Sponsor investments in IFSC AIFs to come under the automatic route

RBI relaxation to allay round tripping concerns associated with sponsor commitment and shorten fund set-up time in IFSC

The Reserve Bank of India (RBI) has allowed sponsor investments by Indian entities in alternative investment funds (AIFs) set up in an overseas jurisdiction or in an International Financial Services Centre (IFSC) in India to come through the automatic route.

The relaxation is expected to resolve the issue of round tripping associated with sponsor commitment and will shorten the set-up time for fund managers wanting to establish their IFSC presence

"It has been decided that any sponsor contribution from a sponsor Indian Party to an AIF set up in an overseas jurisdiction, including IFSCs in India, as per the laws of the host jurisdiction, will be treated as Overseas Direct Investment (ODI). Accordingly, an IP can set up AIF in overseas jurisdictions, including IFSCs, under the automatic route provided it complies with Regulation 7 of the FEMA rules," the RBI observed in a note on Wednesday.

Investments in IFSC AIF are considered outbound in nature and, until now, there wasn’t a clear guidance from the RBI on whether an approval would be required for making such sponsor investments. Also, there were apprehensions that the RBI may view AIFs focussed wholly or partly in making Indian investments as vehicles for ‘round tripping’.

"To the extent the sponsor investment is made as per laws of the host jurisdiction, these aspects seem to have been addressed through the circular," said Subramaniam Krishnan, Partner, Private Equity - Tax, EY India. "The relaxation should provide impetus to India-based sponsors considering an AIF set-up in IFSC as the RBI approval will now no longer be required subject to meeting the specified conditions."

Regulatory approvals typically took 3-4 months and dissuaded or added to the compliance burden of Indian GPs wanting to manage IFSC AIFs from their existing offices outside the IFSC.

"Permitting sponsor investment via the automatic route will expedite the fund set-up process and incentivize both Indian and foreign promoters to set up AIFs in the GIFT city," said Khushboo Chopra - Head of Business Development India, Sanne.

"This will give a much required booster to the GIFT regime and ease the process for Indian entities sponsoring GIFT based funds, without going through the tedious and time-consuming process of regulatory approvals and entity set-ups," added Divaspati Singh, partner, Khaitan.

The automatic route will be available subject to the Indian entity meeting certain conditions that include being regulated, having a three year profitability track record, and getting the necessary approval from regulatory authorities in India and overseas. For example, if an NBFC is sponsoring a fund, then it needs an NOC from RBI whereas if a PMS is sponsoring, then it needs a nod from Sebi.

The sponsor commitment is 2.5 per cent of the corpus, or $750,000 for category 1 and category 2 AIFs, whichever is lower. For category 3 funds, it is 5 per cent of the corpus or $1.5 million, whichever is lower.

Experts, however, reckon some ambiguities remain in the manner in which the circular has been drafted.

"In many cases, the investments by the IP would be in a manager/sponsor entity in IFSC which in turn will make sponsor commitment in the IFSC AIF. It is not clear if such situations are covered," said Tushar Sachade, Partner,  Price Waterhouse & Co LLP.

According to Sachade, the sponsor is often commercially required to make commitments which are much higher in value then that are required by the regulations. The RBI circular, it seems, only covers sponsor commitment up to regulatorily required commitment, he said.

"It would help if clarity could be provided that such sponsor investments would be permitted to be made both directly and indirectly (via the fund manager or sponsor entity setup overseas or in IFSC) and further also be permitted in situations where there is no mandate for sponsor investments under the host jurisdiction laws," added Krishnan.