Generally known as different funding funds (AIFs), these native fund homes, which have emerged as important sources of threat capital, made a robust attraction at a gathering a few fortnight in the past with senior officers of the Securities and Alternate Board of India (SEBI), Reserve Financial institution of India (RBI) and ministry of finance, two individuals accustomed to the discussions informed ET.
At stake is the way forward for the fast-growing AIF business which has been pooling in cash for over a decade from native and offshore buyers to bankroll unlisted companies, startups and increasing companies.
Their concern and the pressing plea requesting a established order on laws, stems from the draft FEMA (Overseas Funding) Guidelines 2026. The draft, launched by RBI on July 21, 2026, offers regulators the scope to alter the parameters that qualify an AIF as ‘overseas managed’. Presently, an AIF with virtually all offshore buyers is considered a home entity if its sponsor and funding supervisor are Indian owned and managed.
As SEBI and RBI had expressed earlier than, such a rule opens the door to regulatory arbitrage: a overseas investor barred from possession or management in delicate industries places cash in an AIF (backed by Indian sponsor and supervisor) to not directly purchase fairness stake in corporations working in sectors having overseas direct funding (FDI) restrictions.
After the draft July pointers, AIFs worry {that a} relook on the ‘overseas possession and management’ definition to curb such oblique possession would imply that even AIFs with Indian managers and sponsors can be thought of as overseas entities if majority of the fund corpus is contributed by overseas buyers. As soon as categorised as overseas entities, such AIFs would run into funding restrictions and formalities relevant to overseas direct buyers.
With non-residents accounting for 40% of AIF investments, the draft guidelines have rattled the business, as ET had reported on August 11.”On the assembly, the AIF foyer tried to place throughout the purpose that the India story could be greatest bought by Indian managers. They’re greatest positioned to canvass for capital from numerous markets — a technique that has labored within the final 10 years. The business mentioned that if the federal government intends to liberalise overseas investments, such a change may decelerate inflows,” mentioned an individual who attended the assembly.
In truth, AIFs have even requested for a carve out within the current regulation in order that funds whose sponsors and managers are owned and managed by listed Indian monetary establishments ought to be handled as home AIFs even when greater than 50% fairness of those establishments is with overseas individuals. “Personal banks and NBFCs are regulated and registered with RBI. So long as they’re listed, AIFs backed by them ought to be thought of home. AIFs have requested for simplification of guidelines associated to final useful possession,” mentioned a supply.
The regulatory and ministry officers neither raised the problem of regulatory arbitrage nor reacted to the factors made by AIF business officers whose views on the draft norms have been sought. The issues over regulatory arbitrage was first captured in a be aware positioned earlier than SEBI board in Might 2024. In addition to AIFs’ ‘oblique possession from downstream funding’, it mentioned, “..there’s scope that the investments may circulate from our land border sharing international locations by means of AIFs in corporations past the permissible restrict for computerized route underneath FDI coverage, undermining the spirit of Press Word 3 notification and the steps taken by Authorities of India on this regard.”
