AIFs can leverage without limits in IFSC

KR Srivats New Delhi | Updated on December 11, 2020

This will give offshore fund managers a lot of leeway in taking commercial calls

GIFT City regulator IFSCA has removed several restrictions in current regulations on Alternative Investment Funds (AIFs) operating in International Financial Service Centre (IFSC), providing more flexibility to offshore fund managers looking to set up funds in such centres in the country.

Restrictions on leverage, creation of co-investment pools and diversification norms have been done away with by the International Financial Services Centres Authority (IFSCA).

These measures are expected to give offshore fund managers lot of leeway in taking commercial calls and in structuring funds based on negotiations with investors so as to better returns, say experts. Until now, a category I and II AIF operating in IFSC were not allowed to leverage. Also, Category III funds can only leverage up to a permissible limit.

Now IFSCA has relaxed leverage restrictions and brought it in line with International best practices. Leverage will be permitted subject to disclosure in the placement memorandum and consent of investors. The AIF employing leverage should have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the Fund, IFSCA has said.

Co-investment pools

The IFSCA has also done away with the diversification norms subject to appropriate disclosure in the placement memorandum.

The Authority has also permitted creation of co-investment pools as a separate class of unit within the AIF subject to the condition that the terms of such segregated investments are not more favourable to the common pool of capital.

In the past, there has been some confusion as to whether the AIFs can act as a fund-of-fund and also make direct investment. The Authority has clarified that AIF in IFSC will be able to make investment in AIF in India alongside other permissible investments.

Welcome move

Tushar Sachade, Partner, Tax and Regulatory Services, PwC India told BusinessLine that it is heartening to see that IFSC Authority has acted so swiftly to amend the existing guidelines to bring it in line with the international practices.

“These liberalisations will go a long way in providing required flexibility to the offshore fund managers to structure their funds based on commercial negotiation with their investors with a view to enhance fund returns.

This move will also promote setting up of funds in IFSC and will make IFSC a preferred fund jurisdiction for offshore fund managers looking to set up India focused funds,” he said.

It maybe recalled that SEBI operating guidelines which came in 2018 broadly adopted the AIF regulations in India for IFSC also.

They did come with relaxations like if AIF is in IFSC, one can invest globally without restrictions. Indian AIF had 25 per cent cap for outbound investments.

AIF regulations for IFSC had certain limitation including that leverage was restricted —AIF I and II were not allowed to do leverage. They were allowed to do leverage only for temporary funding purpose.

Currently, fund regimes in offshore financial centres follow light touch regulations and give a lot of flexibility to the investment manager to negotiate and commercially agree terms of investments such as leverage, diversification etc. with their investors. Now IFSCA has made changes to bring the norms in Indian IFSCs in sync with those in offshore jurisdictions.

Published on December 11, 2020

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