Answer ... The alternative investment landscape in India – which includes both portfolio management services and alternative investment funds (AIFs) – has demonstrated remarkable growth, outpacing the expansion of traditional mutual funds observed in recent years. AIFs have emerged as trailblazers in India’s investment landscape, demonstrating an impressive compound annual growth rate of 36% over the last five years. Within this category, Category II AIFs – which include venture capital, private equity, real estate funds and private credit – have experienced significant growth, primarily driven by the increased interest and participation of high-net-worth and ultra-high-net-worth individuals. The alternative investment landscape in India is poised for substantial expansion, projected to reach INR 43640 billion in the coming five years. This predicted surge is not solely attributed to foreign investment but should also be significantly bolstered by domestic capital. The Securities and Exchange Board of India (SEBI) is vigilantly monitoring the burgeoning AIF landscape and periodically updates the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations’) in the interests of investors. This enhanced regulatory scrutiny has contributed to greater compliance within the AIF sector and a matured regulatory framework over time.

India’s International Financial Services Centre (IFSC) in Gujarat International Finance Tec (GIFT) City is becoming a key player in the global alternative investment landscape. With a favourable regulatory environment, including exemptions from certain Indian taxes, GIFT City is attracting AIFs globally. Its strong global connectivity facilitates the easy capital sourcing and allocation for AIFs. GIFT City also acts as a gateway to India’s thriving markets, attracting both domestic and international AIFs. This growing presence is boosting foreign investment in India and contributing significantly to the development of India’s alternative investment sector.

Answer ... In a recent series of consultation papers, SEBI introduced several noteworthy proposals for the AIF regime. These recommendations encompass various aspects, including:

• permitting Category I and II AIFs to borrow funds with certain restrictions;
• enforcing the dematerialisation of securities held by AIFs in portfolio entities;
• mandating the appointment of a custodian for all AIFs;
• setting a limit on the number of tenure extensions for large-value funds; and
• establishing criteria to determine the status of ‘qualified institutional buyers’ for AIFs – particularly those accepting over 50% of their corpus from a single investor or investors within the same group.

These proposed changes seek to enhance the regulatory framework and increase investor protection within the AIF regime.

Further, tax revisions and amendments to Indian tax laws are typically incorporated into the annual budget presented by the government to Parliament. This occurs on a scheduled date each year – usually around February or July. The budget outlines the government’s fiscal policies, tax proposals and other financial initiatives for the upcoming fiscal year.

Answer ... The current trend in the financial landscape in India – particularly within the IFSC – is the launch of strategic initiatives aimed at positioning GIFT City as a go-to hub for global investors. The implementation of targeted tax incentives and government measures has made GIFT City an attractive destination for the establishment of funds with a specific focus on India.

Global investors supporting Indian start-ups often choose to set up operations in established tax havens such as Singapore, Mauritius or the Cayman Islands. However, the introduction of the IFSC AIF regime provides offshore funds with a compelling alternative for investments in Indian assets through routes such as foreign direct investment, foreign venture capital investment and foreign portfolio investment. This positions them to potentially operate as feeder funds for Indian AIFs, offering a viable alternative avenue for investment.

The International Financial Services Centres Authority (IFSCA) (Fund Management) Regulations, 2022 have further enhanced the appeal of the IFSC by introducing the concept of family investment funds. Tailored to facilitate the management of the financial affairs of a single family, these regulations contribute to the diverse and dynamic financial ecosystem within the IFSC.

Beyond the tax benefits, the regulatory environment in the IFSC boasts additional advantages, including the absence of a minimum net-worth requirement. Notably, non-resident Indians and foreign entities under family control can make unlimited investments in a foreign investment fund. These combined advantages have cemented the IFSC’s status as an attractive and competitive destination for a wide range of financial operations, drawing attention and interest from global investors and financial entities.