Difference between Retail & Non-Retail Fund Management Entity under IFSCA Regulations

(1) Restricted Schemes are schemes that may be launched by Registered FMEs for various investment strategies for: –

(a) investing in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds, ESG Funds, Special Situation funds (as detailed in Part D of this Chapter) and such other Schemes/Funds as may be specified by the Authority. Schemes falling under this clause shall be a close ended scheme and filed before the Authority as Category I Alternative Investment Fund.

Retail Schemes are schemes that shall be launched by Registered FMEs (Retail) for pooling money from all investors or a section of investors through an offer document for investment as per its stated investment objective in various permissible investments.

Eligible FMEs and Filing of Offer Document

As per regulation 43. (1) No scheme shall be launched unless a draft offer document is filed with the Authority along with the applicable application fees at least twenty-one (21) working days before the launch of the scheme.

(2) The validity of the offer document for launch of the scheme shall be twelve (12) months from the date of observation letter of Authority.

(3) The FME shall ensure that the comments of the Authority are incorporated in the offer document prior to launch of the scheme.

(4) The FME shall ensure that any material changes from the information provided in the draft offer document are informed to the Authority immediately.

(5) No retail scheme shall be filed with the Authority unless it has been approved by the fiduciaries;

(1) Restricted schemes shall have less than one thousand (1000) investors or such number as may be specified by the Authority.

(2) Accredited Investors or investors investing above USD 150,000 may invest in such schemes: Provided that in case of investors who are employees or directors or designated partners or partners of the FME, the minimum value of investment shall be USD 40,000: Provided further that the minimum investment threshold shall not apply to an accredited investor and employees or directors or designated partners or partners of the FME.

Retail schemes shall have at least twenty (20) investors with no single investor investing more than twenty-five percent (25%) in a scheme:

Provided that the condition shall be complied within a maximum period of six (6) months from the closure of the offer.

(1) Restricted schemes may be launched as open ended or close ended schemes. In case of a close ended scheme, the maximum tenure and amount to be raised should be decided upfront and disclosed in the placement memorandum. The minimum tenure of a close ended scheme shall be one year.

(2) Extension of the tenure of the close ended restricted schemes may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value of their investment in the restricted scheme: Provided that any further extension beyond two (2) years may be considered subject to express consent of the investors and exit opportunity shall be provided to other investors.

(3) Restricted schemes shall be constituted in IFSC as Company or LLP or Trust under the applicable laws of India.

(1) Retail schemes could be open ended or close ended. In case of a close ended schemes, the maximum tenure shall be decided upfront and disclosed in the offer document. The minimum tenure of a close ended scheme shall be three (3) years.

(2) Extension of the tenure of the close ended schemes may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value of their investment in the scheme and the approval of the Authority.

(3) Retail schemes shall be constituted in IFSC as Company or Trust under the applicable laws of India.

(4) Retail schemes may be launched for various investment strategies including for investment in Social Ventures, Infrastructure, ESG sectors (ESG schemes), specific sectors (sectoral schemes), certain themes such as infrastructure (thematic schemes), certain asset class (equity schemes, debt schemes, etc.) or a combination thereof or towards certain solution (retirement schemes, schemes for children education, etc.) subject to such terms and conditions as may be specified by the Authority.

A restricted scheme may invest the moneys collected under any of its schemes only in a specific list of instruments which inter alia include securities issued by unlisted entities, securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdiction, money market instruments, debt securities, derivatives including commodity derivatives, units of mutual funds and AIFs in India and foreign jurisdiction, investment in LLPs, etc.

Importantly, a close ended scheme may invest up to twenty percent (20%) of the corpus in other physical assets such as real estate, bullion, art or any other physical asset as may be specified by the IFSCA from time to time

A retail scheme may invest moneys collected under any of its schemes only in securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdictions; securities issued by unlisted entities; money market instruments; debt securities; securitized debt instruments, which are either asset backed or mortgage-backed securities; other investment schemes set up in the IFSC, India and foreign jurisdiction subject to appropriate disclosure in the offer documents; derivatives including commodity derivatives only for the purpose of hedging subject to suitable disclosures in the offer document; units of mutual funds and alternative investment funds in India and foreign jurisdiction; or such other securities or financial products/assets or instruments as specified by IFSC

1) The placement memorandum for restricted schemes shall clearly include disclosures regarding the investment objective, the targeted investors, proposed corpus, investment style or strategy, investment methodology, proposed tenure of the scheme, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the scheme. The FME and the fiduciaries shall comply with the disclosure requirements as may be specified by the Authority.

(2) Any material deviation or alteration to the fund strategy should be made with the consent of at least two thirds (2/3rd) of investors by value.

(3) The FME shall ensure that the NAV is disclosed to the investors at least on a monthly basis in case of an open-ended scheme and half-yearly in case of a close ended scheme.

(4) The FME shall ensure that the portfolio under the scheme is disclosed to the investors at least on a quarterly basis within one month from the end of the quarter.

(5) Any other material disclosure as considered suitable by the FME or the fiduciaries shall be informed to the investors immediately.

(1) The offer document for retail schemes shall clearly include all disclosures which are material for investors to make a decision regarding investing in such schemes.

(2) The disclosures in the offer document shall inter-alia include disclosures regarding the investment objective, the targeted investors, proposed corpus, investment style or strategy, investment methodology, proposed tenure of the scheme, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the scheme. The FME and the fiduciaries shall comply with the disclosure requirements in the offer document as may be specified by the Authority.

