Answer ... The key to smooth establishment of an AIF in India is to get the investment structure right from the start. Investment managers must engage in careful consideration of the target investors, their jurisdiction of residence, the target sectors and the instruments for deciding on the right structure and combination of vehicles. The structure must meet both the spirit and the letter of the regulations – although, as many of the regulations are fairly nascent, there is little direct jurisprudence or regulatory opinion on the matter.
Paying adequate attention to compliance, governance and reporting (to regulators and to investors) is another habit that investment managers must cultivate. Care must be taken not to switch between convenient or aggressive positions.
Attention must be paid to the contractual arrangements between the general partner and the limited partners, as well as between the AIF and investee companies, such that the scope of rights and obligations of each party is clearly delineated. This should mitigate, if not eliminate, the risk of disputes arising at the time of exit or winding up, and in turn should avoid value destruction at the portfolio level.
Flexibility must be retained in the documentation and structure so as to accommodate any future changes in the regulatory and tax regimes. Given that the regimes for pooling vehicles in India are at a fairly nascent stage, changes in law during the life of the fund may adversely affect the AIF.
Lastly, thus far, inadequate attention is being paid to the management team and the alignment of its interests with those of the fund and its investors. Limited partners have increasingly become wary of significant team churn, and hence diligence on the key investment team and contractual arrangements to tie the interests of the team with those of the AIF has become a crucial dialogue with general partners.