Sebi bars AIFs from raising capital from non-compliant foreign investors

Foreign investor must be is a resident of the country whose market regulator is a signatory to either IOSCO multilateral MoU or has signed bilateral MoU with Sebi

The Securities and Exchange Board of India (Sebi) on Friday issued fresh guidelines to Alternative Investment Funds (AIFs) barring them from raising fresh capital from foreign investors who do not meet specified conditions.

At the time of on-boarding investors, the manager of an AIF will have to ensure the foreign investor is a  resident of the country whose securities market regulator is a signatory to the International Organization of Securities  Commission’s (IOSCO) Multilateral MoU or a signatory to the bilateral MoU with Sebi.

IOSCO has multilateral MoUs with the regulators of over 140 countries. Industry experts, while welcoming the decision, said that there is not much information on the amount of inflow from countries which are outside this ambit.

Furthermore, the investor or its underlying investors contributing 25 per cent or more in the corpus of the investor, should not be a resident of a jurisdiction having deficiencies in anti-money laundering strategies or in combating the financing of terrorism.

“The decision is in line with the expectation on regulations for the inflow of foreign investments. The intent of the Sebi is that investors from only those jurisdictions be allowed which have sufficient information sharing arrangements with SEBI. This is as per global standards to avoid money-laundering,” said Sahil Shah, counsel, Khaitan & Co.

In the fresh circular, Sebi noted that in case such an investor has been on-boarded to an AIF, the manager will not drawdown any further capital contribution from them until the conditions have been met.

The new guidelines are applicable to investors already on-boarded to the existing schemes of AIFs.

Recently, the capital market regulator has tightened its framework for AIFs with several amendments to the regulations. Sebi has specified the manner of calculating the tenure of a close-ended scheme of an AIF and prescribed a fee for change in control of the manager or sponsor in its previous circulars issued in November.