Asset Management: Alternative Investment Funds

Narendra Kumar

11 Jan, 2021

It refers to the management of assets. It is the direction of clients assets i.e. cash or securities by a financial services company.

Such an institution offers investment services along with a varied range of product services that a laymen investor might not able to apprehend. It needs to achieve the investment goal specified in the policy document attached. It cans however in the form of various sorts of funds i.e. hedge funds, pension or retirement funds or you can say mutual funds. It simply & conventionally displays the idea of making money from the existing set of money ideally.

Overview:

Asset management companies administer the funds of their client in order to achieve a financial objective within specific guidelines pertaining to the investment pool.It can be done via using various financial vehicles like derivatives, options, futures, equity scrips of securities etc.

Asset managers, here depending on the clients’ objectives and risk appetite, would thereafter manage the funds and ensure that the financial goals are fulfilled. It is a technique for managing money.

Legislations:

Fund / Asset Management & its marketing are regulated in India by Securities Exchange Board of India^[1] & where in the case of the offshore market or FDI involvement through Reserve Bank of India.

Onshore Funds –

1. SEBI (AIF) Regulations, 2012.
2. SEBI (Mutual Fund Regulations), 1996
3. Portfolio Management Regulations, 1993
4. Collective Investment Scheme, 1999

Offshore Funds –

1. Foreign Portfolio Investors, 2014
2. RBI Foreign Exchange Management Act, Regulations 2000
3. Foreign Venture Capital Regulations, 2000

*Key requirement applicable for differentiation is an application by investment managers’ i.e. Minimum professional experience of 5 years in portfolio/investment management, meeting capital adequacy requirements, fit & proper criteria & other infrastructure requirements.

Setting up

As per Asset Management rules, Trusts can only be used as legal vehicles for mutual fund registration.

In 1964, the Unit Trust of India (a state body that is to be the sole vehicle for retail investments in Indian capital markets), launched its first open-ended equity scheme, Unit 64. This turned out to be one of the most popular mutual fund schemes in the country. In 1993, SEBI introduced the MF Regulations, which paved the way for the entry of private sector players & other young investment enthusiasts in the mutual fund industry. The entry of private sector mutual funds created competitive efficiencies in the industry and helped investors to choose from schemes with different maturity periods with terms & conditions and different risk-return profiles. In addition to domestic investors, the following are permitted to invest in mutual fund schemes under the MF Regulations:

• FPIs subject to their applicable investment limits;
• Non-resident Indians& the investment repercussions; and
• long-term investors such as sovereign wealth funds, multilateral agencies, endowment funds, insurance funds, pension funds and foreign central banks registered with SEBI.

Apart from Mutual Funds, various other schemes are floated for asset management i.e. Alternative Investment Funds, Infrastructure Investment Funds, Real Estate Investment Trusts. They basically come in the ambit of pooling of non-retail fund base. They can only be marketed via Private Placement.

Scenario

In the wake of 2015, SEBI proposed to remove certain restrictions to allow Indian AMC’s registered under the MF Regulations (AMC) based in India to be able to manage FPIs registered as either Category I FPIs or Category II. In the 2015’s Union Budget, the then Finance Minister proposed amendments to encourage fund management activities in India. Under the mentioned scheme, an offshore fund having an eligible fund manager in India should not create a tax presence (business connection) for the fund in India unless certain objective defined parameters have been met or fulfilled.

• Under current Indian treaties and domestic law, the presence of a fund manager in India increases the risk of the offshore fund constituting a permanent establishment (PE) or tax presence in India and thereby being subject to tax in India, to the extent attributable such territorial presence. The Finance Minister, in his budget speech, also announced that foreign investment will be automated & permitted in AIFs & other related fund collecting schemes.

However, Indian investors dealing in foreign funds established or managed abroad, the Liberalized Remittance Scheme (LRS) allows Indian resident individuals to undertake permissible capital and current account transactions over it. At present, the limit for overseas investments by resident individuals under the LRS is US$125,000 per person but the RBI has announced that the limit is being increased to US$250,000 per person lately. Companies incorporated in India or bodies created under any act of Parliament/Partnership firm registered under the Indian Partnership Act, 1932/LLP incorporated under the Indian Limited Liability Partnership Act, 2008 are allowed to make overseas direct investment under either the automatic route or the approval route by way of contribution to the capital or subscription to the memorandum of a foreign entity.