Introduction to Alternative Investment Funds (AIFs)

• Alternative Investment Funds (AIFs) are privately pooled investment vehicles in India, distinct from mutual funds and collective investment schemes, designed to cater to investors seeking diversification and innovative opportunities.
• Certain entities, such as family trusts, employee welfare trusts, and holding companies under the Companies Act, 1956, are exempt from registration under the SEBI (AIF) Regulations, 2012.
• Categories: AIFs are categorized into three types under Regulation 3(4) of the SEBI (AIF) Regulations, 2012:
• Category I: Focuses on socially or economically beneficial investments, such as start-ups, SMEs, infrastructure, and social ventures.
• Category II: Includes real estate, private equity, and distressed asset funds, catering to stable, long-term investment needs without leverage.
• Category III: Employs complex trading strategies and leverage, targeting high-risk investors with hedge funds and PIPE funds.
• Purpose and Objectives: AIFs align with broader economic goals, such as fostering innovation, supporting infrastructure, and promoting socially beneficial initiatives, while offering structured yet flexible investment avenues.
• Regulatory Framework: The classification ensures clarity, accountability, and alignment with policy objectives, enabling growth and innovation in India’s alternative investment landscape.

Key Requirements for Fund Management Entities (FMEs) in IFSCs

• Registration Categories: Entities managing funds in IFSCs must register as one of three categories of Fund Management Entities (FMEs): Authorised FME (accredited investors), Registered FME (Non-Retail), or Registered FME (Retail). Each has specific investor types, fund activities, and operational scopes, such as managing private placements, public offers, and ETFs.
• Eligibility and Structure: Applicants must establish a presence in IFSCs as a company, LLP, or branch (with restrictions on LLPs and branches for Registered FMEs (Retail)). Branches must meet net worth, ring-fencing, and operational conditions at the parent level. Key governance structures, like a minimum of four directors with independent representation, are mandatory.
• Track Record and Key Personnel: FMEs must demonstrate a “sound track record” (e.g., $200M AUM over 5 years for Registered FMEs (Retail) or alternative fintech contributions) and employ qualified personnel with a minimum of five years’ experience in securities or financial products. Specific roles, including Principal Officers, Compliance Managers, and KMPs, must be based in the IFSC.
• Net Worth and Fit-and-Proper Criteria: FMEs must meet net worth requirements per regulations, with branches relying on parent-level financial assurances. All personnel and shareholders must be fit and proper, reflecting integrity, financial stability, and regulatory compliance.

• Infrastructure: Adequate infrastructure, including office space, systems, and staff, proportional to operational needs, is mandatory. FMEs must ensure compliance, furnish necessary information to the Authority, and undergo inspections before registration approval.
• Certificate of Registration: FMEs receive a Certificate of Registration upon satisfying all requirements and paying the applicable fee. Registration is contingent on regulatory compliance, prompt disclosure of changes, and avoidance of false or misleading information. Changing registration categories requires prior Authority approval.
• Application Review and Refusal: Applications with deficiencies must be rectified within 30 days; otherwise, the Authority may reject them, providing reasons for refusal. Registration validity is determined by the Authority unless suspended, canceled, or surrendered.
• Surrender of Registration: FMEs can voluntarily surrender registration, subject to the Authority’s approval, ensuring orderly exit from regulatory obligations.
• Scheme Launch and Fiduciary Appointment: FMEs may launch schemes under regulatory provisions, requiring fiduciaries (e.g., directors, partners, or trustees) to meet fit and proper criteria, adhere to the Code of Conduct, and comply with governance obligations. Retail schemes require prior Authority approval for fiduciary appointments.
• Governance and Oversight: These regulations ensure FMEs operate with comprehensive oversight, maintaining transparency, accountability, and alignment with regulatory expectations.

GIFT City: India’s Emerging Financial Hub

• Strategic Location: Positioned between Ahmedabad and Gandhinagar as India’s first operational IFSC.
• Thriving Ecosystem: Home to 500+ entities, including banks, fintech firms, and India’s first bullion exchange.
• Regulatory Backbone: IFSCA ensures seamless operations with single-window clearance for financial services.

CONCLUSION

The regulatory framework for Fund Management Entities (FMEs) in International Financial Services Centres (IFSCs) ensures a structured and transparent environment for managing alternative investments. By establishing clear categories of registration, eligibility criteria, governance structures, and compliance requirements, the framework promotes accountability, integrity, and investor protection. The provisions related to track record, fit-and-proper criteria, net worth, and infrastructure are designed to maintain the operational efficiency and financial stability of FMEs. Overall, these regulations aim to foster a robust investment ecosystem while aligning with broader economic and regulatory objectives in the IFSCs.