Answer ... According to the Securities and Exchange Board of India (SEBI) (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’), a manager appointed by the AIF to oversee its investments may take the form of either a person or an entity situated in India. Ordinarily, these managers are established as companies or limited liability partnerships (LLPs).

The manager of a SEBI-registered AIF must be established in India. During the certification process, SEBI will evaluate the professional qualifications and experience of the manager’s key investment team, who will serve as employees, partners or directors of the investment manager. The SEBI application necessitates the investment manager to showcase the essential infrastructure required for effectively managing AIFs.

Within the International Financial Services Centre (IFSC), fund management entities (FMEs) have the flexibility to adopt various structures, such as a company, an LLP or a branch thereof. Alternatively, they can choose any other form as specified by the International Financial Services Centres Authority (IFSCA).

In the case of AIFs within the IFSC, FMEs can also be established as a branch of an entity already registered or regulated by a financial sector regulator in India or a counterpart in a foreign jurisdiction that engages in similar activities. This setup, whether a branch or a new legal entity, must possess adequate infrastructure – including office space, equipment, communication facilities and manpower – commensurate with the scale of its operations in the IFSC. Additionally, if an FME opts to establish a branch in the IFSC, the branch operations must be segregated from those of the registered entity outside the IFSC. The IFSCA (Fund Management) Regulations, 2022 (‘FM Regulations’) also require the FME to have a principal officer and additional key management personnel in the IFSC, depending on the category of FME.

Answer ... For a thorough exploration of the pros and cons related to various structural choices, please see question 2.3. Additionally, question 8.2 offers valuable insights into the tax considerations relevant to AIF managers and investment advisers.

Answer ... Investment managers of AIFs need not register separately with SEBI in order to manage the AIF. Regulation is directed at the fund rather than the manager, and the manager is automatically registered when the fund completes its registration process. However, anyone offering investment advice for remuneration to clients or other entities must be registered with SEBI as an investment adviser under the SEBI (Investment Adviser) Regulations, 2013.

Additionally, in the case of an FME in the IFSC, located in Gujarat International Finance Tec (GIFT) City, authorisation from the IFSCA is required to engage in such activities.

Answer ... Requirements in India:

• The AIF manager must be based in India, with key investment team members being employees, partners or directors of the manager.
• SEBI will assess the professional qualifications and experience of the investment team during the registration process.
• At least one key team member must have a professional qualification in finance, accountancy, business management, commerce, economics, capital markets or banking from a university or institution recognised by the central government, a state government or a foreign university. Alternatively, a charter from the CFA Institute or any other qualification specified by SEBI will be accepted.
• At least one key team member must hold certifications as specified by the SEBI periodically.
• The manager or sponsor must have the necessary infrastructure and manpower to effectively discharge its activities.

Requirements in GIFT City:

• Infrastructure:
• • FMEs in the IFSC can be established as a branch or a new entity.
  • An FME’s infrastructure – including office space, equipment, communication facilities and manpower – must be proportionate to its operations. The office should be dedicated, secured and accessible only by authorised person(s) of the FME.
  • For a branch set-up, there must be effective ringfencing of operations from the registered entity outside the IFSC.
• Key personnel requirements:
• • The FM Regulations mandate a principal officer and additional key management personnel in the IFSC, depending on the category of FME.
• Net worth requirements:
• • Authorised FMEs: $75,000.
  • Registered FMEs (non-retail): $500,000.
  • Registered FME (retail): $1 million.
• Applicant and key individual requirements:
• • The applicant, principal officer, directors/partners/designated partners, key managerial personnel and controlling shareholders must be fit and proper individuals at all times. A person is deemed ‘fit and proper’ if they have a record of fairness and integrity, including financial integrity, good reputation, character and honesty.
  • Disqualifications would include:
  • • convictions for moral turpitude, economic offences or securities law violations;
    • pending recovery proceedings or winding-up orders;
    • insolvency, unreleased discharge or unsoundness of mind;
    • orders restraining financial product dealings within the last three years;
    • any adverse regulatory orders within the last three years;
    • financial unsoundness, wilful defaulter status or fugitive economic offender declaration; and
    • any other disqualification specified by the authority.

Answer ... AIF managers: As detailed in question 4.3, there is no requirement for a manager to seek a separate registration or licence for managing AIFs other than approvals as mentioned in the SEBI (Investment Adviser) Regulations, 2013.

FMEs in GIFT City:

• The IFSC in GIFT City operates as a special economic zone (SEZ), necessitating approval from SEZ authorities for each ‘unit’, including funds and FMEs.
• To register as an FME, an application must be submitted to the IFSCA in the prescribed format.
• Upon receiving registration, the FME can proceed to launch its scheme by submitting the private placement memorandum (PPM) to the IFSCA in advance.
• The setup and registration process with the IFSCA typically takes around two to three months.

