Alternative investment funds seek clarifications

New Delhi: India’s alternative investment funds (AIFs) are seeking greater clarity from the government on recently announced tweaks to the FDI norms, which require prior approval for all investments from China — the largest backer of the country’s startup ecosystem.

Investors told ET they are concerned about whether government nod will be required to draw down capital from their Chinese or Chinese-origin limited partners (LPs), for placing fresh bets or making follow-on investments in select portfolio companies.

AIFs — defined as Sebi-registered funds established or incorporated in India — are privately pooled investment vehicles that collect funds from investors, both Indian and foreign. There are an estimated 650 funds, trusts and LLPs on Sebi’s website, including prominent ones such as IndiaQuotient and Kae Capital, which count Chinese investors as their LPs.

‘Logistical Nightmare’

“We are awaiting clarifications from relevant authorities. Till then, we can only wait and watch. Some of our Chinese backers have already expressed their anxiety,” the general partner at a leading early-stage fund told ET on the condition of anonymity.

Chinese investors — strategic and financial — pumped in an estimated $4 billion into the Indian startup ecosystem in 2019, making them the largest backers of the country’s digital economy. Their investments in funds are estimated to be much more.

“AIFs draw their capital over a 3-4-year cycle. Some of these capital commitments would have been entered into a few years ago, with a good portion of the capital being already invested by now. For AIFs to go back and change the contracts now, find an alternative investor, and then inform Sebi again — it’s a logistical nightmare,” said Siddarth Pai, founding partner of 3one4 Capital.

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3one4 Capital does not count any Chinese or Chinese-origin investors in its list of LPs.


Under Press Note 3, the central government has made prior approval mandatory for all FDI from countries with which India shares a land border. While this requirement was already in place for investments originating from Pakistan and Bangladesh, the latest tweak has been made to prevent what has been described as ‘predatory’ capital investments by Beijing, at a time when markets have gone into a tailspin.

“I think the quality of communication from the regulatory authorities has to improve. At a time like this, the government could have, at the very least, set up a forum or mechanism explaining the reasons for the decision, and invited industry representation. That hasn’t taken place,” Anand Lunia, founding partner at IndiaQuotient, told ET.

Legal experts said there is little clarity about what situations will affect AIFs, and in what situation they get a leeway. “In most cases, it is difficult to attribute nationality to AIF’s pooled investment funds,” said Dipti Lavya Swain, partner at HSA Advocates.

According to Swain, with the current amendment in place, AIFs already having Chinese capital are also worrying about fund deployment in Indian companies. This is because of the ‘greyness’ surrounding the meaning of ‘beneficial ownership’, including in a situation where the sponsor or manager of the AIF is an Indian owned and controlled entity.


The issue has also brought to fore the lack of domestic institutional capital support in Asia’s third-largest economy. “For larger capital commitments, China has been the go-to destination over the past few years, given the lack of domestic institutional capital in India. The issue, however, remains for future fund-raising,” said Gaurav Chaturvedi, partner at Kae Capital. He said Kae Capital has already drawn down the funds committed by investors.

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“What this episode shows is that India is severely lacking in domestic capital and its participation, and that notifications like this can actually threaten an entire industry. This is why it is imperative that India creates a system that incentivises domestic capital to invest in AIFs and startups,” Pai said.



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