The classification of Alternative Investment Funds (AIFs) and Mutual Funds (MFs) as related parties to a company hinges on their legal structure and applicable regulations. AIFs can be structured as Trusts or Limited Liability Partnerships (LLPs), with LLPs falling under the category of a Body Corporate. MFs, however, are always structured as Trusts under the Indian Trusts Act, 1882. According to Section 2(76) of the Companies Act, 2013, and SEBI Listing Regulations, related parties include companies and body corporates. Consequently, AIFs structured as Trusts and MFs are not regarded as entities or body corporates and are excluded from related party classifications unless they are set up as LLPs with a controlling interest held by a company. Furthermore, SEBI Listing Regulations explicitly exclude Mutual Funds from related party transaction norms for listed MF units. A review of annual reports from AIF sector companies, including Kotak AMC and Edelweiss, reveals that AIF investments are not disclosed under related party transactions. Control over AIFs lies with Trustees, while fund managers operate under their directives. Based on these factors, AIFs and MFs generally do not qualify as related parties under the Companies Act or SEBI Listing Regulations unless specific conditions, such as controlling interest in an LLP structure, are met. This analysis is based on existing legal provisions and serves informational purposes only.
Whether Alternative Investment Funds (“AIF”) and Mutual Funds (“MF”) regarded as Related Parties to a Company?
To understand whether AIFs and MFs qualify as related parties, it is essential to note that AIFs can be structured either as a Trust or a Limited Liability Partnership (“LLP”) (with LLP being a part of a Body Corporate), whereas MFs are always structured as Trusts.
- Definition of Related Parties under the Companies Act and SEBI Listing Regulations: According to Section 2(76) of the Companies Act and SEBI Listing Regulations the term “related parties” refers to a Company and a Body Corporate. AIFs structured as Trusts do not qualify as either a Company or a Body Corporate unless they are set up as a LLP.
- AIFs and MFs as Non-Entities: AIFs in the form of Trusts and MFs are not considered entities or body corporates, nor are they living persons capable of suing or being sued. They are formed under the Indian Trust Act, 1882, through a Trust Declaration, in compliance with SEBI (AIF) Regulations, 2012 and SEBI (Mutual Funds) Regulations, 1996, respectively.
- SEBI Regulations Exclusion: SEBI Listing Regulations specifically exclude Mutual Funds from the scope of Related Party Transactions (RPTs), stating that RPT norms do not apply to units issued by MFs listed on recognized stock exchanges.
- Review of Annual Reports: A review of the Annual Reports (including financial statements) of Companies in the AIF Sector, such as Kotak AMC, Nuvama Wealth, 360 One Wam, and Edelweiss, shows that none of them classify AIFs as related parties. While all of these companies made investments in AIFs during the year, it appears that they don’t consider these investments under RPT disclosures.
- AIFs and LLPs: Most AIFs are typically structured as Trusts and are not considered related parties, unless they are established as LLPs in which the Company holds a controlling interest.
- Control and Voting Rights under the Companies Act: Even if an AIF is structured as an LLP, it will not be classified as a related party under the Companies Act unless the Company holds controlling interest, voting rights, or is the Internal Trustee.
- Management and Control of AIFs: The control of AIFs lies with the Trustee, while the fund management entity or managers operate strictly in accordance with the Trustee’s instructions or guidelines.
Based on these points, we may accordingly say that AIFs and MFs are not considered as related parties under the applicable regulations.
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Disclaimer: The contents of this article have been prepared based on the relevant provisions of the Companies Act, 2013, and applicable SEBI Regulations. However, readers should refer to the relevant provisions for a better understanding. The views expressed are solely those of the author and do not constitute legal advice or an official position. While every effort and due care has been made to ensure the accuracy of the information, the author accepts no responsibility for any errors or omissions, and the article should not be quoted before any authority without the author’s written consent. The content is provided for informational and educational purposes only, and the author disclaims any liability for any loss or damage arising from reliance on the information presented.
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