Budget opens door for foreign investment in AIFs
Mumbai: Finance minister Arun Jaitley on Friday proposed allowing foreign investment in alternative investment funds (AIFs), which typically collect money from high net-worth investors to invest primarily in unlisted securities.
The move announced in the fiscal 2016 budget, once implemented, will not only boost foreign money inflows but also stimulate growth of start-ups and projects that often face difficulties in raising working capital due to their small size or unconventional business objectives.
The move will also potentially bring large global hedge funds and wealthy foreign individuals, which now mostly invest in listed firms, into the unlisted space, accelerating the growth of an burgeoning AIF industry.
“Alternate investment funds regulations have been notified by Sebi. Such alternate investment funds provide another vehicle for facilitating domestic investments. Keeping in view the need to increase investments from all sources, I propose to also allow foreign investments in alternate investment funds,” said finance minister Arun Jaitley in his budget speech.
India’s AIF industry has more than doubled during the past year—faster than traditional investment vehicles such as mutual funds and market-linked insurance products. AIF managers raised capital commitments worth Rs.20,457.45 crore from affluent Indian investors in the fiscal year till the end of December from Rs.11,186.36 crore in the previous year.
Of the money committed by investors, asset managers raised funds to the tune of Rs.7,790.52 crore in the year till December compared with Rs.2,883.49 crore collected a year earlier.
Local AIF managers, including private equity (PE) and venture capital (VC) funds, have followed their overseas counterparts in pouring money into Indian technology and e-commerce start-ups, triggering a boom in early-stage investments.
In addition, prospects of a rebound in India’s economic growth have prompted wealthy investors in the country to embrace riskier investments in private equity, real estate and hedge funds in search of higher returns.
In April 2012, the capital markets regulator brought all AIFs such as PE funds, VC funds, infrastructure funds and social sector funds under an omnibus regulation with the objective of reducing the investment risk of investors.
The regulation classified AIFs under three categories, with the first category including VC funds, small and medium enterprises funds, social venture funds and infrastructure funds, and the second category including PE funds, debt funds and funds of funds.
The third category includes hedge funds. The number of firms that have introduced AIF schemes too has increased. There were 123 AIFs in India as on 28 November, while 18 more are awaiting regulatory approval.