Foreign Investments Into AIFs Face Additional Conditions

SEBI's latest circular on AIFs aims to limit jurisdictions from which foreign investments can be secured.

<div class="paragraphs"><p>(Source: Reuters)</p></div>
(Source: Reuters)

Alternative investment funds, a category that covers hedge funds to private equity, will have to fulfill additional conditions while accepting money from foreign investors.

AIFs shall accept money only from investors living in countries whose security market regulator is signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding or the bilateral MoU with Securities and Exchange Board of India, according to a new circular by SEBI.

There are 129 signatories to the global MoU including Pakistan, Bangladesh, and Russia.

At first glance, this seems like a limitation on investments in Indian AIFs from certain countries, according to Jay Gandhi, partner at Shardul Amarchand Mangaldas and Co. This is an additional requirement applicable to SEBI-regulated AIFs and is not part of the FDI policy and also does not apply to permitted FDI investments in other entities.

This requirement is, however, waived if the investor is a government or government-related entity, according to Gandhi. The carve-out, he said, has been done in order to facilitate bilateral investment.

This seems to have been done with the intention to permit the government to recognise certain countries and their government-related institutions for investments into AIFs, even if such a country does not meet the threshold condition. However, it does not seem to cover private investors residing in such territories approved by the Indian government.
Jay Gandhi, Partner, Shardul Amarchand Mangaldas & Co.

The circular also limits the control exercised by residents of Financial Action Task Force non-compliant countries. According to the circular, investor or 25% of the underlying investors controlling the investor should not reside in countries that are sanctioned by UN Security Council and do not have robust policies for anti-money laundering or to combat terrorist financing.

AIFs are also directed to not accept further investments from an investor currently on board but residing in such a jurisdiction and from any entity that subsequently fails to meet the conditions.

The new guidelines come to effect immediately.