From UPSC perspective, the following things are important :
Prelims level: AIFs and their regulation; Benefits offered.
Why in the News?
In response to tightening regulations impacting operations, the RBI has recommended that investments exceeding 50% of Alternative Investment Funds (AIFs) units by a person resident outside India be treated as Indirect Foreign Investment.
BACK2BASICS:What are Alternative Investment Funds (AIFs)?
Who can invest in an AIF?
Categories of an applicant who can seek registration as an AIF:
Note: Investment by an Indian company (which is owned or controlled by foreigners) into another Indian entity is considered as Indirect Foreign Investment (IFI). It is also known as downstream investment. |
Present Regulatory Landscape:
- Regulatory Ambiguity: Recent regulatory notes have instilled mistrust in the industry, particularly regarding Foreign Direct Investment (FDI) policy surrounding AIFs, spooking investors and prompting reconsideration of fund deployment strategies.
- Changing Stance: The regulatory stance has evolved, with amendments in 2015-16 allowing AIFs to attract foreign capital through the automatic route, promoting onshore management and incentivizing Indian fund managers to relocate to India.
Offshore Alternatives:
- Reason for Offshoring: Offshore funds benefit from a more stable regulatory environment, with considerations for tax implications necessitating careful structuring.
- Attractive Destination: Gujarat International Finance Tec-City (GIFT City) has emerged as an attractive alternative for managers due to regulatory stability, tax incentives, and proximity to India.
PYQ:[2020] With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (a) It is the investment through capital instruments essentially in a listed company. (b) It is a largely non-debt-creating capital flow. (c) It is the investment which involves debt-servicing. (d) It is the investment foreign institutional investors make in Government securities. |
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