomesticinvestors,thefollowingarepermittedtoinvestinmutualfundschemes
undertheMFRegulations:•FPIssubjecttotheirapplicableinvestmentlimits;
•non-residentIndians;and
•long-terminvestorssuchassovereignwealthfunds,multilateralagencies,endowmentfunds,insurancefunds,pensionfundsandforeigncentralbanksregisteredwithSEBI.
12What arethekeylawsandothersetsofrulesthat governretailfunds?
SEBIregulatesmutualfundsoperatinginIndiathroughtheMFRegulationsandrelatedrulesandcircularsissuedbyit(inparticular,theMasterCircularonMutualFunds).ThelatestMasterCircularonMutualFundswasissuedon1October2014.
13Must retailfundsbeauthorisedorlicensedtobeestablishedormarketedinyourjurisdict ion?
MutualfundsoperatinginIndiamustberegisteredwithSEBI.
14Whocanmarket retailfunds?Towhomcantheybemarketed?
Mutualfundsormutualfundunitsmaynotbemarketedorsoldbyanintermediaryunlesstheyhave:
•passedthecertificationexaminationconductedbytheAssociationofMutualFundsofIndia(AMFI);
•obtainedacertificationfromtheNationalInstituteofSecuritiesMarkets;and
•obtainedaemployeeuniqueidentificationnumber(EUIN)fromtheAMFIandanAMFIregistrationnumber.
Intermediariescanincludedistributors,agents,brokers,andsub-brokers.Anintermediarycanbeanindividualorabusinessentity.
Ifanintermediaryisalsoabrokerorsub-broker,registrationmustbeobtainedundertheSEBI(StockBrokerandSub-Broker)Regulations1992.Anintermediarythatisnotabrokerorsub-brokerandhasobtainedanAMFIcertificatedoesnotrequireanyadditionalregistrationwithSEBItosellormarketmutualfundunits.
15Arethereanyspecialrequirementsthat applytomanagersoroperatorsofretailfunds?
TheMFRegulationsprescribecertaincriteriafortheappointmentofanassetmanagementcompany(AMC)tomanagemutualfundsregisteredthereunder.TheMFRegulationsrequirethattheAMCberegisteredwithSEBIundertheMFRegulations.Additionally,theRegulationsimposeadequacyrequirementsregarding,amongothers,professionalexperienceandnetworthforapplicantstoobtainregistrationasAMCsbeforeAMCsareeligibletomanagemutualfunds.
Separately,theTISPROsetsoutcapitalisationrequirementsiftheAMChasforeigninvestment.Thecapitalisationrequirementsdiffer,dependinguponthepercentageofforeigninvestmentintheAMC:•upto51percentforeigninvestment:US$500,000,tobebroughtupfront;
•between51and75percentforeigninvestment:US$5million,tobebroughtupfront;and
•above75percentforeigninvestment:US$50million,ofwhichUS$7.5millionmustbebroughtupfrontandthebalancebroughtwithin24months.
16What aretheinvestment andborrowingrest rict ionsonretailfunds?
Mutualfundscaninvestinsecurities,moneymarketinstruments,privateplaceddebentures,securitiseddebtinstruments(eitherasset-backedormortgage-backedsecurities),goldorgold-relatedinstruments,realestateassets,infrastructuredebtinstrumentandassetsassetoutintheMFRegulations.
Mutualfundscannotborrow,excepttomeettemporaryliquiditydemandsforthepurposeofrepurchaseorredemptionofunits,orpaymentofinterestordividendstounit-holders.Theamountofanysuchborrowingshallnotexceed20percentofthenetassetsoftheschemeandthedurationoftheborrowingshallnotexceedsixmonths.However,underanexceptiontothegeneralborrowingrestrictions,amutualfundcanlendandborrowsecuritiesunderthespecificframeworkprescribedbySEBI.
17What isthetaxt reatment ofretailfunds?Areexempt ionsavailable?