(3) Any material deviation or alteration to the fund strategy should be made with the consent of at least two thirds (2/3rd) of investors by value.

(4) The FME shall ensure that the NAV is disclosed to the investors on a daily basis in case of an open-ended scheme and weekly basis in case of a close ended scheme.

(5) The FME shall ensure that the portfolio under the scheme is disclosed to the investors at least on a quarterly basis within one (1) month from the end of the quarter.

(6) Any other material disclosure as considered suitable by the FME or the fiduciaries shall be informed to the investors immediately.

A retail scheme shall not borrow except to meet temporary liquidity needs for the purpose of redemption: Provided that the retail scheme shall not borrow more than twenty percent (20%) of the AUM of the scheme and the duration of such a borrowing shall not exceed a period of six (6) months.

(1) In case of an open ended scheme, the maximum investment in securities of unlisted companies should not exceed twenty- five percent (25%) of the corpus of the schemes.

(2) The minimum size of the restricted schemes shall be USD 5 Million.

(3) Restricted schemes may invest in its associate subject to the prior approval of seventy -five percent (75%) investors in the scheme by value

(1) In case of an open-ended schemes, the maximum investment in unlisted securities should not exceed fifteen percent (15%) of the total AUM of the schemes.

(2) The minimum amount of investment by an investor in case of close ended schemes investing more than fifteen percent (15%) in unlisted securities, shall be USD 10,000:

Provided that a close ended scheme shall not invest more than fifty percent (50%) in unlisted securities. Explanation. – For retail schemes investing less than fifteen percent (15%) in unlisted securities, the minimum amount of investment of USD 10,000 shall not be applicable.

(3) Retail schemes shall not invest more than ten percent (10%) of its AUM in securities of a single company: Provided that the retail scheme may invest up to fifteen percent (15%) in a single company with the prior approval of the fiduciaries:

Provided further that the limit on single company shall not be applicable in case of Index schemes.

(4) Retail schemes shall not invest more than twenty-five percent (25%) of its AUM in a single sector: Provided that in case of a financial services sector the amount shall not exceed fifty percent (50%) of the AUM of the scheme: Provided further that the limits on sectoral caps shall not apply in case of a sectoral or thematic or an Index Scheme.

(5) Retails schemes shall not invest more than twenty-five percent (25%) of the AUM in its associate.

(1) The FME and fiduciaries shall ensure compliance of investment valuation norms.

(2) In line with the investment valuation norms, the assets of the scheme may be valued by an independent third-party service provider such as a fund administrator or custodian registered with the Authority, a valuer registered with Insolvency and Bankruptcy Board of India or such other person as may be specified by the Authority.

(1) The FME and fiduciaries shall ensure compliance with the investment valuation norms as specified in the Sixth Schedule.

(2) In line with the investment valuation norms, the assets of the scheme may be valued by an independent third-party service provider such as a fund administrator or a custodian, registered with the Authority, a valuer registered with Insolvency and Bankruptcy Board of India or such other person as may be specified by the Authority.

(1) FME shall compute the NAV of each restricted scheme at least on a monthly basis: Provided that in case of a close ended restricted scheme the computation of NAV shall take place at least half-yearly.

(2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended, if required.

(1) The FME shall compute the NAV of each retail scheme on a daily basis: Provided that in case of a close ended retail scheme the computation of NAV shall take place at least on a weekly basis.

(2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended.

(1) The FME shall ensure that under a restricted scheme, the FME or its associate shall invest:

(a) In case of a close ended scheme,

(i) at least 2.5% of the targeted corpus and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of less than USD 30 Million;

(ii) at least USD 750,000 and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of more than USD 30 Million:

(b) In case of open-ended scheme,

(i) at least 5% of the targeted corpus and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of less than USD 30 Million;

(ii) at least USD 1,500,000 and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of more than USD 30 Million:

Provided that the contribution by the FME shall not be mandatory in case of relocation of funds /schemes established or incorporated or registered outside India to IFSC.

(2) The said contribution in proportion to investor ‘s investment in the scheme shall be made by the FME or its associate entity within forty-five (45) days and maintained on ongoing basis: Provided that the period of forty-five (45) days may be extended subject to the satisfaction of the Authority.

(3) The said contribution if brought in by FME shall be included for the purpose of net-worth requirements as detailed under Chapter II.

(4) The said contribution shall be exempted if: –

(a) at least two-thirds (2/3rd) of the investors in the scheme by value permits waiver of such contribution; (b) at least two-thirds (2/3rd) of the investors in the scheme are accredited investors; or

(c) The scheme is a fund of fund scheme investing in a scheme which has similar such requirements.

(1) The FME shall ensure that under a retail scheme, the FME or its associate shall invest at least, lower of one percent (1%) of the AUM of the scheme or USD 200,000:

Provided that the contribution by the FME shall not be mandatory in case of relocation of funds /schemes established or incorporated or registered outside India to IFSC.

(2) The said contribution shall be made by the FME or its associate within forty-five (45) days and maintained on ongoing basis:

Provided that the period of forty-five (45) days may be extended subject to the satisfaction of the Authority.

(3) The said contribution if brought in by FME shall be included for the purpose of net-worth requirements as detailed under Chapter II.

(4) The said contribution shall be exempted if the scheme is a fund of fund scheme investing in a scheme which has similar such requirements