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SEBI Spares AIFs Dollar 20m FDI Floor

MONEY MATTERS Markets regulator clears the air on sponsors and managers of alternative investment funds, saying they come under Sebi regulations and are exempt from FDI rule
Local business houses and financial services groups will find it easier to rope in foreign partners to carry out fund management activities in India with the capital market regulator, Sebi, clearing the fog caused by a new rule.
The Securities and Exchange Board of India has spelt out that sponsors and managers of alternative investment funds, or AIFs, are covered by its regulations — a stand that will spare the sponsors and managers of these funds from a recent government rule that foreign direct investment (FDI) in unregulated financial services cannot be less than Dollar 20 million.
AIFs are money pooling vehicles for venture capital funds, private equity houses, real estate and hedge funds, besides others. Sebi’s AIF regulations issued in 2012 provide a framework for registering funds but not sponsors/managers — which may be entities that are not currently regulated by any of the financial services regulators. However, it made little difference.
This changed with a mid-April notification, which made things difficult for companies, institutions and fund managers planning to tie-up with global partners for AIFs. According to the finance ministry release, minimum FDI for an ‘unregulated fund-based’ service — asset or portfolio management — was Dollar 20 million while the floor FDI for an ‘unregulated non-fund based service’ (such as investment advisor, forex broking etc) was Dollar 2 million.
The rule virtually shut the doors for FDI to most AIFs as very few foreign investor, no matter how large, would bring in as much as $20 million in the manager/sponsor entity. Sebi’s response to the venture capital industry last month that sponsor/manager of AIFs “may considered to be regulated by Sebi to the extent of its activities as sponsor/manager of a Sebi registered AIF,” has cleared the uncertainty, two persons familiar with the development told ET.
“The Sebi clarification has provided considerable clarity to the overseas investors that they will not be required to pump in a minimum capital of $20 million. The ambiguity created by the finance ministry release which treated any unregistered/non-licensed financial services player akin to being unregulated and in turn subjected to an impractical minimum capitalisation, discouraged several Indian fund managers seeking foreign joint venture partners,” said Tejesh Chitlangi, senior partner, IC Universal Legal.
Local fund managers are often keen to bring in a foreign financial services group as foreign partner. First, it could encourage overseas investors to put money into Indian AIFs. Second, the presence of a global investment manager could also attract local high net worth investors and institutions to invest in an AIF. “Indian asset managers are today globally competitive and the clarification by the regulator will raise the interest of global partners in the AIF space in India. It’s a welcome move by Sebi,” said Jyoti Rai, head of channel partners, Edelweiss, Prime Broking & Custody.
The activities of an AIF funds are primarily undertaken by a ‘manager’ who may also be a sponsor. According to Moin Ladha, parter at Khaitan & Co, at the time of considering an AIF registration application, SEBI does consider the qualification, infrastructure and fit and proper status of the sponsor and manager in addition to the main applicant entity. “While this clarification states the actual position Sebi has been maintaining, it does clear any doubts regarding regulated status of the sponsors and managers from an FDI perspective. This clarification in my view is also an indication of Sebi’s intention to improve monitoring of AIF’s and its activities including the source of funds employed by it,” said Ladha.Since 2012, pooling of investments from local or overseas investors has to be through AIFs registered with Sebi.

The Economic Times, New Delhi, 09th July 2018

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