Answer ... The following additional requirements/restrictions/obligations apply to AIF managers:

• The AIF, key management personnel, trustee, trustee company, directors of the trustee company, designated partners or directors of the AIF, managers and their key management personnel must adhere to the specified Code of Conduct outlined in the Fourth Schedule of the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’).
• The manager and either the trustee, the trustee company, the board of directors or the designated partners of the AIF are collectively responsible for ensuring compliance with the Code of Conduct specified in the Fourth Schedule of the AIF Regulations.
• The manager is accountable for every decision of the AIF, ensuring compliance with:
• • regulations;
  • the terms of the placement memorandum;
  • agreements with investors;
  • the fund documents; and
  • the applicable laws.
• The manager is responsible for ensuring that AIF decisions comply with established policies and procedures, as well as other internal policies, subject to conditions specified by SEBI.
• The manager may form an investment committee (by any name) to approve AIF decisions, subject to conditions specified by SEBI.
• If the corpus of the AIF exceeds INR 5 billion, the sponsor or manager must appoint a custodian registered with the SEBI for safeguarding securities.
• The manager is prohibited from providing advisory services to any investor other than the clients of a co-investment portfolio manager, as specified in the SEBI (Portfolio Managers) Regulations, 2020, for investments in securities of investee companies where the AIF managed by it makes investments.
• The manager, trustee, trustee company, board of directors or designated partners must ensure the segregation and ring-fencing of assets and liabilities of each scheme of an AIF. This extends to segregating and ring-fencing bank accounts and securities accounts for each scheme.
• The manager must appoint a compliance officer responsible for monitoring compliance with the provisions of the act, rules, regulations, notifications, circulars, guidelines, instructions and any other directives issued by the SEBI.

Answer ... An AIF manager has the authority to impose limitations on the issuance, redemption or transfer of interests concerning the AIFs under its management.

Investors/contributors are not permitted to solicit or transfer/pledge any of their units, capital commitment, interests, rights or obligation with regard to the AIF without the prior written consent of the investment manager, which may be denied by the investment manager. The transfer is subject to the following requirements:

• The proposed transferee/pledgee is an eligible person;
• The proposed transfer/pledge will be subject to the execution of necessary documentation by the transferee/pledgee and the transferor/pledgor, as may be stipulated/prescribed/required by the investment manager; and
• The proposed transfer/pledge will not contravene any applicable law or policy of the government or otherwise is not prejudicial to the interests of the trust/fund. In the event of the transfer of units by a contributor, the new contributor will execute a deed of adherence acknowledging that it will be bound by the terms and conditions of the trust documents, in accordance with the form specified in the contribution agreement.

Conditions for redemption:

• Closed-ended AIFs: Closed-ended AIFs have the authority to limit transfers or redemptions of investor interests at the discretion of their investment managers. Closed-ended AIFs are not allowed to provide priority exit rights to investors.
• Open-ended funds: For open-ended funds, the circumstances under which a manager can restrict redemptions are subject to detailed disclosures in the PPM or as required by law. The suspension of redemptions is permissible only under exceptional circumstances, serving the best interests of the AIF investors. During the suspension period, new subscriptions cannot be accepted by the manager. Any suspension of redemptions for open-ended schemes must be promptly reported to SEBI.

Post the redemption of units and payment of consideration, the contributor will cease to be entitled to any rights in respect thereof and accordingly its name will be removed from the list of contributors with respect to such units. Units that are not redeemed by the AIF will be redeemed as per the applicable laws after the term comes to an end.

Answer ... The investment manager of an AIF is acknowledged as a regulated entity according to the AIF Regulations. By virtue of this recognition, an AIF manager is eligible to receive up to 100% foreign investment through the automatic route, circumventing the need for government approval, unless the manager has engaged in other unregulated financial services activities.

The AIF Regulations do not prescribe a maximum limit for investments by the fund manager or sponsor. However, through its informal guidance, SEBI has emphasised that the quantum of investment by the fund manager or sponsor should align with the continuing interest obligations applicable to the AIF, ensuring coherence and compliance with regulatory requirements.

Category I and II AIFs: The manager of a SEBI-registered AIF must be established in India. The manager or sponsor of the AIF must maintain a continuing interest in the AIF, constituting a minimum of 2.5% of the corpus or INR 50 million, whichever is lower. This interest must take the form of a direct investment in the AIF and should not be facilitated through the waiver of management fees.

Category III AIFs: For Category III AIFs, the stipulated continuing interest is higher, set at a minimum of 5% of the corpus or INR 100 million, whichever is lower.

Moreover, the manager or sponsor must transparently disclose its investment in the AIFs to investors. This disclosure ensures clarity and openness regarding the financial involvement of the manager or sponsor in the AIF, fostering trust and transparency within the investment framework.

Angel funds: The manager or sponsor must maintain a consistent stake in the angel fund of at least 2.5% of the corpus or INR 5 million, whichever is lower. Importantly, this continuing interest must not be achieved through the waiver of management fees.

