A Category III Alternative Investment Fund (AIF) requested Securities and Exchange Board of India (SEBI) for an Informal Guidance by way of interpretative letter under the provisions of SEBI (Informal Guidance) Scheme, 2003.
The AIF approached SEBI seeking clarity on whether a Category III AIF can invest in Mutual Funds on a permanent basis as a part of their multi asset portfolio.
SEBI in reference to the said letter provided the following comments:
- In terms of Regulation 18 of AIF Regulations, Cat III AIFs may, inter alia,
- invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products.
- deal in goods received in delivery against physical settlement of commodity derivatives.
- buy or sell credit default swaps in terms of the conditions as may be specified by the Board from time to time.
- engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as may be specified by the Board.
- In terms of Regulation 2(1)(o) of AIF Regulations, “investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an AIF makes an investment.
- Thus, investment in Mutual Funds is not covered under permissible investments by a Category III AIF.
- However, in terms of Regulation 15(1)(f) of AIF Regulations, un-invested portion of the investable funds and divestment proceeds pending distribution to investors of AIFs (including Cat III AIFs) may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, Triparty Repo Dealing and Settlement, Commercial Papers, Certificates of Deposits, etc. till the deployment of funds as per the investment objective or the distribution of the funds to investors as per the terms of the fund documents, as applicable.
Thus, a Category III AIF can invest into mutual fund only for a temporary purpose.
Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement
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