Answer ... The types of AIFs typically found in India are detailed in question 1.2.
Answer ... Under the AIF Regulations, an AIF can be structured in the form of a limited liability partnership, company, body corporate or trust. Typically, the trust is the preferred structure, due to ease of management and administration – in contrast to companies and limited liability partnerships (LLPs), which are subject to stringent and restrictive governance and compliance requirements under the Companies Act, 2013 and Limited Liability Partnership Act, 2008 respectively.
Answer ... Trusts: The advantages are as follows:
- They are easy to set up and wind up.
- They offer broad flexibility in relation to their commercial objectives.
- There are minimal statutory disclosure requirements, as compared to a company or LLP.
- Regulatory compliance under the Trusts Act is minimal compared to the LLP Act or the Companies Act, resulting in much lower costs of running the AIF.
The disadvantage is that they can be subject to tax at a maximum marginal rate if the trust is a discretionary trust or if the beneficial interest of the investors is indeterminate, as in the case of hedge funds.
LLPs: The advantages are as follows:
- They have a separate legal identity and perpetual succession.
- The liability of all partners is limited to the extent of their capital contribution.
- There are fewer compliance requirements compared to a company.
- There is no maximum limit on the number of partners, subject to the maximum limit of investors (1,000) under the AIF Regulations, and there is no need to engage a trustee for the AIF.
The disadvantages are as follows:
- The sponsor or manager of the AIF must be appointed as a designated partner and the designated partners have unlimited liability to ensure that the partnership complies with all applicable laws.
- In case of fraud against creditors of the LLP, the personal assets of the partners may also be attached to satisfy the claims of defrauded creditors.
- Certain onshore financial institutions cannot invest in an LLP, which limits the scope for raising capital.
- LLPs with foreign partners are subject to certain exchange control restrictions on investments in investee companies. In sectors where 100% foreign direct investment (FDI) is permitted under the automatic route and which have prescribed conditions such as minimum capitalisation, LLPs cannot bring FDI without prior governmental approval. Further, downstream investment by LLPs involves certain additional compliance requirements.
- The setting up and winding up of an LLP can take much longer compared to a trust.
Company: The advantages are as follows:
- It has a distinct legal identity and perpetual succession.
- The liability of the shareholders is limited to the extent of their investment.
- There is separation of ownership and management, as the management is vested in the board of directors of the company.
The disadvantages are as follows:
- There are more stringent compliance and reporting requirements.
- Additional compliance requirements result in higher costs.
- The company must abide by stricter accounting and auditing requirements.
- The setting up and winding up of a company can take much longer compared to a trust.
Answer ... In India, the most widely used AIF structure is the Category II AIF, as this provides broader flexibility for the manager to formulate the investment policy and objectives of the AIF.
Answer ... Until the introduction of AIF Regulations in 2012, India did not have a specific regime that regulated domestic hedge funds. Since the commencement of the AIF Regulations, Category III registration has increased steadily. The preferred fund structures remain private equity and hedge funds. In recent times, due to growing interest in the lending space, the number of debt funds and funds focused on stressed/distressed opportunities has increased significantly.
Answer ... The manager of an AIF is responsible for the day-to-day operations and management of the AIF. The manager must be an entity set up in India. Typically, managers are organised as either companies or LLPs. Also see question 4.9 on outsourcing of activities by managers.
Answer ... The AIF Regulations require the sponsor or manager of the AIF to appoint a custodian registered with the Securities and Exchange Board of India (SEBI) for safekeeping of securities if the corpus of the Category I or the Category II AIF is more than INR 5 billion. However, the sponsor or AIF manager of a Category III AIF is mandatorily required to appoint a custodian irrespective of the size of corpus of the AIF. Such custodian should keep custody of securities and, in the case of commodity derivatives, custody of the goods received in delivery against physical settlement of commodity derivatives.
Answer ... No, there are no provisions for redomiciling funds into India. An AIF must be an entity set up in India (whether as a trust, company or limited liability partnership).