Answer ... Alternative investment funds (AIFs) are governed by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’). Prior to 2012, AIFs were governed by the SEBI (Venture Capital Funds) Regulations, 1996, which have now been repealed.
Additionally, AIFs receiving foreign investment must comply with:
- the SEBI (Foreign Portfolio Investor) Regulations, 2019 (‘FPI Regulations);
- the Foreign Exchange Management Act, 1999; and
- the rules and regulations issued thereunder, including the Foreign Exchange Management (Non-debt Instruments) Rules, 2019 (‘FEMA Regulations’).
Answer ... Under the AIF Regulations, an AIF can seek registration in either Category I, Category II or Category III.
Category I: The stated objective is to provide certain benefits to Category I AIFs, which include AIFs that invest in:
- start-ups or early-stage ventures;
- social ventures or small and medium-sized enterprises (SMEs);
- infrastructure; or
- such other sectors as the government considers are socially and/or economically desirable.
These AIFs are perceived to have a positive effect on the economy and the government often extends concessions or incentives to them. The following types of AIFs fall under Category I:
- venture capital funds;
- SME funds;
- social venture funds;
- infrastructure funds; and
- angel funds.
Category II: Category II AIFs are residual funds that do not fall within the definitions of Category I or Category III AIFs. The largest number of AIFs are registered under this category.
Category III: Category III AIFs are typically hedge funds or funds which trade with a view to making short-term returns. They employ complex or diverse trading strategies and may engage in leverage. This category also includes all open-ended AIFs – that is, AIFs that may not have a fixed term and that permit contributors to redeem their units.
At present, certain tax and regulatory concessions have been conferred on Category I and II AIFs.
Answer ... The AIF Regulations contain specific provisions in relation to extra-territorial reach. However, in case of breach of the AIF Regulations and/or the FEMA Regulations, both SEBI and the Reserve Bank of India (RBI) have the powers to take action against the AIF, the manager of the AIF and the sponsor of the AIF, and their respective promoters. Hence, to this extent, SEBI and the RBI can pass necessary orders against non-Indian shareholders or promoters.
Answer ... India is a party to several bilateral tax treaties and investment protection treaties to address double taxation of income, which have relevance in the case of cross-border fund structures and cross-border investments. For further details see question 1.6.
Answer ... The following bodies are responsible for regulating AIFs in India.
SEBI: SEBI is the securities market regulator and was established under the SEBI Act, 1992, in order to protect investors’ interests in securities and develop and regulate the securities market. SEBI is the relevant regulatory body governing AIFs. SEBI has wide powers under the SEBI Act and AIF Regulations, including the power to conduct inspections, searches and seizures, to impose penalties and to issue other orders, such as an order barring errant persons from accessing the capital markets. Additionally, SEBI issues informal guidance or non-binding opinions on various queries on the interpretation of the AIF Regulations and related circulars.
RBI: The RBI is the central bank of India and was established under the RBI Act, 1949. One of the key powers of the RBI is the power to regulate foreign exchange through the FEMA Regulations. The FEMA Regulations prescribe the framework relating to:
- foreign exchange in-flows;
- downstream investments;
- additional conditions such as sectoral caps and pricing norms;
- repatriation of income and capital out of India; and
- reporting requirements.
The RBI is also the relevant authority under money laundering laws. In this regard, the RBI has imposed obligations on certain regulated entities to report suspicious transactions to the Financial Intelligence Unit – India), which was set up in 2004 to safeguard the financial system from economic offences.
Answer ... Data provided on the SEBI website (www.sebi.gov.in) confirms that SEBI has made efforts to team up with its counterparts in other countries to strengthen cross-border cooperation in the area of securities regulation. In this regard, SEBI has signed bilateral memoranda of understanding (MoUs) with various securities regulators to:
- enhance cooperation and exchange of information for regulatory and enforcement purposes;
- facilitate mutual assistance;
- contribute to the efficient performance of supervisory functions;
- assist in imparting technical domain knowledge; and
- enable effective enforcement of the laws and regulations governing the securities markets.
Specifically in relation to AIFs, SEBI has signed bilateral MoUs with securities market regulators of 27 member states of the European Union/European Economic Area concerning consultation, cooperation and the exchange of information relating to the supervision of managers of AIFs. A total of 27 bilateral MoUs were signed on 28 July 2014 with several countries, including France, Germany, Ireland, Italy, the Netherlands, Spain and the United Kingdom.
India is a member of the Financial Action Task Force (FATF) and the RBI – through the FATF – cooperates with other member nations in implementing necessary measures, reviewing money laundering and terrorist financing techniques and counter-measures, and promoting the adoption and implementation of appropriate measures globally.
India has also signed tax information exchange agreements with various countries, such as the Cayman Islands, enabling bilateral sharing of banking information and allowing officials of one country to undertake tax examinations in the other.