AIF Regulations: Meaning of Ownership Interests and Investor Interests in a Company – Part II

[The following
post is part of the series contributed by Vinod
and Soma Bagaria. The
authors can be reached at
[email protected]
[email protected]
respectively. The first post of the series can be found
As the AIF
Regulations are unclear on the extent of its applicability in case of
companies, guidance can be sought from other jurisdictions.
United States
In the US, the Investment Company Act,
1940 (“US Act”) regulates an
investment company, which has been defined as an issuer of securities that:
is, holds itself out to be, or proposes
to be engaged primarily in the business
of investing, reinvesting, or trading in securities
is engaged or proposes to engage in the
business of issuing face amount certificates of the instalment type, or has
been engaged in this business and has such a certificate outstanding; or
is engaged or proposes to engage in the
business of investing, reinvesting, owning, holding, or trading in securities,
and owns or proposes to acquire investment securities having a value exceeding
40% of the value of the issuer’s total assets (exclusive of government
securities and cash items) on an unconsolidated basis.
Financial Accounting Standards Board (“FASB”)
sets out the following criteria for determination of an ‘investment company’:[1]
1. An investment company is an entity that
does both of the following:
funds from an investor or investors and provides the investor(s) with
professional investment management services
Commits to its investor(s) that its
business purpose and only substantive activities are investing the funds for
returns from capital appreciation, investment income, or both
2. An investment company and its
affiliates do not obtain or have the
objective of obtaining returns or benefits from their investments that are
either of the following:
than capital appreciation or investment income.
Not available to noninvestors or are not
normally attributable to ownership interests
[emphasis supplied]
course, the above criteria are only indicative and cannot be construed as a
litmus test for determination of an investment company. However, it is
pertinent to note that a clear distinction
has been made between the investment interest
and ownership interest, the latter being excluded as an investment
United Kingdom
Section 235 of
the Financial Services and Markets Act, 2000 defines a collective investment
scheme to mean:
any investment arrangements with respect to
property of any description, including schemes, money, the purpose or e
ect of which is to enable persons taking part in the
arrangements (whether by becoming owners of the property or any part of it or
otherwise) to participate in or receive profits or income arising from the
acquisition, holding, management or disposal of the property or sums paid out
of such profits or income.
It has been
further stated that the participants in such scheme shall not have day-to-day
control over the management of the property, whether or not they have the right
to be consulted or to give directions.
both of the following characteristics shall be satisfied:
contributions of the participants, and the profits or income out of which
payments are to be made to them, shall be pooled; and
the property
shall be managed as a whole by or on behalf of the operator of the scheme.
Therefore, a
collective investment scheme is an arrangement that enables a number of
investors to pool their assets and have these professionally managed by an
independent manager.[2] The
segregation between management and investors, therefore, is quite clear.
European Union
The Directives
relating to undertakings for collective investment in transferable securities
(“UCITS Directive”)[3]
excludes a collective investment
undertaking undertakings of the closed ended type from the purview of the UCITS
.[4] In
other words, a closed-end vehicle, which is what all companies are, is
completely excluded from the UCITS Directive.
The Directive on AIF Managers by the EU
Committee of the House of Lords, AIF was defined to
include hedge funds,
private equity funds, venture capital firms, commodities and real estate funds.[5]
The Securities and Futures Act (Cap
289) of Singapore defines a collective investment scheme to mean:
(a) an arrangement in
respect of any property —
under which —
the participants do not have day-to-day
control over the management of the property
, whether or not they have the
right to be consulted or to give directions in respect of such management; and
the property is managed as a whole by or
on behalf of a manager
under which the contributions of the
participants and the profits or income from which payments are to be made to
them are pooled; and
but does not include —
arrangement operated by a person otherwise
than by way of business
(ii) an arrangement under which each of the
participants carries on a business other than investment business and enters
into the arrangement solely incidental
to that other business
arrangement under which each of the participants
is a related corporation of the manager
(x) a
closed-end fund
constituted either as an entity or a trust;
Here again,
one would notice a complete exception carved for closed-end funds, which would
include all investment companies.
(to be continued)

– Vinod Kothari &
Soma Bagaria

[1] See Investment Companies
Summary of Decisions Reached to Date During Redeliberations as of September 5,
2012. Available at: (last visited on October 10,
[2] (last visited on October 11,
[3] Directive 2009/65/EC of the
European Parliament and of the Council. Available at: (last visited on October 10,
[4] Article 3(a) of
the UCITS Directives.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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