Government to Allow Investments in Alternative Investment Funds

NEW DELHI: Providing a fresh avenue for foreign investors, the government today announced allowing overseas investments in Alternative Investment Funds (AIFs) -- a new class of pooled-in investment vehicles for real estate, private equity and hedge funds, among others.     

"Keeping in view the need to increase investments from all sources, I propose to also allow foreign investments in Alternate Investment Funds," Finance Minister Arun Jaitley said while Presenting the Budget for 2015-16 in the Lok Sabha.     

AIFs, which have been so far facilitating domestic investments, are funds established or incorporated in India for the purpose of pooling in capital from Indian investors for investing as per a pre-decided policy.     

Commenting on the proposal, Equirus Capital Managing Director Ajay Garg said: "It will help NRI and institutional participation which constitutes a big segment of investors being targeted by the AIF. But the big challenge on tax treatment to avoid double taxation for investors in AIF has not been addressed."      

"Overseas investors may show interest but it will depend on the fineprint whether such investors will get any tax benefit or not," Quantum AMC, Head-Fixed Income, Murthy Nagarajan said.     

Under Sebi guidelines, AIFs can operate broadly in three categories. The Sebi rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.     

The regulator in May 2012, notified the guidelines for this new class of market intermediaries.     

The Category-I AIFs are those funds that get incentives from the government, Sebi or other regulators and include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds.     

The Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds, among others.     

The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. These AIFs include private equity funds, debt funds or fund of funds, as also all others falling outside the ambit of two other categories. 
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