The last week witnessed two positive regulatory updates relevant to the domestic funds industry. While on one hand, the Ministry of Corporate Affairs (MCA) has cleared the mist of scepticism around SEBI registered trusts, including Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITS), holding partnership interests in limited liability partnerships (LLPs); the Foreign Investment Promotion Board (FIPB) has, in a landmark decision, granted approval to an AIF Trust to accept Non Resident Indian (NRI) investments based on its undertaking to provide the details of such NRI investors as and when they participate in the AIF. This marks a significant shift from the FIPB’s earlier requirement of providing such details at the stage of the filing the FIPB application.

MCA affirms LLP Investments by AIFs, REITs and INVITS

Typically, AIFs in India are, for various reasons including operational convenience and flexibility, set up as private trusts under the provision of the Indian Trusts Act, 1882 (Act). Further, the recently notified SEBI regulations on REITs and INVITS require these vehicles to operate as trusts.

The Act defines a ‘trust’ as ‘an obligation annexed to the ownership of property, and arising out of a confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or another and owner’. As per the provisions of the Act, while the trustee of a trust would be the owner of trust property, he would hold the same for the benefit of its beneficiaries and in the capacity of a trustee. Hence, the trusts set up under the provisions of the Act are not considered to be legal persons or body corporates.

However, Section 5 of the Limited Liability Partnership Act, 2008 (LLP Act) permitted only an individual or a body corporate to become a partner of an LLP. In light of the aforesaid, a view was prevalent in the industry that since the trustee of a trust would not hold the LLP partnership interest for its own purpose, but in the capacity of a trustee; AIF trusts, REITs and INVITS could not hold partnership interests in LLPs even where such trustees were body corporates. This view raised apprehensions on the feasibility of investments by trusts registered as AIFs, REITs or INVITS in LLPs.

However, the MCA has now, vide General Circular No 37/2014 (Circular) dated 14 October 2014, clarified that trusts set up under the SEBI regulations (which includes AIFs, REITs and INVITS) can become partners of LLPs and trustees of such trusts, being body corporates, would be allowed to hold partnership interests in LLPs without the addition of the statement that it is a trustee.

The above Circular is particularly relevant, given that LLPs today have become the vehicles of choice for conducting business in various sectors of the Indian economy, given their simpler constitution and ease of operation when compared to companies. The Circular also expands the investment horizon of AIFs, REITs and INVITS, which can now acquire partnership interest of LLPs in the name of their trustees. Further, from a taxation perspective, once an LLP pays tax on its income, the distributions made by such LLP are not subject to tax in the hands of its partners and are also free from levy of any dividend distribution tax, which is applicable on dividend distributions made by a company, thus making LLPs a vehicle of interest for entrepreneurs and investors alike. In a nutshell, the clarification by the MCA is well timed and a welcome move.

FIPB’s pragmatic view resolves the ‘Chicken-or-Egg-First’ dilemma for AIFs on Investor Disclosures

The Consolidated Foreign Direct Investment Policy of India dated 17 April 2014 (FDI Policy) provides that any investments by NRIs in Indian trusts, including AIFs, require prior approval of the FIPB. Accordingly, AIFs seeking to raise monies from NRIs required the FIPB approval before accepting such investments.

In many cases, it was observed that the FIPB required such AIFs to disclose details of the NRI investors at the stage of application itself; while potential NRI investors usually required the AIFs to obtain all regulatory approvals before making any binding capital commitments. Hence, the requirement of providing details of NRI investors was making the situation akin to the ‘chicken-or-egg first’ dilemma because the NRI investors would not invest, in absence of the necessary regulatory approvals. As a result of this, the FIPB approvals turned into long drawn processes till the AIFs could present the FIPB with details of at least a few NRI investors. This was a typical problem faced by the VC-PE industry players, who historically have accepted capital commitments from investors by holding ‘closings’ upon reaching specific targets and not admitting investors prior to that.

In a recent case, the FIPB has granted approval to an AIF to accept NRI investments based on the AIF’s undertaking to provide full details of the NRI investors, along with appropriate certification of source of funds verification undertaken by it, as and when it receives such investments. This pragmatic approach of the FIPB should be lauded whole heartedly for serving as an adequate resolution of the dilemma. While FIPB approvals are awarded on a case-by-case basis, based on the facts and circumstances of each case, and do not serve as precedents; it may now be feasible for AIFs to approach the FIPB based on an undertaking to provide investor details, as and when the investments are received by them. Nevertheless, it is to be noted that prospective applicants would need to fulfil all other applicable conditions prior to seeking FIPB’s approval, prescribed under the prevailing FDI Policy and other foreign exchange regulations, as applicable to them.


With the advent of a new Central Government earlier this year, which is perceived as being investor-friendly, there was an upsurge in the expectations of the domestic funds industry in terms of regulatory reforms. The Central Government has showcased strong indications of its inclination to restrict red-tape and develop a conducive environment for investors and entrepreneurs. The above developments may be early indications that the industry’s love may not be one-sided! To summarize, these developments could certainly make life a little simpler for fund managers – both at the fund raising and investment stages.

Having said that, the industry wishlist also includes bringing NRI participation in an AIF trust under the automatic route, i.e. without any approval from a regulatory body, which would be a boon to the market and NRI investors, who may then easily access an alternative asset class onshore.