SEBI issues circular for alternative investment funds

Alternative Investment Funds follow guidelines by SEBI

The Securities and Exchange Board of India (SEBI) on 26 November 2018 issued a circular outlining the operating guidelines for alternative investment funds (AIFs) in the international financial services centre (IFSC). SEBI had issued the SEBI (International Financial Services Centre) Guidelines, 2015 (IFSC Guidelines) on 27 March 2015, where it outlined the broad framework for setting up an AIF in the IFSC.

The circular provides for:

Registration of alternative investment funds operating in the IFSC. Any fund incorporated in the IFSC in the form of a trust, company, limited liability partnership (LLP) or body corporate can register itself as an AIF in accordance with the provisions of SEBI (Alternative Investment Funds) Regulations, 2012, under the categories listed. It provides that the application for grant of a certificate should be made in accordance with the registration provisions under the AIF regulations, with a non-refundable application fee of US$1,500 (₹106,142). The circular also provides for the amount of the registration fee, scheme fee and re-registration fee.

Compliance requirements, conditions and restrictions. Any person specified under clause 22(1) of the IFSC Guidelines, which prescribes the conditions on investment, may invest in AIFs operating in the IFSC. Further, such AIF will be permitted to invest in securities: (a) listed in the IFSC; (b) issued by companies incorporated in IFSC; and (c) issued by companies belonging to a foreign jurisdiction.

Alternative Investment Funds have been permitted to set up in the IFSC to invest in India through the foreign venture capital investment or foreign direct investment (FDI) route (in accordance with the applicable FDI policy) in addition to the foreign portfolio investment route. The circular states that each scheme of the AIF is required to have a fund of at least US$3 million with a minimum ticket size of US$150,000. If the investors are employees, directors or managers of the AIF, the minimum ticket size is US$40,000.

The circular provides that the manager or sponsor of a Category I or Category II Alternative Investment Funds must have a continuing interest obligation of at least 2.5% of the fund of the AIF or US$750,000, whichever is lower; in case of a Category III Alternative Investment Funds, it must be 5% of the reserve or US$1.5 million, whichever is lower, provided that such interest should not be through the waiver of management fees. Additionally, an AIF set up in the IFSC may invest in units of other AIFs set up the same way and in India, in accordance with the terms of the AIF regulations.

Sponsors and managers of Alternative Investment Funds. The manager or sponsor of an existing AIF in India may act as a manager or sponsor of an AIF set up in the IFSC either by setting up a branch in the IFSC or incorporating a company or an LLP in the IFSC. We have also touched further on the subject of AIFs and the 5 key parameters to set up Alternative Investment Funds.

Custodian. The manager or sponsor of a Category I and Category II AIF must appoint a custodian registered with SEBI for the safekeeping of securities when the fund of the AIF exceeds US$70 million. However, a Category III AIF will be mandatorily required to appoint a custodian irrespective of the size of the fund.

Angel funds. The circular provides that an angel fund must have capital of at least US$750,000. With regard to the eligibility criteria for an investor, the circular states that an individual investor is required to have net tangible assets of at least US$300,000 excluding the value of their principal residence, while a body corporate is required to have a net worth of at least US$1.5 million. Additionally, an angel fund must accept an investment of at least US$40,000 from an angel investor up to a maximum period of five years.

The circular further provides that angel funds must invest in venture capital undertakings (VCUs) in India which have a turnover of less than US$3.75 million, in accordance with AIF regulations. Also, angel funds must only invest in VCUs that are not promoted, sponsored or related to an industrial group whose group turnover exceeds US$45 million. Investments by an angel fund in any VCU must not be less than US$40,000 and must not exceed US$1.5 million. The continuing interest obligation for the manager or sponsor of an angel fund must be 2.5% of the fund or US$80,000, whichever is lower, with such interest not being through the waiver of its management fees.

Miscellaneous. In addition to the abovementioned guidelines, all provisions of the AIF regulations and the guidelines and regulations under it, must apply to Alternative Investment Funds in the IFSC, their investors, sponsors, managers and other intermediaries, as the case may be, provided that para 2(B) of the SEBI circular dated 1 October 2015 governing overseas investments by AIFs does not apply to AIFs set up and operating in the IFSC. Also, such AIFs are required to report their activities in accordance with para 3.2 of the SEBI circular dated 29 July 2013, which provides for the operational, prudential and reporting norms for AIFs, and the reporting must be denominated in millions of US dollars.

The business law digest is compiled by Nishith Desai Associates (NDA). NDA is a research-based international law firm with offices in Mumbai, New Delhi, Bengaluru, Singapore, Silicon Valley, Munich and New York. It specializes in strategic legal, regulatory and tax advice coupled with industry expertise in an integrated manner.