SEBI Increases Scrutiny on Foreign Investment in AIFs

Revised norms for alternative investment funds (AIFs) to raise money from international investors have been released by market regulator Securities and Exchange Board of India (SEBI). AIFs are funds created or incorporated in India with the intention of pooling resources from domestic and international investors for investments in accordance with a predetermined policy.

The circular mandates that the manager of an AIF would have to confirm that the foreign investor is a resident of a nation whose securities market regulator is a signatory to the Multilateral Memorandum of Understanding of the International Organization of Securities Commissions (IOSCO) or a signatory to a bilateral Memorandum of Understanding with SEBI.

The SEBI stated in a circular that “AIFs may accept commitments from an investor who is a Government or Government-related investor and does not meet the aforesaid condition, if the investor is a resident of the country as may be approved by the Government of India.”

Additionally, the investor or underlying investor contributing 25% or more of the corpus or identified on the basis of control should not be someone on the Sanctions List made public by the UN Security Council and should not reside in a nation named in the Financial Action Task Force’s public statement (FATF) as a nation that has strategic Anti-Money Laundering or Combating the Financing of Terrorism Deficiencies to which counter measures apply, has not committed to an action plan created with the FATF to remedy such inadequacies, or has not made enough progress in addressing the deficiencies.

The manager of the AIF will not withdraw any additional capital contributions from an investor who has been onboarded to a scheme of an AIF for the purpose of making investments unless the investor once again satisfies the conditions.

The same would hold true for investors who have already signed up for AIF schemes but do not match the required criteria, according to SEBI. The new regulations would take effect immediately.

The FATF identifies jurisdictions, on an ongoing basis, that have strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. The FATF does not recommend that these jurisdictions implement enhanced due diligence measures; however, market regulators take precautionary measures to avoid related risks. The norms put additional compliance burdens on AIFs.