AIFs may face issues over ‘foreign’ investment panels | Economic Times

Mumbai: Foreign investors serving on the investment committees (IC) of private equity funds face uncertainty as it is not clear whether such appointments will be construed as ‘control’ under the non-debt instrument rules.Multiple people with direct knowledge of the matter told ET that if regulators link such appointments to control, several Alternative Investment Funds (AIFs) will effectively become foreign entities, causing downstream investment rules to apply. On the flipside, if large investors are not given a position in the investment committees, they may choose not to make investments through that specific fund.To be sure, most of the large foreign institutions have internal governance codes that mandate them to be part of investment committees, and monitor the deployments. Most of the private equity funds provide a representation to their large investors in the ICs. It plays an advisory role to the fund manager and vets the investment decisions proposed by the fund manager.Currently, AIFs are treated as domestic investors if the fund is incorporated in India and has a manager who is Indian resident. Hence, even foreign investment coming through a local AIF is treated as domestic investment. So, the sectoral caps and investment restrictions that apply to foreign funds coming directly would not be applicable to investments coming through AIFs.Lack of clarity on the matter is currently creating problems for several AIFs since market regulator, the Securities and Exchange Board of India (Sebi), has put several applications on hold. People with direct knowledge of the matter said Sebi has sought guidance from the Reserve Bank of India (RBI) on this matter. Emails sent to Sebi and RBI remained unanswered.Legal experts say the rules clearly allow foreign residents to have control and all that is needed is an affirmation from the regulators. “The Sebi move to hold back applications with external non-resident members on an AIF’s decision-making committee seems to be emanating from an out-of-place exchange control provision that requires the control of an AIF to vest with its investment manager and sponsor to the general exclusion of others,” said Tejesh Chitlangi, partner, IC Universal Legal. “All that is required is for the RBI to remove the ambiguity, after which Sebi may start granting approvals.”80353597The mere presence of foreign investors on ICs does not make a fund foreign controlled. “The specific issue is regarding control in the hand of non-residents which is determined based on the fund document and the rights of the investment manager,” said Moin Ladha, partner, Khaitan & Co. “Mere existence of a non-resident member in the investment committee in absence of control should not by itself be a concern.”Typically, the fund manager and sponsor of a fund control the vehicle. However, Sebi has come across instances where ICs were given extra powers such as veto on the investment decisions. Such special powers have prompted Sebi to intervene.In September 2020, Sebi said ICs would be treated on a par with the sponsors and fund managers in terms of liability. Until then, ICs were advisory bodies but this new Sebi circular made them equally responsible.