Answer ... AIF managers and investment advisers are typically structured in one of the following forms:
- body corporate;
- private limited or public limited company (incorporated under the Companies Act, 1956 or the Companies Act 2013); or
- limited liability partnership (LLP) registered under the LLP Act.
AIF managers must seek approval from SEBI under the AIF Regulations. Further, investment advisers must seek registration under the SEBI (Investment Advisers) Regulations, 2013.
Answer ... AIF managers and investment advisers are generally structured taking into consideration tax benefits, compliance requirements and other commercial considerations. Please see question 2.3 for the advantages and disadvantages of various structures. Please see question 8.2 for tax considerations in relation to AIF managers and investment advisers.
From a compliance perspective, the LLP is the preferred structure. This is due to simplicity and flexibility in incorporation, management and governance, in comparison to a company.
Answer ... The SEBI (Investment Advisers) Regulations govern all forms of providers of investment advice; however, AIF managers are exempt from the requirement to seek registration under the regulations. This is due to the fact that SEBI has jurisdiction over AIF managers through the registration granted to an AIF under the AIF Regulations.
Answer ... In granting approval to an AIF, SEBI will consider the following factors in relation to the manager and the key investment team:
- The key investment team of the manager should have adequate experience, with at least one key member of personnel having a relevant professional qualification and not less than five years’ experience in advising or managing pools of capital; in fund or asset or wealth or portfolio management; or in the business of buying, selling and dealing of securities.
- The manager should have the necessary infrastructure and manpower to effectively discharge its activities.
- The manager should make adequate disclosures in relation to any previous refusal of grant of any registration by SEBI for any entity established by the manager, or relevant details of any disciplinary history of the manager.
- The manager should comply with the ‘fit and proper’ criteria as set out in the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
In order to meet the ‘fit and proper person’ test, the manager and its principal officer, the director, the promoter and the key management persons must have the following characteristics:
- integrity, reputation and character;
- absence of convictions and restraint orders;
- competence, including financial solvency and net worth; and
- absence of categorisation as a wilful defaulter.
Answer ... As detailed in questions 4.3 and 4.4, there is no requirement for a manager to seek a separate registration/licence for managing AIFs other than approval from SEBI as part of the AIF application process. The process for obtaining authorisation typically takes approximately two to three months, as detailed in question 3.3.
Answer ... The following are the key requirements set out in the AIF Regulations in relation to managers and under the SEBI (Investment Advisers) Regulations for investment advisers:
- Managers should solicit or collect funds for AIFs only by way of private placement.
- Managers should make disclosure of their investment in AIFs.
- Managers should appoint a custodian registered with SEBI for the safekeeping of securities as per the AIF Regulations.
- Managers should make disclosure of conflicts of interest to investors as and when these arise.
- Any signification change in the key investment team of the AIF manager should be intimated to all investors.
- The representatives of the investment adviser or the investment adviser providing investment advice should have the requisite qualifications as prescribed under the SEBI (Investment Advisers) Regulations.
- Investment advisers which are bodies corporate should have a net worth of not less than INR 25 million.
- Investment advisers shall not receive any consideration by way of remuneration or compensation, or in any other form, from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.
- Investment advisers shall maintain an arm’s-length relationship between their activities as an investment adviser and other activities.
- Investment advisers shall not enter into transactions on their own account which are contrary to the advice given to clients for a period of 15 days from the date of such advice, except in accordance with the SEBI (Investment Advisers) Regulations.
- Investment advisers shall conduct risk assessments of all their clients and intimate to them details of their risk profile.
Answer ... Yes, an AIF manager can impose restrictions on the issue, redemption or transfer of interests in relation to the AIFs it manages. Such restrictions should be clearly disclosed in the private placement memorandum, as well as in the contribution agreement which is entered into with investors.
Redemptions are allowed only in the case of open-ended AIFs (ie, Category III AIFs). Managers must clearly disclose to investors in the placement memorandum the possibility that redemptions may be suspended in exceptional circumstances. The suspension of redemptions by the manager shall be justified only in exceptional circumstances, provided that such suspension is exclusively in the best interests of investors of the AIF or is required under the AIF Regulations or by the SEBI.
Answer ... Yes. AIF managers set up as companies or LLPs must be incorporated in India. The manager can be either Indian owned and controlled or foreign owned or controlled. Further, the AIF Regulations stipulate that a minimum continuing interest must be held by the AIF manager or sponsor in the corpus of the AIF. In case of an AIF managed by a foreign owned or controlled manager, the AIF must additionally comply with the requirements set out in the Foreign Exchange Management (Non-debt Instruments) Rules with respect to its downstream investments.
Further, a Category III AIF which has received foreign investment can invest only in those securities or investments in which a foreign portfolio investor is permitted to invest under the Foreign Portfolio Investment Regulations.
Answer ... Yes, subject to compliance with the Guidelines on Outsourcing of Activities by Intermediaries issued by SEBI. Managers cannot outsource their core business activities and compliance functions. Managers must comply with the principles for outsourcing framed by SEBI, as follows:
- The manager must adopt a comprehensive outsourcing policy;
- The manager must conduct due diligence and adopt a risk management programme to address the outsourced activities and the relationship with the third party; and
- The manager should ensure that outsourcing arrangements neither diminish its ability to fulfil its obligations to customers and regulators nor impede effective supervision by the regulators.
Outsourcing relationships must be governed by written contracts or agreements which clearly describe all material aspects, including the rights, responsibilities and expectations of the parties, client confidentiality issues and termination procedures.
Answer ... Yes, managers can provide investment management services to funds other than AIFs. Further, the manager can also provide portfolio management services to segregate mandate accounts by seeking registration under the SEBI (Portfolio Managers) Regulations, 1993 or to retail funds under the SEBI (Mutual Funds) Regulations, 1996. A manager that advises resident Indian clients must seek registration under the SEBI (Investment Advisers) Regulations. The manager must also disclose such associated relationships as potential conflicts of interest in the private placement memorandum.
Managers must fulfil the following additional requirements prescribed by SEBI:
- capital adequacy requirements, as prescribed under the respective regulations;
- segregation between the different business activities in terms of bank accounts, key investment teams and operation teams; and
- ownership interest in funds as per the prescribed regulations.