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Mint
6 days ago
- Business
- Mint
Sebi may revisit AIF rules after industry pushback on investor parity norms
Mumbai: The Securities and Exchange Board of India (Sebi) is reviewing a set of new rules for Alternative Investment Funds (AIFs) following growing concerns from fund managers, legal advisors and investors, at least five people aware of the development told Mint on the condition of anonymity. The rules, which came into effect in December 2024, were designed to ensure equal treatment of investors, but many in the industry say they are too inflexible and may disrupt existing fund structures and global investor participation, experts said. AIFs—private pools of capital that invest in startups, real estate, and unlisted companies—have become a major vehicle for capital formation in India. As of 31 March 2025, AIFs had invested ₹5.38 trillion, according to Sebi data. Of this, real estate accounted for ₹69,896 crore, IT services for ₹34,553 crore, and NBFCs for ₹25,564 crore. The 13 December Sebi circular mandates that all AIF investors must be treated equally, both in how capital is drawn down and how returns are distributed. This is based on two key principles: pro-rata rights, which require profits and losses to be shared in proportion to each investor's committed capital; and pari-passu rights, which ensure all investors are treated equally, unless a specific exemption applies. The rules were meant to bring clarity and fairness to the AIF space. But they have also cast uncertainty over existing fund structures, especially those involving differentiated rights, preferred investor classes, or global institutional limited partners (LPs). Before the rule change, private funds had more leeway to tailor rights for different investors. Some offered priority distribution models where 'senior" investors received returns before 'junior" ones, often in exchange for taking on less risk. While Sebi always promoted fair treatment in spirit, these practices were not explicitly restricted until now. The regulator first signalled discomfort with these structures in 2022, when it paused fundraising by funds using such waterfall distribution models. The December circular went further, formalizing a uniform treatment requirement and narrowing the scope for deviation. Seeking clarity on real-world impact Since then, legal and industry experts have warned that the rules, though well-intentioned, could stifle fund design and discourage foreign participation. 'The Sebi circular on pro-rata and pari-passu rights for AIF investors was brought to bring clarity to fund structuring, aiming to ensure fairness and uniformity in investor rights, while carving out limited exceptions for sponsors and other strategic investors," said Moin Ladha, partner at Khaitan & Co. Ladha noted that the transition has raised difficult questions about how the rules affect legacy commitments and deal terms. 'Since its issuance, however, several industry stakeholders have raised concerns regarding its impact on legacy fund commitments and other commercial arrangements necessary for making investment viable," he said. 'While Sebi has not issued a formal clarification so far, it has usually been proactive in engaging with the industry to address practical implementation challenges," Moin added. Industry participants are also seeking clarity on how these rules apply to multi-layered structures, and to Employee Welfare Trusts (EWTs)—entities used by some funds to allocate carried interest or profit-sharing to employees, Moin noted. The circular does allow a few carve-outs. Fund sponsors and managers, for instance, can make subordinated investments—meaning they take more risk and are paid last. Large Value Funds (LVFs), which collect ₹70 crore or more from each investor, can also offer special terms, so long as they're disclosed upfront in legal documents. Even so, legal experts say these exceptions are too narrow to accommodate common practices in the industry. 'Regulatory clarity on the 'pro-rata' part of the December 13, 2024, Sebi circular would go a long way in aligning legal expectations with practical realities for AIFs," said Nandini Pathak, partner, Bombay Law Chambers. She pointed out that global funds routinely use different allocation methods depending on the phase of investment. While capital calls may be based on outstanding commitments, distributions often follow the ratio of actual capital invested. 'Institutional LPs also prefer allocation rules for distributions to be on invested capital ratio basis, as is evident from the ILPA standard term sheet," she said, referring to the guidelines followed by large international investors. Experts argue that Sebi should allow Indian AIFs to adopt such globally accepted practices—provided they're clearly spelled out in the fund's Private Placement Memorandum (PPM), which lays out terms, risks and investment strategy for potential investors. Sebi response in the works To address the feedback, Sebi has formed a Standard Setting Forum (SSF), which is reviewing suggestions and working on a list of investor rights that AIFs may offer on a differential basis without violating the equal treatment rule. 'The SSF is looking at detailed industry feedback and certain reforms are expected," said Vivaik Sharma, Partner at Cyril Amarchand Mangaldas. 'The SSF has specified a positive list of rights which may be provided by AIFs on a differential basis. It should be clarified that any additional rights may be offered to specific investors of AIFs so long they are not prejudicial to any other investor." Some concerns go beyond distribution rights. Experts have pointed to other commercial nuances the rules currently overlook—such as profit-sharing with advisors or offsetting fund expenses across different legal entities in a master-feeder structure, a common setup for funds with international investors. 'When dealing with master-feeder structures where fund expenses are incurred at both levels (main fund and sub-funds), allowing for offsets of the relevant amount of fund expenses incurred at the feeder level when considering the proportionate allocation of fund expenses among investors at the master fund level, are some of the areas for reconsideration," said Clarence Anthony, founder of Clarence & Partners. 'Most of these could be addressed by amending the Implementation Standards for offering of differential rights to select investors of an AIF." People familiar with the matter said Sebi is currently reviewing all industry feedback and may issue formal clarifications or revisions in the coming months.