Amutualfundisexemptfromincometaxatthefundlevelonincomeandgainsarisingtothefundfromitsinvestments.Dividendsdistributedbyamutualfund(otherthananequity-orientedfund)toitsunitholdersaretaxeddependingonthetypeofmutualfund.
18Must theport folioofassetsofaretailfundbeheldbyaseparatelocalcustodian?What regulat ionsareinplacetoprotect thefund’sassets?
AmutualfundmustplaceandmaintainitsassetswithacustodianregisteredwithSEBI.ThecustodiansaregovernedbytheSEBI(CustodianofSecurities)Regulations1996.
19What arethemaingovernancerequirementsforaretailfundformedinyourjurisdict ion?
Mutualfundsmustprovideinvestorswiththefollowingdocuments:
•theofferingdocument;
•astatementofaccounts,tobedeliveredwithin30daysfromtheclosureofanewfundoffering;and
•annualandsemi-annualreports.
Inadditiontotheabove,mutualfundsarealsosubjecttootherongoingdisclosurerequirements,whichmustbemadeviatheirwebsites,includingdisclosureof:
•theportfolio(alongwithitsinternationalsecuritiesidentificationnumber)asatthelastdayofthemonthforalltheirschemes.Thismustbedisplayedonafund’swebsiteonorbeforethe10thdayofthesucceedingmonth;
•anylargeholdings,whichshouldbedisclosedinthehalf-yearlyandannualresults;
•thetotalcommissionandexpensespaidtodistributorssatisfyingcertainconditions;
•anannualreportcontainingaccountsoftheassetmanagertotheretailfund;
•thecurriculavitaeofkeypersonnel;and
•detailsofinvestorcomplaintsreceivedbythefundfromallsourcesandvettedbytrusteesofthefund.
20What aretheperiodicreport ingrequirementsforretailfunds?
MutualfundsmustfilethefollowingreportswithSEBI:
•auditedannualfinancialstatements,includingthebalancesheetandprofit-and-lossaccount;
•unauditedaccounts,onasix-monthlybasis;
•quarterlystatementsofmovementsinthenetassetsofthescheme;and
•quarterlyportfoliostatements,includingchangesfromthepreviousperiod,foreachscheme.
21Canthemanageroroperatorplaceanyrest rict ionsontheissue,t ransferandredempt ionofinterestsinretailfunds?
Transferofinvestmentsfromoneschemetoanotherschemeinthesamemutualfundshallbeallowedonlyif:
•suchtransfersaredoneattheprevailingmarketpriceforquotedinstrumentsonspotbasis.‘Spotbasis’shallhavethesamemeaningasspecifiedbythestockexchangeforspottransactions;and
•thesecuritiessotransferredshallbeinconformitywiththeinvestmentobjectiveoftheschemetowhichsuchtransferhasbeenmade.
Non-retailpooledfunds
22What arethemainlegalvehiclesusedtoset upanon-retailfund?Howaretheyformed?
AnAIFinIndiacanbeset-upintheformofatrust,acompanyoralimitedliabilitypartnership(LLP).AlmostallAIFsinIndiaareformedastrustsbecausetheregulatoryframeworkgoverningtruststructuresinIndiaisstableandallowsthemanagementtowriteitsownstandardofgovernance.
23What arethekeylawsandothersetsofrulesthat governnon-retailfunds?
InadditiontotheAIFRegulations,SEBIhasalsointroducedarealestateinvestmenttrusts(REITs)regimeaswellasaninfrastructureinvestmenttrustregime(InvITs).TheSEBI(REITs)Regulations,2014andSEBI(InvITs)Regulations,2014werenotifiedon26September2014andhavebeeninforcesinceOctober2014.
24Must non-retailfundsbeauthorisedorlicensedtobeestablishedormarketedinyourjurisdict ion?
Thepoolingofnon-retailfundsisaregulatedactivityinIndiaandanAIFmustberegisteredwithSEBIundertheAIFRegulationsbeforebeginningitsactivitiesasanAIF.
