Investment in Category-II AIFs saw five-fold increase in 3 years: Sebi data

Investment by funds in the same category as the real estate relief fund that the Finance Minister announced on Wednesday has more than quintupled over the past three years.

The value of Category II alternative investment funds rose from Rs 13,776 crore in June 2016 to Rs 74,817 crore in June this year, according to the Securities and Exchange Board of India’s quarterly data. 

Finance Minister Nirmala Sitharaman has said the government will also set up a Category II AIF. The fund will also look to draw investment from sovereign and pension funds in addition to its domestic capital.

A sovereign fund is one that invests money belonging to a foreign government, and is usually set up to manage the country’s surplus money that may be generated through sales of natural resources such as oil. 

A pension fund invests retirement money. Both are considered long-term sources of foreign capital. But addressing some regulatory issues could ease the way for such funds. 

Subramaniam Krishnan, Partner (private equity and financial services), EY India, said the goods and services tax (GST) on management fees, to the extent capital is raised from foreign investors in Category-I and Category-II AIFs, has been a commercial constraint for some foreign investors and fund managers.

“Ideally, to make India competitive vis-a-vis other fund jurisdictions, management fee charged to foreign investors should be nil-rated for GST, because in substance it is export of services. However, technically under the GST law, the AIF is treated as the service recipient and hence GST is imposed on the entire management fee. This, coupled with the fact that expenses towards management fees are not tax-deductible, makes AIF structures relatively unattractive,” he said. Other changes are more specific to real estate-focused funds.

Rajesh H Gandhi, partner at Deloitte Haskins & Sells, said that a regulatory tweak might be needed to deal with situations where there were multiple schemes within the trust structure investing in real estate. 

An alternative investment fund is a vehicle where the minimum investment is Rs 1 crore. Category I AIFs include venture capital funds and infrastructure funds, besides funds that invest in small and medium enterprises, and social venture funds.

Category II funds include those investing in real estate and distressed assets, besides private equity funds. The third category includes hedge funds and others that make use of complex trading strategies.

Business Standard is now on Telegram.
For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel