[The following
post is part of the series contributed by Vinod
Kothari and Soma Bagaria. The
authors can be reached at vinod@vinodkothari.com
and soma@vinodkothari.com
respectively. The first post of the series can be found here.]
post is part of the series contributed by Vinod
Kothari and Soma Bagaria. The
authors can be reached at vinod@vinodkothari.com
and soma@vinodkothari.com
respectively. The first post of the series can be found here.]
As the AIF
Regulations are unclear on the extent of its applicability in case of
companies, guidance can be sought from other jurisdictions.
Regulations are unclear on the extent of its applicability in case of
companies, guidance can be sought from other jurisdictions.
1.
United States
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:
1940 (“US Act”) regulates an
investment company, which has been defined as an issuer of securities that:
(a)
is, holds itself out to be, or proposes
to be engaged primarily in the business
of investing, reinvesting, or trading in securities;
is, holds itself out to be, or proposes
to be engaged primarily in the business
of investing, reinvesting, or trading in securities;
(b)
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 issuing face amount certificates of the instalment type, or has
been engaged in this business and has such a certificate outstanding; or
(c)
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.
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.
The
Financial Accounting Standards Board (“FASB”)
sets out the following criteria for determination of an ‘investment company’:[1]
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:
does both of the following:
a.
Obtains
funds from an investor or investors and provides the investor(s) with
professional investment management services
Obtains
funds from an investor or investors and provides the investor(s) with
professional investment management services
b.
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.
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:
affiliates do not obtain or have the
objective of obtaining returns or benefits from their investments that are
either of the following:
a.
Other
than capital appreciation or investment income.
Other
than capital appreciation or investment income.
b.
Not available to noninvestors or are not
normally attributable to ownership interests.”
[emphasis supplied]
Not available to noninvestors or are not
normally attributable to ownership interests.”
[emphasis supplied]
Of
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
company.
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
company.
2.
United Kingdom
United Kingdom
Section 235 of
the Financial Services and Markets Act, 2000 defines a collective investment
scheme to mean:
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 effect 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.”
property of any description, including schemes, money, the purpose or effect 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.
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.
Furthermore,
both of the following characteristics shall be satisfied:
both of the following characteristics shall be satisfied:
(a)
the
contributions of the participants, and the profits or income out of which
payments are to be made to them, shall be pooled; and
the
contributions of the participants, and the profits or income out of which
payments are to be made to them, shall be pooled; and
(b)
the property
shall be managed as a whole by or on behalf of the operator of the scheme.
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.
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.
3.
European Union
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
Directive.[4] In
other words, a closed-end vehicle, which is what all companies are, is
completely excluded from the UCITS Directive.
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
Directive.[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]
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]
4.
Singapore
Singapore
The Securities and Futures Act (Cap
289) of Singapore defines a collective investment scheme to mean:
289) of Singapore defines a collective investment scheme to mean:
“(a) an arrangement in
respect of any property —
respect of any property —
(i)
under which —
under which —
(A)
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 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
(B)
the property is managed as a whole by or
on behalf of a manager;
the property is managed as a whole by or
on behalf of a manager;
(ii)
under which the contributions of the
participants and the profits or income from which payments are to be made to
them are pooled; and
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 —
(i)
an
arrangement operated by a person otherwise
than by way of business;
an
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;
participants carries on a business other than investment business and enters
into the arrangement solely incidental
to that other business;
(iii)
an
arrangement under which each of the participants
is a related corporation of the manager;
an
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;
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.
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: http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175824491189&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs (last visited on October 10,
2012)
Summary of Decisions Reached to Date During Redeliberations as of September 5,
2012. Available at: http://www.fasb.org/cs/BlobServer?blobkey=id&blobwhere=1175824491189&blobheader=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs (last visited on October 10,
2012)
[2] http://www.hmrc.gov.uk/collective/what-is.htm (last visited on October 11,
2012)
2012)
[3] Directive 2009/65/EC of the
European Parliament and of the Council. Available at: https://indiacorplaw.in/wp-content/uploads/2012/10/L_302_32.pdf (last visited on October 10,
2012)
European Parliament and of the Council. Available at: https://indiacorplaw.in/wp-content/uploads/2012/10/L_302_32.pdf (last visited on October 10,
2012)
[4] Article 3(a) of
the UCITS Directives.
the UCITS Directives.
[5] https://indiacorplaw.in/wp-content/uploads/2012/10/48i.pdf (last visited on October 10,
2012).
2012).