However,theAIFRegulationsprescribeaminimuminvestmentamountof10millionrupees,forallprospectiveinvestorsofanAIFotherthanan‘angelfund’(a2.5millionrupeeminimumisavailableforthefund’semployees,directorsormanager).Theminimuminvestmentamountforanangelfundis2.5millionrupeesforthefirstthreeyearsandalsoaminimumsponsorcommitmentof50millionrupeesor2.5percentofthecorpusoftheAIF,whicheverislower.
25Whocanmarket non-retailfunds?Towhomcantheybemarketed?
AIFscanonlybemarketedbyprivateplacement,however,thereisnospecificrestrictionontheclassofinvestortowhomAIFscanbemarketedunderIndiansecuritieslaws.Nevertheless,ifapersontriggersthe‘investmentadviser ’provisionsintheSEBI(InvestmentAdvisers)Regulations2013(IARegulations),theymustregisterwithSEBIinaccordancewiththerelevantprovisions.ThemanagersofanAIFareexemptfromregistrationrequirementsundertheIARegulations.
26Doinvestor-protect ionrulesrest rict ownershipinnon-retailfundstocertainclassesofinvestor?
Therearenospecificrestrictions.However,theminimuminvestmentrequirementinahedgefundis10millionrupees(a2.5millionrupeeminimumisprovidedtoemployeesordirectorsofthefund).
27Arethereanyspecialrequirementsthat applytomanagersoroperatorsofnon-retailfunds?
ThroughtheAIFRegulations,SEBIimposesadequacyrequirementsforthecontinuinginvolvementofthesponsorormanagerintheAIFthroughrequirementscoveringsponsorcommitment,infrastructure,manpowerandexperienceofAIFmanagers.
28What isthetaxt reatment ofnon-retailfunds?Areanyexempt ionsavailable?
TheIndianFinanceMinister,ArunJaitleyannouncedthe2015UnionBudgetBillon28February2015.Inresponsetoalong-standingdemandoftheinvestmentfundsindustryinIndia,theFinanceMinisterhassoughttoextendpass-throughstatustoAIFsthatareregisteredasCategoryIAIFsorCategoryIIAIFs(together,‘investmentfunds’).BeforetheFinanceMinister ’sannouncement,pass-throughstatuswasonlyavailabletoCategoryIAIFsundertheventurecapitalfund(VCF)sub-categoryandVCFsthatwereregisteredundertheerstwhileSEBI(VentureCapitalFunds)Regulations,1996.
TheBillprovidesthatanyincomeaccruingorarisingto,orreceivedby,aunitholderofaninvestmentfundoutofinvestmentsmadeintheinvestmentfundshallbeliableforincometaxinthesamemannerasiftheinvestmentshadbeenmadedirectlybytheunitholder.Inotherwords,theincomeofaunitholderinaninvestmentfundwilltakethecharacteroftheincomethataccruesorarisesto,orisreceivedby,theinvestmentfund.TheBillalsoproposestoexempttheincomeofaninvestmentfundotherthanincomechargeable
underthetitle‘Profitsandgainsofbusinessorprofession’.ThememorandumtotheBillalsoannouncedthatincomereceivedbyinvestmentfundswouldbeexemptedfromthecollectionoftaxatsourcebyportfoliocompanies.
29Must theport folioofassetsofanon-retailfundbeheldbyaseparatelocalcustodian?What regulat ionsareinplacetoprotect thefund’sassets?
ThesponsorormanagerofanAIFundertheAIFRegulationsisrequiredtoappointacustodianregisteredwithSEBIforsafekeepingofitssecuritiesiftheAIFisaCategoryIIIAIForifthecorpusoftheAIFismorethan5billionrupees.
30What arethemaingovernancerequirementsforanon-retailfundformedinyourjurisdict ion?
