Introduction: The Securities and Exchange Board of India (SEBI) plays a pivotal role in regulating financial markets. In a recent development, Prajana Advisors Private Limited sought informal guidance from SEBI regarding the investment scope of Athena Alternative Investments Trust, a Category III Alternative Investment Fund (AIF). The focus revolves around the applicability of Regulation 18 under the AIF Regulations, specifically in relation to investing in mutual funds as part of a multi-asset portfolio.
Detailed Analysis:
1. Query and Background: Prajana Advisors, as the Investment Manager of Athena Alternative Investments Fund, raised a crucial query in their letter to SEBI. The central question is whether a Category III AIF can make permanent investments in mutual funds within a multi-asset portfolio.
2. SEBI’s Response: SEBI, in its response, acknowledged the registration details of Athena Alternative Investments Trust and delved into the interpretation of Regulation 18 of AIF Regulations. The key points from SEBI’s response are as follows:
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- Permissible Investments: Regulation 18 of AIF Regulations outlines various investment avenues for Category III AIFs, including securities, derivatives, and complex products. Notably, investments in mutual funds are not explicitly covered.
- Definition of “Investee Company”: SEBI clarified the definition, emphasizing that an “investee company” encompasses entities like special purpose vehicles, limited liability partnerships, and others. Mutual funds do not fall within this definition.
- Exception under Regulation 15(1)(f): While Regulation 18 doesn’t explicitly permit mutual fund investments, SEBI highlighted an exception under Regulation 15(1)(f). It allows the uninvested portion of funds to be placed in liquid mutual funds until deployment aligns with the fund’s objective.
3. Disclaimer: SEBI emphasized that their views are based on the information provided in the query and may vary with different facts or conditions. The interpretative letter does not represent the final decision of the Board.
Conclusion: In conclusion, SEBI’s interpretative letter provides valuable insights into the permissible investments for Category III AIFs, specifically addressing the query about mutual fund investments within a multi-asset portfolio. While Regulation 18 doesn’t explicitly include mutual funds, the exception under Regulation 15(1)(f) allows flexibility in utilizing uninvested funds. However, stakeholders should note that individual circumstances might lead to different interpretations, and the letter does not alter the broader regulatory framework. This clarification offers guidance to industry participants navigating the complex landscape of AIF Regulations.
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Securities and Exchange Board of India
DEPUTY GENERAL MANAGER
ALTERNATIVE INVESTMENT FUND AND FOREIGN PORTFOLIO INVESTOR DEPARTMENT DIVISION OF POLICY AND DEVELOPMENT
SEBI/HO/AFD/PoD/OW/2023/38073
September 13, 2023
Mr. Vineet Bagri
CEO and Fund Manager,
Prajana Advisors Private Limited,
Investment Manager of Athena Alternative Investments Fund,
1101, Naman Centre, BKC, Bandra (East), Mumbai – 400051
Dear Sir,
Sub: Request for Informal Guidance by way of interpretative letter under the provisions of Securities and Exchange Board of India (Informal Guidance) Scheme 2003 relating to Regulation 18 of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”)
Ref: Your letter dated July 13, 2023
1. In the context of your letter under reference, you have, inter alia, stated that Athena Alternative Investments Trust is a SEBI registered Category III Alternative Investment Fund (“AIF”) bearing registration no. IN/AIF3/22-23/1166 and have sought an interpretive letter under the Securities and Exchange Board of India (Informal Guidance) Scheme 2003 from SEBI on the following query:
Whether a Cat III AIF can invest in Mutual Funds on a permanent basis as a part of the multi asset portfolio?
2. Our Comments
The submissions made in your letter have been considered and without necessarily agreeing with your analysis, our view on the issues raised in your letter are as under:
2.1 In terms of Regulation 18 of AIF Regulations, Cat III AIFs may, inter alia, –
a) invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products.
b) deal in goods received in delivery against physical settlement of commodity derivatives.
c) buy or sell credit default swaps in terms of the conditions as may be specified by the Board from time to time.
d) engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as may be specified by the Board.
2.2 In terms of Regulation 2(1)(o) of AIF Regulations, “investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an AIF makes an investment.
2.3 Thus, investment in Mutual Funds is not covered under permissible investments by a Category III AIF.
2.4 However, in terms of Regulation 15(1)(f) of AIF Regulations, un-invested portion of the investable funds and divestment proceeds pending distribution to investors of AIFs (including Cat III AIFs) may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, Triparty Repo Dealing and Settlement, Commercial Papers, Certificates of Deposits, till the deployment of funds as per the investment objective or the distribution of the funds to investors as per the terms of the fund documents, as applicable.
3. This above position is based on the information furnished in your letter under reference. Different facts or conditions might lead to a different interpretation. This letter does not express the decision of the Board on the question referred through your
4. You may note that the above views are expressed only with respect to the clarification sought in your letter under reference on the AIF Regulations and do not affect the applicability of any law and any other regulations, guidelines and circulars framed or administered by SEBI or any other authority.
Yours faithfully,
Sanjay Singh Bhati
