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MUMBAI : Nikhil Kamath, a co-founder of Zerodha, has announced the launch of the first Alternative Investment Fund (AIF) in Gujarat’s GIFT city called True Beacon Global. GIFT city is a special economic zone that was first envisaged in Arun Jaitley’s 2015 budget with the idea of creating an international financial services hub.

Kamath already manages a category III AIF outside GIFT city called True Beacon One, which was launched in September 2019. According to Kamath, it delivered a return of 47.2% in calendar year 2020, beating the Nifty50, the index of the largest 50 companies in India, by 32.3%. True Beacon Global is targeting an initial corpus of $100 million. This would bring it close to the current size of around $140 million ( 1,000 crore) for True Beacon One.

The AIF, True Beacon Global, is a category III AIF, meaning it can profit from stock prices rising and falling and take on leverage (debt). The fund’s long-only allocation, accounting for about 60% of exposure, will invest exclusively in the Nifty50 universe. The remaining exposure of about 40% is realized through long-short proprietary strategies that aim to hedge the long-only component.

Thus the net unhedged part of the fund can go below 60% also. Kamath is cautious on valuations in the Indian market. “I don’t see much value, considering that India is trading at price-to-earnings (PE) multiples of around 40. India is a stock market that trades at PE of 20-25 when things are going well. That may not always be the case," he said.

"A lot of premium has been built into the India market based on political stability. For the first time there appears to be a threat to the incumbent government. Hence the premium has to go away at some time. The narrative is not focusing on that because the rest of the world is also expensive. We will be around 50-60% hedged," he added.

According to Richard Pattle, co-founder and chief executive officer, True Beacon, the AIF will not charge a fixed fee. It will charge a performance fee of 10%, with a high watermark on par with the structure of True Beacon One. For instance, if the value of your investment in the fund goes from 100 to 110, a fee of 1 will be charged. Kotak Mahindra Bank will be the custodian of the AIF.

AIFs in GIFT city are not subject to any tax on profits from derivatives (such as futures and options) trading which confers them with an advantage over their ‘on-shore’ counterparts (those located in India outside GIFT). The latter have to consider profits on derivatives as business income and deduct tax at source accordingly which can go as high as 42.7%.

For equity transactions, AIFs in GIFT city are subject to the same regime as onshore AIFs, Kamath clarified. This is 15% short-term gains tax for holding periods of less than 1 year and 10% capital gains tax on longer holding periods. AIFs in GIFT are also exempt from tax on bond trading and face a 10% tax on interest income.

This makes such AIFs attractive for NRIs who face a tax deduction of just 10-15% on their investments in equity focused AIFs. However, NRIs cannot constitute more than 50% of the corpus of the AIF. “We are also raising funds from institutions such as pension funds, hedge funds and insurance companies, Pattle clarified. True Beacon Global aims to generate a 6% per annum outperformance over the Nifty over a 2-3 year period, he added.

“There is no problem of liquidity. AIFs located in GIFT conduct their trades on NSE and BSE and get the same liquidity as other market participants in India," Kamath clarified. However they are subject to the same transaction costs such as Securities Transaction Tax (STT) and Stamp Duty as other market players such as mutual funds and onshore AIFs.

Foreign investors and NRIs can invest in GIFT city in foreign currencies and redeem money without any restriction on repatriation. According to Kamath, True Beacon has no plan to hedge rupee exposure. “The rupee is supposed to depreciate by around 4% every year and hedging it also costs 4%. We don’t think there is a strong case for depreciation given the need for countries such as the US to keep their own currencies competitive," he said.

Sachin Samant, president, Banking & Financial Institutions Group, Kotak Mahindra Bank, said, “Foreign portfolio investments are now a reality through GIFT IFSC. As pioneers in this field, we look forward to on-boarding new investors and providing them with a wide range of services catered towards their investments." Kotak Mahindra Bank was associated with the licensing process for True Beacon and is also the deemed depository participant (DDP) and custodian for the AIF.

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