ToregisterwithSEBIasanAIF,pursuanttotheAIFRegulations,afundmustfillinForm-A.ScheduleIIoftheAIFRegulationsprovidesfortheamounttobepaidasfeesforregistrationasanAIFundertherelevantcategory.TheAIFRegulationsalsoprovideforsubmissionofperiodicreportsconcerningtheactivitiesandreturnsoftheAIFtoSEBIandtheinvestors.Asspecifiedabove,theAIFRegulationsprovideforminimumexperienceofkeypersonnelofthemanager,requirethemanagerorsponsortohaveacontinuinginterestintheAIF,imposecertainrestrictionsonco-investmentbythemanagerinportfoliocompaniesoftheAIF,requirethemanagerorsponsortoactinafiduciarycapacitytowardsitsinvestorsanddiscloseanyconflicts,addressallinvestorcomplaints,maintainrecordsandensuretransparency.
ThemanagerofanAIFisalsorequiredtoestablishandimplementwrittenpoliciestoidentify,monitorandappropriatelymitigateconflictsofinterest.
31What aretheperiodicreport ingrequirementsfornon-retailfunds?
Theperiodicreportingrequirementsfornon-retailfundsareasfollows:
•AIFsarerequiredtoprovidereportstoinvestorsatleastonanannualbasis,within180daysfromtheyearendcontainingfinancialinformationoftheportfoliocompanies,materialrisksandtheirmanagementetc.
•ThemanagementfeesorfeesforthesponsorandanyfeeschargedtotheAIForanyportfoliocompanybyanassociateofthemanagerorsponsorhavetobeperiodicallydisclosedtotheinvestors.
•CategoryIIIAIFsarespecificallyrequiredtoprovidequarterlyreportstoinvestorswithin60daysofendofthequartercontainingfinancialinformationoftheportfoliocompanies,materialrisksandtheirmanagement,amongothers.
•Anysignificantchangeincontrolofthemanager,sponsororanyportfoliocompanyhastobeannouncedtotheinvestors.
•Anybreachofaprovisionoftheprivateplacementmemorandumoragreementmadewithanyinvestororanyotherfunddocuments,asandwhensuchbreachoccurs,mustbeannouncedtotheinvestors.
•Anyoperational,portfolioandtransactioninformationregardingtheinvestmentsoftheAIFmustbeperiodicallynotifiedtotheinvestors.
•Anymaterialliability,legalproceedings,inquiriesandactionsbylegalorregulatorybodies,asandwhentheymayarise,mustbenotifiedtotheAIF.
Separatelymanagedaccounts
32Howareseparatelymanagedaccountstypicallyst ructuredinyourjurisdict ion?
ThePMSRegulationsregulateseparatelymanagedaccountsinIndia.UnderthePMSRegulations,the
portfoliomanageradvises,directsorundertakesonbehalfofitsclientthemanagementoradministrationofaportfolioofsecuritiesorthefundsoftheclientpursuanttoacontractorarrangementwiththeclientandtheunderlyingassetsareheldbytheclientsdirectly.PortfoliomanagementservicesunderthePMSregulationscanbediscretionary(wheretheportfoliomanagerhasthediscretiontomakeinvestments)andnon-discretionary(wherethediscretionlieswiththeclients).FPIsregisteredundertheFPIRegulationsmayalsoavailthemselvesoftheservicesofaportfoliomanager.
SeparatelymanagedaccountscanalsobeanunregulatedactivityinIndiaifthemanagerisnotundertakingsuchactivitiesunderthePMSRegulations.Analternativeistoenterintoaninvestmentadvisoryagreementwiththeclientstoseparatelymanagetheiraccounts.However,thisapproachmaypotentiallytriggertherecentlynotifiedSEBI(InvestmentAdvisers)Regulations,2013(IARegulations)whereinaninvestmentadviserisrequiredtoregisterundertheIARegulationsforprovidinginvestmentadvisoryservicestoclients.
33What arethekeylegalissuestobedeterminedwhenst ructuringaseparatelymanagedaccount?
Thekeylegalissuespertainingtoaseparatelymanagedaccountmayincludethefollowing:
•IftheseparatelymanagedaccountsarenotcoveredunderthePMSregulations,thenasindicatedabove,aninvestmentadvisoryagreementcouldtriggertheIARegulations.
