RBI's notification on partly paid AIF units puts industry in a bind
Mumbai, May 27, 2024
Move to help regularise units issued to FPIs amid concerns on fee outgo
Foreign portfolio investors (FPIs) are in a bind after a recent notification by the Reserve Bank of India (RBI) that aims to regularise the issuance of partly-paid units by alternative investment funds (AIFs).
While the central bank's move paves the way to issue these units, industry players fear they may face penal action for outstanding issuances made.
Last week, the RBI issued a circular stating that it will regularise the issuances of partly-paid units by AIFs to investors outside India prior to an amendment done in March through “compounding.”
It entails that partly-paid units by AIFs issued before March will be legitimised on payment of a fee.
The AIF industry has sought more clarity on the amount to be paid for this move.
“The RBI issued a circular to regularise the partly-paid units issued in the past but has not provided any visibility on the compounding amounts involved. The AIF industry hopes this amount will be a flat fee instead of a percentage of the capital drawn down. The latter would cause considerable distress to the operating model of an AIF,” said Siddarth Pai, founding partner, 3one4 Capital & co-chair, Regulatory Affairs Committee, IVCA.
The issues around partly-paid units had come to the fore around six months back when Form INVI, which needs to be filed by an AIF within 30 days of the receipt of the capital contribution from investors, did not allow for such partly-paid units to be filed.
AIFs are pooled investment vehicles and investors are allotted units based on their contribution or beneficial interest in the portfolio. The investment managers draw down capital from investors based on the commitments when there is an investment opportunity. This is done by issue of partly-paid units.
To enable this, the Securities and Exchange Board of India (Sebi) allowed AIFs to issue units either as partly paid or fully paid.
After the issues in filing Form INVI, the AIF industry reached out to the department of economic affairs (DEA) and RBI on the issue. Following this, the rules were amended in March to include the term ‘partly-paid units’ in Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
“It is rare for the regulator to let anyone off the hook through compounding. Nevertheless, this situation emphasises the importance of taking a cautious approach in the face of regulatory uncertainties,” said Neha Malviya Kulkarni, chief growth officer, SuperNAV.
Legal players believe that the step will remove the overhang of the unresolved regulatory issues and reduce the risk of potential penalties arising from non-compliance with earlier regulations for AIF.
“AIFs that had issued partly-paid units to non-residents before the regulatory amendments now have a clear pathway to regularise these actions legally. For FPIs, the RBI's decision provides a sense of investment security,” said Siddharth Mody, partner, JSA Advocates and Solicitors.
However, an AIF Trustee said it was unclear on the trigger behind discontinuation of filing of partly-paid units in Form INVI, which became the root cause behind the need for amendment in the Foreign Exchange Management Act (Fema) and AIF norms.
“Harmonisation of terminologies and mechanisms across bodies of law are essential to the smooth operation of long-term financial products like AIFs. Changes to forms and reporting avenues need to be discussed with industry bodies so that these may reflect the operations of the industry,” added Pai.
Story So Far
- Under Sebi norms, alternative investment funds (AIFs) can issue partly paid units to investors
- Late last year, AIFs faced issues in filing Form INVI as it did not allow filing for such partly paid units issued to FPIs and residents outside India
- Form INVI has to be filed by AIFs within 30 days of the receipt of investments from investors
- AIF industry raised the issue with RBI and the government
- In March, Department of Economic Affairs amended Foreign Exchange Management (Non-debt Instruments) Rules, 2019, to include ‘partly paid units’
- Last week, RBI issued notification to ‘regularise’ such units issued prior to March through ‘compounding’
- Compounding refers to an amount or fee to be paid by the AIFs
[The Business Standard]