Time of India
02-07-2025
- Business
- Time of India
RBI's Trust concerns stall wealth transfer plans of India's rich families
Mumbai: A 'trust deficit' between the regulator and several rich Indian families is stalling plans to ring-fence wealth and put in place a succession strategy for the nextgen. Many promoter families hold shares of the companies they own as well as portfolio investments in other securities and listed non-group entities through closely-held non-banking finance companies (NBFCs). Family patriarchs have often preferred transferring their-and other family members'-ownerships in such NBFCs to a trust which holds the investments and distributes the earnings to the trust beneficiaries. This family blueprint to preserve wealth now faces a challenge. The Reserve Bank of India ( RBI ), which regulates NBFCs, is questioning the transfer of ownership of at least four families to discretionary trusts due to the opaque structure of trusts, persons familiar with the subject told ET. If an NBFC holds a substantial stake in any listed entity, an ownership transfer of the finance company also requires the approval of the Securities & Exchange Board of India, under the takeover code. "Perhaps, RBI could take a cue from the approach adopted by Sebi vide its 2017 circular, to consider prescribing conditions for addressing policy concerns over future changes or control structure in a trust," said Moin Ladha, partner at the law firm Khaitan & Co. "In any event, most families would retain the control and only a contractual obligation in the nature of trust is created for achieving continuity and succession planning. So, the eligibility and fit and proper status isn't impacted by the settlement to trust," said Ladha. Live Events Some believe that RBI's reservations may also stem from the fact a promoter giving guarantee to a group company to enable it borrow at a lower interest rate or carry out certain other transaction, may isolate the shares by setting them aside in a trust if the guarantee is invoked. RBI, however, does stall the shift in ownership as long as the NBFC in question is a 'core investment company' holding and managing investments in group companies. Also, core companies which have not raised money from public investors or through bank borrowings, may not need a go-ahead from the regulator. While RBI did not respond to ET's queries, the regulator, sources said, is likely to harbour the view that unlike long-term, strategic holdings in group companies, an NBFC's investments in shares of non-group companies are in the nature of short-term, portfolio investments. Since the latter kind of NBFCs is considered to be dealing in financial securities, RBI does not want them to be controlled by trusts. A discretionary trust is formed by the settlor (who is often the head of the family who transfers the assets), immediate family members are named as beneficiaries, and independent professionals or a trusteeship company serve as the trustees responsible for distributing the earnings of the trust from cash inflows like interest, rent, and capital gains to the beneficiaries in proportions that are not prefixed. "It's sometimes perceived that the RBI is trying to reduce the number of NBFC licence holders. Any transfer of ownership or management application ends in denial. It seems the regulator wants to focus on a few players who do proper compliance. We have seen cancellation of licences for failing to file annual returns or not maintaining adequate capital," said Rajesh Shah, partner at the CA firm Jayantilal Thakkar & Co. Any change in NBFC shareholding resulting in acquisition or transfer of 26% or more of its paid-up capital requires prior RBI approval. "The process is stringent, with RBI empowered to seek additional information during its due diligence. When the acquirer is a trust, KYC compliance extends to both trustees and beneficiaries, posing greater complexity in discretionary trusts where ownership is undefined. Notably, RBI regulations do not prescribe a specific timeline within which such approvals must be granted, making the overall process both document-intensive and time-sensitive for investors and promoters alike," said Isha Sekhri, partner at Isha Sekhri Advisory LLP, a CA firm. Economic Times WhatsApp channel )
Time of India
25-06-2025
- Business
- Time of India
In Swiss they trust, though the banks are not as cool as before
Mumbai: Why are so many Indians parking money in Swiss accounts despite the alpine banks losing their once-famed secrecy? Who are these people? Is it forbidden funds- as one would suspect- or kosher money? Questions are popping out from numbers released by the Swiss National Bank, claiming that Indian money with Swiss banks trebled in 2024. What has happened? Some of the money flowing into the custody of these tight-lipped bankers may have a questionable colour. But, new rules in the UK and other countries, coupled with global uncertainties and choppy currency markets are driving many NRIs, wealthy families leaving India as well as rich residents to keep their money with Swiss banks, say financial advisors and lawyers familiar with such asset planning. According to them, most of the recent deposits piling up in Swiss banks are not 'black money' but funds of overseas Indians moving from other jurisdictions to Switzerland-many choosing to hold family wealth in Swiss foundations and trusts which are governed by friendly regulations. Switzerland offers a framework to recognise trusts formed under foreign law. (Join our ETNRI WhatsApp channel for all the latest updates) "The recent overhaul of the UK's non-dom rules has prompted many