•Whilestructuringseparatelymanagedaccountsofforeigninvestors,itwouldbeimportanttoconsiderthetreatybenefitsthatcanbeavailedfromthedoubletaxationavoidancetreatybetweenIndiaandthejurisdictionwheresuchforeigninvestorsareresident.
•Iftheclientswhoseaccountsarebeingmanagedareforeigninvestors,andthemanagerisinIndia,thenthereisataxriskinvolvedconcerningpermanentestablishment.ThetaxauthoritiesmayclaimthatthepresenceofthemanagerinIndiaforforeigninvestorsisapermanentestablishmentofsuchinvestorsinIndia.Inthiscase,thetreatybenefitswillnotbeapplicabletotheforeigninvestorsandtheirgainsfromsuchseparatelymanagedaccountsmaybetaxedasbusinessprofitsarisinginIndia.
34Isthemanagement ormarket ingofseparatelymanagedaccountsregulatedinyourjurisdict ion?
ThemanagementofseparatelymanagedaccountsisregulatedbySEBIthroughthePMSRegulations.AportfoliomanagerlookingtomanageseparatelymanagedaccountsfallingunderthePMSRegulationsisrequiredtoseekregistrationundertheRegulations.ThisregimeisseparatefromtheAIFregimeandtheMFregime,themanagementforwhichisregulatedseparately.
General
35Arethereproposalsforfurtherregulat ionoffunds,fundmanagersormarketersoffundsinyourjurisdict ion?
InJanuary2015,SEBIproposedtoremovecertainrestrictionstoallowIndianassetmanagementcompaniesregisteredundertheMFRegulations(AMCs)basedinIndiatobeabletomanageFPIs
registeredaseitherCategoryIFPIsorCategoryIIFPIsundertheFPIRegulations.
Inthe2015UnionBudget,theFinanceMinisterproposedamendmentstoencouragefundmanagementactivitiesinIndia.Undertheproposal,anoffshorefundhavinganeligiblemanagerinIndiashouldnotcreateataxpresence(businessconnection)forthefundinIndiaunlesscertainobjectivedefinedparametershavebeenmet.UndercurrentIndiantreatiesanddomesticlaw,thepresenceofafundmanagerinIndiaincreases
theriskoftheoffshorefundconstitutingapermanentestablishment(PE)ortaxpresenceinIndiaandtherebybeingsubjecttotaxinIndia,totheextentattributabletothePE.Today,India-focusedoffshorefundsdealwiththisriskbyengagingmanagersoutsidethecountry,orengagingIndianresidentsonanadvisorybasis.TheFinanceMinister,inhisbudgetspeech,alsoannouncedthatforeigninvestmentwillbeallowed
inAIFs.
36Out lineanyspecificrequirementsforstock-exchangelist ingofretailandnon-retailfunds.
Retailfunds
UndertheMFregulations,allclosed-endedfunds(otherthananequity-linkedsavingsscheme)mustbelistedonarecognisedstockexchange.Therefore,thesecondarymarketprovidesanexitrouteforclosed-endedfunds.Inanopen-endedmutualfund,investorscanenterandexittheopen-endedmutualfundatanypointintime,atapricelinkedtothenetassetvalueofthefund.
Non-retailfunds
Closed-endedAIFscanbelistedonstockexchangesafterfinalcloseoftheAIForitsschemewithaminimumtradeableamountof10millionrupees.However,theAIFRegulationsprohibit‘angelfunds’fromlistingonanyrecognisedstockexchangeandnoAIFhasbeenlistedonastockexchangesofar.
37Isit possibletoredomicileanoverseasvehicleinyourjurisdict ion?
CurrentIndianlawsdonotprovideforredomicilinganoverseasvehicleinIndia.
38Arethereanyspecialrulesrelat ingtotheabilit yofforeigninvestorstoinvest infundsestablishedormanagedinyourjurisdict ionordomest icinvestorstoinvest infundsestablishedormanagedabroad?
