[ A D V E R T O R I A L ]
AIFs in India
Over the past few years, the alternative investment fund (AIF) industry in India has been on a growth
path. Global Custodian speaks to Christophe Belaerts, CEO, BNP Paribas Securities Services, India.
Global Custodian: What accounts for the
growth of AIFs in India?
Christophe Beelaerts: The Securities and
Exchange Board of India (SEBI) intro-
duced regulations to manage AIFs in 2012
and in the past five years the number of
such funds has grown eightfold. Accord-
ing to SEBI statistics, AIFs currently have
around US$22bn in commitment.
AIFs face a bright future, since the
appetite for alternative investments in
India, including allocations to real estate
and private deb t is likely to keep grow-
ing. Moreover, foreign interest has been
boosted by the decision to allow overseas
investment in AIFs.
GC: Which structures are most popular for
AIFs in India?
CB: Although AIFs can be set up as a trust,
an LLP or a company, some 95 per cent
of funds are registered as Trusts. These
provide high levels of client confidential-
ity, low compliance requirements and are
easy to run.
GC: What about the tax implications?
CB: When it comes to Category I and Cat-
egory II AIFs (See box), business income
is taxed at the AIF level; full pass-through
for income from investments, such as
capital gains, dividends and interest, is
allowed. Losses are retained at the fund
level and not passed on to the investors.
Figure 1: AIF growth
Christophe Belaerts,
CEO, BNP Paribas Securities Services, India
Category III AIFs do not benefit from
pass-through status, which means in-
come is taxed at the fund level as per the
general taxation principles applicable to
the AIF’s structure, but the same income
could be taxed at both the fund level and
the investor level, and in some circum-
stances the AIF’s entire income might
be taxed at the Maximum Marginal Rate
(MMR). Investors have no certainty as to
whether the AIF’s income will be classi-
fied as capital gains or as business income.
GC: Are there any particular challenges
faced by AIFs with foreign capital?
CB: Though Category III AIFs (most of
which are trusts) have proved popular as
Source: Securities and Exchange Board of India (SEBI)
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a means of exposure to Indian securities,
there are indeed tax issues around foreign
investors. If a Category III AIF has just
one non-resident investor or Foreign Cap-
ital/Investments then every restriction
applying to Foreign Portfolio Investors
applies to the entire fund.
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2014-15
Categories of AIF
Category I: Close-ended funds set up
to invest in start-ups, early-stage ven-
tures, infrastructure and other sectors
considered socially desirable and shall
include venture capital funds.
Category II: These are AIFs that are not
in Category I or III. Mainly close-ended
funds set up to invest in areas such as
real estate, private equity, debt, funds
of funds etc.
Category III: Close-ended or open-end-
ed, and typically employ complex
trading strategies and invest 100 per
cent in listed securities.
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GC: How does interest in AIFs compare to
mutual funds?
CB: AIF’s are still some way behind mu-
tual funds, which have around US$330
billion in assets under management. This
is partly because AIFs have a relatively
limited audience as they deal in more
complex, higher-risk investments than
mutual funds, and require a minimum
investment of one crore rupees (around
USD 160,000).
Although AIFs are unlikely to catch up
with mutual funds in terms of their AuC,
they are growing fast. But as is clear from
the issues discussed above, the sector would
benefit from the clarification of a number of
grey areas relating to structure and taxation.
Investors should therefore pay close atten-
tion to future amendments from regulators
to see if these issues are addressed.
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Spring 2018
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