NRIs to relocate to either the UAE or Europe. Understandably, they are moving their wealth accounts. Singapore and Switzerland are the natural choices for holding such accounts. This could be the reason for increased remittance to Switzerland. Singapore and Switzerland are increasingly attracting global investors as evolved financial jurisdictions," said Moin Ladha, partner at the law firm Khaitan & Co. Live Events This year, the UK changed its 200-year old regime, causing many NRI families to look for second homes in other countries to escape high tax on overseas earnings and inheritance. The Swiss central bank data show that Indian money held through asset managers, insurers, and other financial intermediaries surged three times to 3.5 billion Swiss franc (or ₹37,600 crore), after falling to a four-year low in 2023. Money in customer (or retail) accounts of Indian clients rose only 11% in 2024. "The numbers point at a broader global trend of capital reallocation driven by regulations and tax," said Ladha. While there is no official statement from Swiss Banks about the reasons for the surge in Indian deposits, it reflects Switzerland's continued status as a trusted financial hub, said Isha Sekhri, who specialises in international and cross-border taxation. The strength and stability of the Swiss Franc amid geopolitical volatility, combined with its safe-haven reputation and agile regulations, make it an attractive destination for capital preservation, she said. While the Swiss currency slipped last year, it has appreciated 9.5% against the US dollar since January, and has outperformed its peers to close 2023 as the best-performing G10 currency. CONFIDENTIALITY LOST However, with countries signing pacts to share information on owners of bank accounts and other financial assets, Swiss banks have probably lost some of their lure to those stashing illicit money. As the Swiss revealed data on active and many closed accounts, the Indian Income tax department and the Enforcement Directorate invoked harsh laws against black money and laundering to question residents and serve notices to several NRIs. "Many of these accounts (linked to Indians) are held through investment vehicles or trusts where Indian individuals are 'ultimate beneficial owners' (UBOs), even if not named directly on the accounts. Enhanced global reporting standards could be contributing to greater visibility of such holdings," said Sekhri, partner at Isha Sekhri Advisory LLP. "Originally, many large families preferred keeping the names of beneficiaries under wraps. Here, Swiss confidentiality came handy, paving the way for estate planning along with tax avoidance," said Mitil Chokshi, partner at the CA firm Chokshi & Chokshi.
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Business Standard
30-05-2025
- Business
- Business Standard
RBI's LRS review to align with wider economic, geopolitical conditions
The Reserve Bank of India's (RBI's) initiative to review the Liberalised Remittance Scheme (LRS) framework is part of a routine exercise to align it with wider economic and geopolitical conditions, experts said. In its annual report released on Thursday, the RBI said it has initiated a comprehensive framework review and is examining various aspects, including the annual remittance limit, permissible purposes, transaction modes, and currency options. The LRS scheme was introduced in 2004, allowing all resident individuals to remit up to $25,000 per financial year for any permissible current or capital account transaction, or a combination of both, free of charge. This limit was gradually revised to $250,000 on 26 May 2015. 'Given the current dynamic economic environment, evolving capital flows, and the emergence of new-age transactions — such as investments in digital assets and international platforms — there is a clear need to relook at the LRS framework. Additionally, with remittances now linked to PAN, there may be a broader policy push to align LRS usage with income-tax compliance, ensuring that outward remittances reflect an individual's financial profile and tax status. A review can also help address concerns around sensitive sectors and potential misuse,' said Moin Ladha, Partner at Khaitan & Co. According to recent data, India's outward remittances under the Liberalised Remittance Scheme moderated by 6.85 per cent year-on-year (YoY) to $29.56 billion in FY25, after rising to an all-time high of $31.73 billion in FY24. In its annual report, the RBI said it has eased procedures and expanded the scope of the LRS in FY25, with the aim of improving convenience and accessibility for resident individuals. From 3 July 2024, authorised dealers (ADs) were allowed to facilitate remittances based on online or physical submission of Form A2, subject to Section 10(5) of FEMA 1999, irrespective of transaction value. Additionally, resident individuals were permitted to send funds under LRS to International Financial Services Centres (IFSCs) for any permissible current or capital account transaction, effective from 10 July 2024, the RBI said. Individuals were also allowed to use funds held in their IFSC-based foreign currency accounts to make transactions in other foreign jurisdictions. Previously, LRS remittances to IFSCs were allowed only for investment in securities. This was expanded on 22 June 2023 to include payments of education fees to foreign universities operating in IFSCs. 'Amid the growing educational inflation abroad and broader inflation, there is a need to relook at the LRS limits. The review is part of periodic assessment and the RBI keeping in sync with the changing realities,' another expert said.