ForforeigninvestorsinvestinginfundsestablishedormanagedinIndia,theexchangecontrolregulationsinIndiacurrentlydonotcontemplateorprovideforinvestmentinfundsregisteredunderthenewAIFRegulations.Inpractice,however,wehaveseenthatforeigninvestorshavebeenpermittedtoinvestinCategoryIandIIAIFs,afterobtainingpriorregulatoryapprovalsandsubjecttocertainconditionsandrestrictions.ForeignventurecapitalfundsregisteredundertheFVCIRegulationsarepermittedtoinvestintoVCFsthatwereregisteredwithSEBIundertheerstwhileSEBI(VentureCapitalFunds)Regulations,1996.
Inthe2015UnionBudget,theFinanceMinisterannouncedthatforeigninvestmentwillbeallowedinAIFsinthefuture(seequestion35).Althoughthisisapositivedevelopment,onehastowaitand
seehowthismeasurewillbeimplemented.ForIndianinvestorsinvestinginforeignfundsestablishedormanagedabroad,theliberalised
remittancescheme(LRS)allowsIndianresidentindividualstoundertakepermissiblecapitalandcurrentaccounttransactions.Atpresent,thelimitforoverseasinvestmentsbyresidentindividualsundertheLRSisUS$125,000perpersonbuttheRBIhasannouncedthatthelimitisbeingincreasedtoUS$250,000perperson.AcircularfromtheRBIisawaitedinthisregard.CompaniesincorporatedinIndiaorbodiescreatedunderanyactofParliamentorapartnership
firmregisteredundertheIndianPartnershipAct,1932oranLLPincorporatedundertheIndianLimitedLiabilityPartnershipAct,2008(bodycorporate),areallowedtomakeoverseasdirectinvestmentundereithertheautomaticrouteortheapprovalroutebywayofcontributiontothecapitalorsubscriptiontothememorandumofaforeignentity.Thecurrentoverseasdirectinvestmentlimitforabodycorporateundertheautomaticrouteis400percentofitsnetworthasperthebodycorporate’slastauditedbalancesheet.
UpdateandtrendsIf2014canbetakenasasignofthingstocome,Indiafocused-fundsareinforaninterestingyearin2015.However,fromaregulatoryviewpoint,thefocusonalternativeinvestmentshasbeenatitspeak.Followingtheglobalfinancialcrisis,therehasbeenagrowthepidemicinlawmakingfocusedonthediscretionarymanagementindustry.AmanagerofanAIFmustnowcontendwithgreatersupervisionandaccountabilitytoboththe
regulatorandtheinvestors.Whilebespoketermsaredesignedtomaintaininvestor-friendliness,giventherecentobservationsbyregulatorsinsophisticatedjurisdictions,sightmustnotbelostofthedisclosurenormsandfiduciary-drivenrulesthatarenowstatutorilymandated.Increasingparticipationbyhedgefundsinprivatemarkets
Theyear2014hasshownfundmanagersbeingnimbleinidentifyinginvestmentopportunities.High-growthcompaniesaretendingtostayprivatelonger.Venturecapitalandprivateequityparticipantsareseeingincreasesofmultiplesbeforethecompaniesgoforinitialpublicoffering(IPO).Aftersuchsignificantincreasesinfirms’valuations,thereistypicallynotmuchscopeforvaluecreationinpublicmarkets,whicharecurrentlyinanoverboughtphase(thoughyettotopout).Inotherwords,therehasbeenashiftinvalueaccretionfromthepublictotheprivatemarkets.This
hasledtoseveraltypicalpublicmarketinvestorslikehedgefundandmutualfundoperatorsshiftingfrompost-IPOtopre-IPOstrategieswheretheyreserveacertainallocationofafund’scorpusforprivatecompanyinvestments.Thisrequiressomestructuringnotonlyforentitiesconcernedbutalsotothefundterms,includingunderstandingsonlock-inrequirementsasthereisnoimmediateliquidityfromsuchunlisted(offthefloorofthestockexchange)opportunities.Operationalguidelinesforonshorefunds
FollowingcloselyinthefootstepsoftherecentobservationsbytheUSSecuritiesandExchange