Corporate debt market development funds: The manager or sponsor must maintain a continuing interest in the fund amounting to no less than INR 50 million. This commitment must be in the form of a direct investment in the fund and should not be fulfilled through the waiver of management fees.

Change in control: SEBI typically asks AIF managers during the application stage to provide information on the shareholding or partnership interest of the manager entity. Regulation 20(13) of the AIF Regulations stipulates that any change in control of the manager or sponsor requires notification with and approval by SEBI. SEBI may impose fees and set other conditions, with which the AIF must comply. SEBI has issued the following circulars providing guidance on the process and fee payment requirements of change in control:

• SEBI Circular SEBI/HO/AFD-1/PoD/P/CIR/2022/155 of 17 November 2022 provides as follows in relation to the fee for a change in control of manager/sponsor or a change in manager/sponsor of an AIF:
• • A fee, equivalent to the AIF’s registration fee, is applied for changes in control or management.
  • The fee must be paid by the manager or sponsor within 15 days and cannot be passed on to investors.
  • If both the manager and sponsor change simultaneously, only a single registration fee is charged.
  • No fee is charged in specific scenarios, such as where the manager is taking control by replacing the sponsor or where sponsors are exiting in AIFs with multiple sponsors.
  • Prior approval given by SEBI is valid for six months from the approval date.
• According to SEBI Circular CIR/IMD/DF/14/2014 of 19 June 2014, read with SEBI Circular CIR/IMD/DF/16/2014 of 18 July 2014, the following process must be followed by AIFs in case of a change in control:
• • Existing unit holders that do not wish to continue after the change should be given an exit option. They must be given at least one month to express their dissent.
  • For open-ended schemes, two exit options are available:
  • • buying out units from dissenting investors at market price; or
    • redeeming units by selling underlying assets.
  • For closed-ended schemes, the exit option involves buying out units from dissenting investors. Prior to this, the units’ valuation is determined by two independent valuers and the exit is at a value not less than the average of the two valuations. The entire process, from the last date of the offer for dissent, should be completed within three months.
• SEBI Circular SEBI/HO/IMD-1/ DF9/CIR/2022/032 of 23 March 2022 has streamlined the process for approving changes in the control of the sponsor and/or manager of an AIF involving a scheme of arrangement under the Companies Act, 2013. The key points are follows:
• • Applications for the change in control must be submitted to SEBI before filing with the National Company Law Tribunal (NCLT).
  • Upon ensuring compliance with the regulatory requirements, SEBI will grant in-principle approval.
  • The in-principle approval is valid for three months from the date of issuance. During this period, the applicant must apply to the NCLT.
  • Within 15 days of the NCLT order, the applicant must submit:
  • • an application for final approval;
    • a copy of the NCLT order approving the scheme;
    • a copy of the approved scheme;
    • a statement explaining any modifications and reasons; and
    • details of compliance with SEBI’s in-principle approval conditions.

Answer ... The manager has the option to establish an investment committee, subject to conditions set by the SEBI. Members of the investment committee must ensure that their decisions align with specified policies. However, this provision does not apply to an AIF where each investor, excluding certain individuals affiliated with the fund:

• has committed to investing at least INR 700 million; and
• has provided a waiver regarding compliance with this regulation, as specified by SEBI.

Further, managers are bound by the SEBI Guidelines CIR/MIRSD/24/2011 on Outsourcing of Activities of 15 December 2011. SEBI’s outsourcing principles emphasise adherence to regulatory guidelines, such as the following:

• The manager must conduct thorough due diligence when selecting and monitoring third-party services.
• A comprehensive policy must be in place to guide outsourcing activities.
• A risk management programme must be established.
• Outsourcing must not compromise obligations to customers and regulators.
• All outsourcing relationships must be governed by written contracts outlining rights, responsibilities and expectations.
• Additionally, steps must be taken to ensure the protection of confidential information from unauthorised disclosure.

The outsourcing of core business activities and compliance functions is prohibited.

Answer ... Managers can extend their investment management services beyond AIFs. However, in doing so, they must:

• provide the relevant services;
• meet licensing requirements; and
• serve an appropriate clientele.

Importantly, these extended services must not conflict with the regulations governing AIFs. Top of Form

They can engage in the following activities:

• They can provide portfolio management services to designated mandate accounts by obtaining registration under the SEBI (Portfolio Managers) Regulations, 1993.
• They can also cater to retail funds in accordance with the SEBI (Mutual Funds) Regulations, 1996.
• Where resident Indian clients are advised, the manager must secure registration under the SEBI (Investment Adviser) Regulations, 2013.

The manager is restricted from offering advisory services to any investor except the clients of the co-investment portfolio manager, as outlined in the SEBI (Portfolio Managers) Regulations, 2020. This restriction specifically applies to investments in securities of investee companies where the AIF managed by the manager is making an investment.

To comply with SEBI regulations, managers must meet some requirements, which are outlined in questions 4.4 and 4.6.