Investments in AIFs to get a boost on RBI notification

MUMBAI: Alternate Investment Funds may soon be flush with money after the Reserve Bank of India on Thursday notified that that non-resident Indians (NRIs) and foreign portfolio investors (FPIs) will be allowed to invest and trade in this category of funds.

AIFs are pooled-in investment vehicles for real estate, private equity and hedge funds. While NRIs were not allowed to invest in them, FPIs came in indirectly through various structures. There are around 200 AIFs registered with the Securities and Exchange Board of India (Sebi). But only 15-20 funds are active.

“The notification paves the way for foreign money to come into AIFs without FIPB (Foreign Investment Promotion Board) intervention and be treated as domestic capital subject to conditions,” said Tejesh Chitlangi, partner at IC Legal. “Also, downstream investment by an AIF shall be not regarded as foreign investment if the sponsor or the manager or the investment manager is Indian owned and controlled.”

The government in its 2015-16 budget had said that it would do away with different categories like FPIs and foreign direct investment for AIF investments with a view to making it easier for overseas investors to invest in these category of funds.

“RBI’s precise notification is a game changer for the AIF industry and $2-3 billion is expected to come from NRIs alone in the next couple of years,” said Akshay Gupta, Group Executive Head – Asset Management, Private Equity and Private Wealth, Indiabulls. “Till now most FPIs were using various structure to invest in AIFs.”

Under Sebi rules, AIFs can operate broadly in three categories. The Category-I AIFs are funds that get incentives from the government, Sebi or other regulators and include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds. The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. The Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds.

Note

This post first appeared in The Economic Times on Nov 20, 2015

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