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

[The following
post is the last 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 two posts in the series can be found
here and here.]
In India, a
company form of a fund is not very prevalent because of several constraining
and restricting reasons. Some of those can be summarized as hereunder:
1.            
Separation
of management and investment
As can be noted, a scheme or a fund
contemplates management by an external manager and does not constitute an
in-house management mechanism. Where the funds are privately pooled for a
common purpose and managed in-house on the bases of a private arrangement,
agreement or understanding, it cannot be construed as an AIF.
The intention of SEBI is clear: (a) to
protect interests of the investors; and (b) ensure proper management of the
capital of the investors. Where there is no public money involved, SEBI clearly
cannot have any intent to monitor.
2.            
Difficulties
with a company form of AIF
Despite
the flexibility in organisational form that might have been SEBI’s objective in
giving the choice of the organisational form, the company form is eminently
unsuitable for an AIF. Reasons are several.
First, Category III
AIFs may be open-ended. In case of companies, open-ended company would mean
free buyback of shares of a company, which is not permissible under the
Companies Act, 1956 where buyback of shares by a company is restricted.
Second, whether
closed-ended or open-ended, most AIFs have a limited life span – in case of
companies, thinking of taking the company to winding up will be an extremely
protracted exercise.
Third, in addition to
the above, there are entry and exit norms applicable under the FDI policy,
which do not apply in case of LLPs and trusts.
Last, needless to
mention the continuous compliance issues associated with a company.
The
reason why the corporate form might have made sense elsewhere in the world is
that the US regulation (Investment Company Act) is an overarching law on all
investment companies. In India, the idea of SEBI could not have been to
regulate investment companies.
Our
recommendation will be that companies should be completely excluded from the
AIF regulations, or it should be clarified that in case of companies, only such
part of investment corpus as is different from the share capital of the company
is counted as size of the AIF. In case of LLPs, general partners are in the
nature of owners/managers of the LLP, while limited partners are external
investors. The AIF Regulations should be focused only on the limited partners’
investments.
(Concluded)
– Vinod
Kothari & Soma Bagaria

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.

1 comment

  • The arguments laid out in the post can hardly be refuted on two counts: (1) a meticulous interpretation of the regulations brought out (2) Even on the basis of first principles, the fundamental role of any securities regulator is to manage/regulate intricate issues flowing out of various so called agency relationships such as intermediary-client, company-investor, etc. But where the investor himself has a control over the ownership interest, the securities regulator should have no business.

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