SEBI Issues Circular on Foreign Investment in AIFs

The Securities and Exchange Board of India (SEBI) has issued a circular on foreign investment in Alternative Investment Funds (AIFs) to incorporate, in its Master Circular, the recently notified thresholds for the determination of beneficial ownership.

Last year, the Ministry of Finance notified amendments to the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, revising the thresholds for determining beneficial ownership. Accordingly, changes were made to Rule 9(3) and the threshold was brought down from 25% to 10% of the company’s shares, capital, or profits. For partnership firms, it was reduced from 15% to 10% of the capital or profits of the partnership and in the case of trusts, the threshold was lowered from 15% to 10% interest in the trust.

SEBI has modified its Master Circular for AIFs to incorporate the amendments to the 2005 rules. As per the circular dated January 11, 2024, at the time of onboarding of investors, the manager of an AIF has to ensure that the investor, or its beneficial owner as determined in accordance with Rule 9(3) of the 2005 rules is not included in the Sanctions List notified by the United Nations Security Council and is not a resident of a country identified in the public statement of the Financial Action Task Force as “i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies”.

The circular adds that if investors who have already been onboarded do not fulfil these criteria, the manager of the AIF cannot drawdown further capital contribution from such investors for making any investment till the criteria is met.