The Securities and Exchange Board of India ("SEBI") has issued an informal guidance on whether a Category III alternative investment fund ("Cat III AIF") can invest in mutual funds on a permanent basis as a part of the multi asset portfolio.
The informal guidance notes that in terms of regulation 18 of the SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations"), a Cat III AIF can, inter alia, invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products. In terms of regulation 2(1)(o) of AIF Regulations, "investee company" means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an AIF makes an investment.
Accordingly, the informal guidance states that investment in mutual funds is not covered under permissible investments by a Cat III AIF. However, in terms of regulation 15(1)(f) of AIF Regulations, un-invested portion of the investable funds and divestment proceeds pending distribution to investors of AIFs (including Cat III AIFs) may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as treasury bills, triparty repo dealing and settlement, commercial papers, certificates of deposits, etc. till the deployment of funds as per the investment objective or the distribution of the funds to investors as per the terms of the fund documents, as applicable.
Please find a copy of the Informal Guidance, here.
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