Answer ... The past half-decade has seen an unprecedented rise in the number of registrations of AIFs in India. While the number of registered AIFs at the beginning of 2018 stood at a modest 366, registrations had soared to 637 as of January 2020. AIFs witnessed a 60% rise in capital growth in the past year alone. As of September 2019, AIFs had raised in total $21.7 billion – more than 11 times the $1.95 billion raised as of September 2015.
Another significant juncture in the funds landscape this decade was the setting up of India’s first strategic investment fund: National Infrastructure and Investment Fund (NIIF), anchored 49% by the Indian government with over $3 billion of capital commitments, modelled on the AIF framework. In the short span of three years, NIIF has grown across three distinct strategies:
- strategic investments in infrastructure through platform joint ventures;
- the fund-of-funds vertical with a diverse footprint across management strategies; and
- opportunistic and structured investment through the third vertical.
Encouraged by the success of NIIF, the Indian government has also established two new funds:
- a fund providing last-mile funding to stalled affordable and middle-income housing projects, expected to start with assets under management (AUM) of INR 250 billion and the government funding 40% of the AUM; and
- a fund forming part of the government’s five-prong strategy to resolve non-performing loans.
The Indian AIF industry has already attracted several large institutional investors across jurisdictions and sectors, such as Temasek, GIC, ADIA, QIA, KIA, KIC, CPPIB, AustralianSuper, CDPQ, CDC, IFC and ADB. It is expected to continue growing over the coming years.
Answer ... Given the rapid growth of the Indian AIF industry and the need to boost foreign investment through such structures, the Securities and Exchange Board of India (SEBI) has established an Alternative Investment Policy Advisory Committee (AIPAC) to make recommendations in this regard. With a focus on promoting the development of AIFs and the start-up ecosystem in India, and removing any hurdles that are hindering the progress of the AIF industry, AIPAC submitted its recommendations in three reports, the last of which was issued on 19 January 2018. The third report sets out AIPAC’s recommendations on key issues, including:
- removing withholding tax for exempt investors and exempt streams of income;
- introducing an investor-level tax regime for AIFs while completely eliminating the AIF as a taxable entity;
- clarifying the indirect transfer taxes applicable at the time of transfer of foreign shares which derive substantial value from Indian assets;
- introducing the concept of an ‘accredited investor’ in India; and
- dividing Category III AIFs into two sub-categories, to distinguish trading funds from non-trading funds.
Some recommendations made by AIPAC in its reports found favour with SEBI, other regulators and the Ministry of Finance, leading to amendments to the AIF Regulations and the IT Act.
SEBI has consistently followed its mandate to improve investor protection through:
- increased disclosure of information to unit holders;
- tight control over expenses and commissions chargeable to investors; and
- enhanced transparency in the activities of managers, to avoid conflicts of interest.
In line with its commitment to these objectives, SEBI has been overhauling several regulatory regimes. For instance, the new regulations governing portfolio managers preclude managers from charging their clients upfront fees and have doubled the minimum investment amount from clients to INR 5 million. SEBI has also introduced similar changes to the Mutual Fund Regulations in recent months, such as elimination of upfront commission. Further, SEBI has, through public consultation papers, indicated proposals that it wishes to introduce to the AIF regime and for investment advisers. If the proposals are effected, there could be a standard format for the AIF’s placement memorandum, which would simplify AIF registration and make available a host of information that would otherwise be unavailable to prospective investors before committing to investing in an AIF. Further, it is proposed that the performance history of AIFs should be benchmarked, allowing investors to compare AIF performance against other AIFs. The proposals relating to investment advisers include:
- providing for client-level segregation of advisory and other services (eg, distribution) at a group level; and
- making mandatory the communication of standard terms and conditions of investment advisory services to the client prior to engagement.
All of these proposed amendments would have a wide-reaching impact on the AIF industry and lead to stronger oversight and supervision.
Answer ... Some industry strategies worth exploring include investing in the relatively new investment regimes such as infrastructure investment trusts (InvITs) and real estate investment trusts (REITs). The popularity of InvITs and REITs lies in their ability to provide stable yield and liquidity through fractional ownership of infrastructure and real estate assets. These vehicles have transformed the real estate and infrastructure market model from asset heavy to asset light, and have made the sectors conducive to easy entry and exit by not only institutional investors, but also retail investors. For tax purposes, InvITs and REITs are classified as ‘business trusts’ and have been accorded a separate concessional tax regime, under which they are tax transparent –that is, they have pass-through status and income is chargeable to tax directly in the hands of unit holders, and not at the trust level. The concessional tax regime also exempts InvIT/REIT investee companies from dividend distribution tax which is otherwise payable by Indian companies at the time of distribution of dividends. InvIT and REIT investors are also subject to beneficial capital gains tax rates.
India has also operationalised its first international financial services centre, Gujarat International Finance Tec-City (GIFT), which has been ranked third in the latest edition of the Global Financial Centres Index. AIFs/pooling vehicles can now be set up in GIFT City and dependence on offshore holding jurisdictions – such as Singapore, Mauritius and the Cayman Islands – can be reduced. Various tax and regulatory concessions have been conferred on entities operating in GIFT City; only time will tell whether the funds industry will embrace GIFT City as the new normal for fund-raising jurisdictions.
Post the promulgation of the Insolvency and Bankruptcy Code, 2016 funds are devising new investment and structural strategies for acquiring stressed or distressed assets. Several strategic investors and global and local funds have bid for and acquired such assets through bilateral arrangements, public auctions and court processes (before the National Company Law Tribunal). The government’s new fund to provide last-mile funding to stalled housing projects (see question 9.1) will be accorded priority over other creditors at the insolvency resolution proceedings.