8 Inter-AIF Investments: A Comprehensive Guide to SEBI's Regulatory Framework

Key Takeaways:

- AIFs can invest in units of other AIFs without labeling themselves as Fund of AIFs.

- Existing AIFs can simultaneously invest in securities and units of other AIFs with consent from unitholders.

- AIFs must disclose proposed allocation, fees, expenses, and compliance processes in their Private Placement Memorandum (PPM).

- Pooling vehicles solely for investing in an AIF must be registered with SEBI as AIFs.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has introduced guidelines to govern Alternative Investment Funds (AIFs) investing in units of other AIFs. These guidelines aim to promote transparency, investor protection, and a well-regulated investment landscape.

Under the SEBI (Alternative Investment Funds) Regulations, 2012, AIFs are permitted to invest in units of other AIFs, subject to specific conditions. This provision allows AIFs to diversify their investment portfolios and gain exposure to various asset classes and investment strategies without the need to label themselves as Fund of AIFs.

Existing AIFs can also leverage this opportunity by simultaneously investing in securities of investee companies and units of other AIFs. However, this approach requires the consent of at least two-thirds of the unitholders by value of their investment in the AIF, as mandated by Regulation 9(2) of the AIF Regulations.

To ensure transparency and investor protection, AIFs proposing to invest in units of other AIFs must provide comprehensive information in their Private Placement Memorandum (PPM). This includes disclosing the proposed allocation for investment in units of other AIFs, the portion of fees and expenses attributable to such investments, the process for ensuring compliance with investment conditions, and details of any investments in units of AIFs managed or sponsored by the same Manager, Sponsor, or their associates.

Furthermore, SEBI has clarified that pooling vehicles created solely for the purpose of investing in an AIF must be registered with SEBI as AIFs. This measure aims to maintain regulatory oversight and ensure that all investment vehicles adhere to the applicable rules and regulations.

By allowing AIFs to invest in units of other AIFs, SEBI aims to facilitate diversification and promote a robust investment ecosystem. However, it is crucial for AIFs to comply with the disclosure requirements, fee structures, and compliance measures outlined in the guidelines to ensure they operate in the best interests of their unitholders.

FAQs:

Q1: Can an AIF invest in units of another AIF without labeling itself as a Fund of AIFs?

A1: Yes, AIFs can invest in units of other AIFs without labeling themselves as Fund of AIFs, as per the SEBI guidelines.

Q2: What information must an AIF disclose in its PPM when investing in units of other AIFs?

A2: AIFs must disclose the proposed allocation for investment in units of other AIFs, the portion of fees and expenses attributable to such investments, the process for ensuring compliance with investment conditions, and details of any investments in units of AIFs managed or sponsored by the same Manager, Sponsor, or their associates.

Q3: Can existing AIFs simultaneously invest in securities and units of other AIFs?

A3: Yes, existing AIFs can simultaneously invest in securities of investee companies and units of other AIFs, subject to obtaining the consent of at least two-thirds of the unitholders by value of their investment in the AIF.

Q4: Are pooling vehicles created solely for investing in an AIF required to be registered with SEBI?

A4: Yes, pooling vehicles created solely for the purpose of investing in an AIF must be registered with SEBI as AIFs to maintain regulatory oversight and ensure compliance with applicable rules and regulations.

Key Precedents:

1. SEBI (Alternative Investment Funds) Regulations, 2012:

- Regulation 15(1)(c) and (d):

Allows AIFs to invest in an investee company up to a specified limit, directly or through investment in units of other AIFs.

- Regulation 9(2):

Requires consent of at least two-thirds of unitholders by value of their investment in the AIF for certain changes, including investment in units of other AIFs.

2. SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2021/584 dated June 25, 2021:

- Provides guidelines for AIFs investing in units of other AIFs, including disclosure requirements in the PPM and restrictions on pooling vehicles.

3. SEBI Circular No. CIR/IMD/DF/14/2014 dated June 19, 2014:

- Clarifies that pooling vehicles shall not be created solely for the purpose of investing in an AIF unless they are registered with SEBI as AIFs.

The SEBI (Alternative Investment Funds) Regulations, 2012, and the subsequent circulars issued by SEBI, establish the legal framework and guidelines for AIFs investing in units of other AIFs. These precedents outline the conditions, disclosure requirements, and compliance measures to ensure transparency, investor protection, and a well-regulated investment ecosystem.

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Here's AIF Circular's verbatim Chapter 8

Chapter 8 - Investment in units of AIFs{28}

8.1. In terms of Regulation 15(1) (c) and (d) of the AIF Regulations, AIFs may invest in an investee company up to a specified limit, directly or through investment in the units of other AIFs. AIFs may invest in units of other AIFs without labelling themselves as a Fund of AIFs.

8.2. Existing AIFs may also invest simultaneously in securities of investee companies and in units of other AIFs, subject to appropriate disclosures in the PPM and with the consent of at least two-thirds of unit holders by value of their investment in the AIF in terms of Regulation 9(2) of the AIF Regulations.

8.3. AIFs which propose to invest in units of other AIFs shall provide, inter-alia, the following information in their PPMs:

(i) Proposed allocation of investment in units of other AIFs;

(ii) Out of total fees and expenses charged to investors of the AIF, portion of fees and expenses which may be attributed to investment in units of other AIFs;

(iii) Process to be followed by the Manager to ensure compliance with investment conditions as specified in Regulation 15 and Regulation 16 or 17 or 18 (as applicable) of AIF Regulations;

(iv) Whether any investments are proposed to be made in units of other AIFs managed/ sponsored by the same Manager/ Sponsor or associates of the Manager/ Sponsor and details thereof, including allocation, fees, expenses, etc.

8.4. Pooling vehicles shall not be created solely for the purpose of investing in an AIF unless the pooling vehicles are registered with SEBI as AIFs{29}

Note:-

{28}SEBI Circular No. SEBI/HO/IMD-I/DF6/P/CIR/2021/584 dated June 25, 2021

{29}SEBI Circular No. CIR/IMD/DF/14/2014 dated June 19, 2014