Commissionthatthereareseveraldisconnectsbetween‘what[generalpartners]thinktheir[limitedpartners]knowandwhatLPsactuallyknow’,SEBIhasissuedacircularthatconsolidatesguidelinesondisclosuresandreportingthatAIFshavetocomplywith.Thecircular,interalia,requiresdetailedtabularexamplesofhowfeeandotherchargesare
calculatedandhowthedistributionwaterfallisstructured.Thecircularalsoprovidesspecificsonhowcertainidentifiedkey-maneventsaretobehandled.Thischangeiscriticalforfundmanagerstonote.Suchdisclosurereducesthespacefor‘views’beingtakenbyafundmanagerinagivenliquidityeventleadingtodistribution.Thisalsorequiresthatthefundmanagerengagesmorecloselywiththefundcounseltoarticulatethewaterfallinamannerthattheycanactuallyimplementwithadegreeofautomation.Anydeviationfromthewaterfallasillustratedinthefunddocumentscouldpotentiallybetakenupagainstthefundmanager.SyntheticparticipationinIndianmarkets
SEBIissuedacircularinNovember2014aligningtheconditionsforsubscriptionofoffshorederivativeinstruments(ODIs)tothoseapplicabletoFPIsundertheFPIRegulations.Theinvestmentrestrictionofkeepingaggregateinvestmentsinasingleportfoliocompany(a
companylistedonanyrecognisedstockexchangeinIndia)below10percentofthetotalissuedcapitalofsuchportfoliocompanyhasalsobeenmadeapplicabletoODIsubscribersbythecircular.Asaconsequenceofthecircular,ODIsubscriptions(syntheticcontractualarrangements)willbeclubbedtogetherwithFPIinvestmentsforreportingof‘ownership’,whereatleast50percentoftheultimatebeneficiariesintheFPIentityandtheODIsubscriberarethesame.IndianrupeevUSdollar-denominatedhurdles
Increasingly,foreignLPsareseekingdollar-denominatedhurdlesfromfundsthathaveaforeigncurrency-denominatedportfolio.ThisisanemergingtrendeveninthecaseofunifiedstructureswheretheforeignLPparticipatesina‘feeder ’thatsubstantiallyinvestsinanIndia-based‘master ’fund(thatseparatelypoolsIndianLPs).Insuchsituations,wherethedistributionwaterfalliscomputedattheonshoremasterlevel,itisincreasinglyexpectedbytheoffshoreLPsthattherupeehurdlematchupadollar-denominatedhurdleaswell.Caremustbetakenthatthereisapassiveoverlayofthedollarhurdlesoastoachieveeliminationoftheriskofcurrencyexchangevolatilityandnottoaddadditionalreturntotheportfolio.Incaseofanyshortfalls,thefundwouldbeexpectedtodistributeadditionalcashflowstoallinvestors(includingonshoreLPs)beforetheGPparticipationinallocationssothatbothonshoreandoffshorepoolsofinvestorsareonthesamefootingondistributions.Choiceofjurisdiction
AftertheOrganisationforEconomicCo-operationandDevelopmentissueditsreport‘ActionPlanonBaseErosionandProfitShifting’in2013,thereisanincreasedpressuretoensureobservanceofkeytaxprincipleslikedemonstratingsubstance,establishingtax-residentstatusandtransfer-pricingprinciples.WiththeimpendingintroductionoftheGeneralAnti-AvoidanceRule,whichallowsIndiantaxauthoritiestore-characterisetransactionsongroundsoflackofcommercialsubstanceamong
otherthings,thishaspromptedashiftwhilestructuringfundstowardconcentratingseveralaspectsconstituting‘commercialsubstance’inthesameentity.So,unlessspecificinvestorsrequirefeedervehiclesfortaxorregulatoryreasons,anattemptismadetopoolLPsinthesamevehiclethatinvestsintheforeignportfolio.Mauritius,theNetherlands,SingaporeandLuxembourgcontinuetobepopularwhilestructuringIndianfundsorfundswithanIndianallocation.
RichieSancheti [email protected]
NandiniPathak [email protected]
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