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The regulatory regime governing pooled investment vehicles in India entails the Securities and Exchange Board of India (SEBI) acting as the securities markets' regulator, inter alia, as follows.

Alternative investment funds

Alternative investment funds (AIFs) are governed under the SEBI (AIF) Regulations, 2012 (the AIF Regulations). SEBI recognised the importance and need of patient source of active capital provided by investment funds as well as their role in the growth of the corporate sector and governance standards. Accordingly, the AIF Regulations were notified in 2012 with the aim to establish a sophisticated framework for governing the formation and operation of all kind of private pools of capital of institutions and sophisticated investors. As of July 2019, SEBI has registered 683 AIFs, which, as at December 2019, have raised reported commitments of around 3.475 trillion rupees, an increase from around 2.394 trillion as at 31 December 2018.

Mutual funds

Mutual funds are governed under the SEBI (Mutual Funds) Regulations, 1996 (the MF Regulations). Mutual funds are primarily targeted toward retail investors with prudential regulations seeking to regulate all kinds of risks. The assets under management (AUM) of the Indian mutual fund industry as at 31 May 2020 stood at 24.5476 trillion rupees. The AUM of the Indian mutual fund industry has grown from 7.43 trillion rupees as at 31 May 2010 to 24.55 trillion rupees as at 31 May 2020 with more than a threefold increase in a span of 10 years.

Real estate investment trusts and infrastructure investment trusts

Real estate investment trusts (REITs) are governed under the SEBI (REIT) Regulations, 2014 (the REIT Regulations) and infrastructure investment trusts (INVITs) under the SEBI (INVIT) Regulations, 2014 (the INVIT Regulations).

SEBI had notified the REIT Regulations and the INVIT Regulations in 2014 towards mitigating the high pressure on banks and non-banking finance companies (NBFCs), which are regarded as traditional sources of financing, for sectors such as infrastructure and construction, which require stable long-term 'patient' capital. As at 7 July 2020, there are three REITs registered with SEBI and 10 SEBI registered INVITs.

Collective investment schemes

Collective investment schemes (CISs) are governed under the SEBI (CIS) Regulations, 1999 (the CIS Regulations). The CIS Regulations were notified in order to curb the growth of a number of unregulated private schemes in the 1990s. However, the CIS regime in India has not gained any notable traction in India. From 1999 to date, there has only been one registration.

Further, asset management activities in India also include providing management or advisory services on a bilateral basis mainly to retail investors and are regulated by SEBI as follows:

  1. portfolio managers under the SEBI (Portfolio Managers) Regulations, 2020 (the PMS Regulations) – as at 7 July 2020 there are 351 portfolio managers registered with SEBI;
  2. investment advisers (IA) under the SEBI (IA) Regulations, 2013 (IA Regulations) – as at 7 July 2020, there are 1,307 IAs registered with SEBI; and
  3. research analysts (RA) under the SEBI (RA) Regulations, 2014 (RA Regulations) – as at 7 July 2020, there are 691 RAs registered with SEBI.

In relation to the offshore funds seeking to invest in India, they are permitted to participate in the listed and debt spaces in India as foreign portfolio investors (FPI) under the SEBI (FPI) Regulations, 2019 (the FPI Regulations). The FPI Regulations notified last year have overhauled the erstwhile SEBI (FPI) Regulations, 2014, simplifying and rationalising registration requirements. As at 7 July 2020, there are 10,392 FPIs registered with SEBI.

For offshore funds seeking to invest in the unlisted space in India, foreign venture capital investors (FVCI) route is a useful route available under the SEBI (FVCI) Regulations, 2000 (the FVCI Regulations). However, at present, an FVCI is permitted to invest only in 10 sectors including infrastructure. The number of FVCIs registered has marginally increased from 253 in 2018 to 254 as at 7 July 2020, with no significant change in the capital invested by FVCIs during this period.

Foreign direct investment (FDI) is investment through equity instruments by a person resident outside India in an unlisted Indian company; or in 10 per cent or more of the post issue paid-up equity capital on a fully diluted basis of a listed Indian company. The FDI route does not entail a registration with SEBI and offers greater variety in terms of sectors albeit requiring prior government approval in certain cases. The FDI inflows have increased by approximately 13 per cent in the year 2019–20 from 2018–2019, that is, from approximately US$44 billion to US$50 billion.

Key trends

Recently, in order to curb opportunistic takeovers/acquisitions of Indian companies on account of the current covid-19 pandemic, the government issued Press Note 3 (PN3). This prohibits investment by an entity of a country that shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, unless prior approval of the government is obtained. The PN3 may adversely affect the offshore investors seeking to invest in India who may have received any part of their capital from such neighbouring countries of India. Further, the government approval process in order to invest from the said nations may also affect timelines of such investments. There also appears to be a lack of regulatory prescription as to the definition of beneficial ownership as no specific threshold or definition has been provided under PN3.

Given the current economic situation, there seems to have been an increase in establishment of special situations funds including where large parts of underlying assets are pre-identified, along with a preference for club-styled funds or managed accounts rather than the conventional blind pool platforms.

The existing market conditions have also thrown up a number of end-of-fund life transactions, such as structured secondaries and fund life extensions.

Fund structuring seems to have come far simpler today in light of the liberalised investment and tax regime for AIFs, and given predictability over the past few years, a number of offshore investors seem to have started considering direct participation in the onshore pool, rather than investing via an offshore feeder.

The government, in its capacity as an anchor investor, has established a collaborative investment platform, namely the National Investment and Infrastructure Fund, for international and Indian investors looking for investment opportunities in infrastructure and other high-growth sectors of the country, which includes a fund of funds programme that is likely to emerge as a significant domestic LP. Further, Small Industries Development Bank of India has been investing in various AIFs in order to promote and accelerate the growth of start-ups and micro, small and medium-sized enterprises in India.