Economic Times
05-05-2025
- Business
- Economic Times
Small foreign stakes in listed cos face banks' regulatory barriers
Tired of too many ads? Remove Ads Tired of too many ads? Remove Ads Popular in Markets Mumbai: Foreign investors planning to test the waters by buying small stakes through off-market deals in listed Indian companies are hitting a wall with banks throwing the rule book at least half a dozen large private and MNC banks, following a rigid interpretation of the law, have told such offshore investors that they can hold less than 10% in listed companies only after registering themselves as foreign portfolio investors (FPI) with the Securities & Exchange Board of India (Sebi).Banks taking such a stance have blocked a few inbound investments even though the proposed share purchases were not on the stock exchange, but planned as secondary off-market trades and preferential stems from the understanding that foreign holdings above 10% would be categorised as 'FDI' while equity interests of less than 10% would be treated as 'foreign portfolio investment'."This issue has been coming up in multiple deals recently at the time of investment. FDI and FPI are two separate investment routes. Quantum of investment, in my view, should not force an investor to change the category of investment as that would not be supported by the current structure and commercial objective," said Moin Ladha, partner at the law firm Khaitan & to commit large stakes, many (non-FPI) investors prefer single-digit holdings in listed this context, several banks hold the view that investments classified as foreign portfolio investments could be only made by Sebi recognised FPIs. Since banks are the authorised foreign exchange dealers responsible for processing the inflows, their disapproval would either stall a transaction or drive the investor to find a bank with a more realistic interpretation of the comfortable with less than 10% investments by non-FPI foreign investors believe that while such an investment should be classified as foreign portfolio investment, it's not necessary that the investor must be an FPI. So, any foreign investor-irrespective of whether it has an FPI license or not-can buy the shares. These banks think that the FDI-related paperwork, like filing of 'foreign currency gross provisional return' (FC-GPR), will not be necessary for such portfolio Foreign Exchange Management (Non-debt Instruments, or NDI)) Rules state that investment of 10% or more in a listed company would be treated as FDI. "Conversely, an investment of less than 10% by any person resident outside India is treated as foreign portfolio investment under Rule 2(t). It may be noted that this is foreign portfolio investment and is applicable for any person resident outside India. It is different from a ' Foreign Portfolio Investor ' which is registered with Sebi," said Anup P. Shah of PPS & Co, a tax and legal advisory firm."It is possible to take the view that a foreign person should be allowed to invest less than 10% in a listed company even if he is not a Sebi-registered FPI. However, this is an issue on which there is no express clarity, leading to diverse interpretations," said than 10% investment, said Ladha, can be undertaken under Schedule I of the NDI rules. "The original intent of the rules is to ease reporting and not curtail investment below 10% under Schedule I," he developments take place at a point when Sebi has broached the idea of allowing foreigners to directly buy listed stocks-the way NRIs can, albeit subject to a FDI-FPI norms are often shaped by the respective turfs of RBI (dealing with FDI) and Sebi (formulating rules on FPIs). Their inability to bridge the gaps have made the rules less flexible. For instance, an FPI must hold less than 10% in a listed company; but if it buys more shares and the holding crosses 10% to reach, say 12%, the entire 12% is considered as FDI. And, even after the FPI sells the additional shares and brings the stake below 10%, it is still considered as FDI.
