India: RBI Permits Foreign Investments In REITs, Invits And Alternative Investment Funds

Last Updated: 25 November 2015
Article by Siddharth Shah, Divaspati Singh and Vivaik Sharma

Most Read Contributor in India, August 2019

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Siddharth Shah (Partner, Khaitan & Co)

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Domestic alternative investment fund managers and fund houses have finally received a 'Diwali Bonanza' from the Government. The much talked about relaxation for foreign investments into Alternative Investment Funds (AIFs) has finally been notified (hereafter referred to as the "Notification") through an amendment to the applicable foreign exchange regulations. The said amendments also cover within their ambit foreign investments in Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (INVITS) (collectively referred to as "Investment Vehicles").

As an effect of the amendments, foreign investments in Investment Vehicles may henceforth be made without any specific approval from the Reserve Bank of India (RBI) or the Foreign Investment Promotion Board (FIPB), from any person outside India (including Foreign Portfolio Investors (FPIs) and non-resident Indians (NRIs), subject to the other conditions prescribed vide the amendments. The salient features of the amendments are summarised below:

  • Who can invest: Any person resident outside India (other than an individual who is citizen of or any other entity which is registered/incorporated in Pakistan or Bangladesh), including a Securities Exchange Board of India (SEBI) registered FPI or a NRI.
  • Funding: The funding for the units of an Investment Vehicle acquired by a person resident or entity registered / incorporated outside India are required to be made by inward remittance through normal banking channels or by debit from NRE or FCNR account(s) as the case may be. 


While the provisions of the Notification appear to be silent on investments made specifically through NRO accounts, the inclusive nature of the language seems to suggest that investments from NRO accounts into Investment Vehicles would also be covered within their ambit. Having said that, further clarity in this regard would be required.

  • Subsequent transactions: A person resident outside India who has acquired or purchased units in an Investment Vehicle may sell or transfer in any manner or redeem the units as per regulations framed by SEBI or directions issued by RBI. While currently the RBI has not prescribed any directions in this regard, the following restrictions on transferability have been placed by applicable SEBI regulations:

    • SEBI AIF Regulations: There are no restrictions on transferability of the units issued, however the fund documents typically contain contractual restriction on transfers;
    • SEBI REITS Regulations: As the units of the REIT would be listed on stock exchanges, they can be traded subject to the guidelines and rules issued by the stock exchanges in this regard; and
    • SEBI INVITS Regulations: As the units of the INVIT would be listed on stock exchanges, they can be traded subject to the guidelines and rules issued by the stock exchanges in this regard.
  • Creating security/charge on Investment Vehicle investments: The amendments also specifically provide that foreign investors may pledge units of Investment Vehicles held by them to avail credit facilities being extended to such foreign investors.


While the SEBI AIF Regulations do not permit Category I and II AIFs to employ leverage at the fund level, the Notification seems to permit non-resident investors to employ leverage on the units held by them in Investment Vehicles by permitting the creation of pledges over such units.

  • Downstream Investments: Downstream investment by an Investment Vehicle shall be regarded as foreign investment if neither the Sponsor nor the Manager / Investment Manager is Indian 'owned and controlled'1 as per the provisions of the regulations. Thus, as long as either the Sponsor or the Manager / Investment Manager is Indian 'owned and controlled', the Investment Vehicle will not be subject to any downstream restrictions. Further, the regulations also clearly provide that the percentage of corpus of the Investment Vehicle held by foreign investors will not be relevant while determining this issue.


Prior to the Notification, foreign investments in investment vehicles registered as trusts were subject to prior approval of the FIPB. The FIPB in many of its approvals had placed conditions on any downstream investments by investment vehicles which accept foreign investments, whereby investments by such investment vehicles were treated as foreign investments and were also subject to the relevant sectoral restrictions on entry route, conditionalities and caps, lock-in requirements, instruments of investments etc as prescribed under the FDI Policy. In many cases, these conditions were made applicable by the FIPB on downstream investments where the actual foreign investment was a small percentage of the corpus of the Investment Vehicle, forcing such vehicles to narrow their investment horizon. However, this position was relaxed by FIPB in a few recent transactions wherein approvals were given sans downstream investment restrictions as long as the Sponsor and Manager of the vehicle were Indian 'owned and controlled'.

The above position has now been fortified by the Notification, since downstream investments by Investment Vehicles now will not be treated as foreign investments irrespective of the quantum of foreign investment in such vehicles so long as either their Sponsor or the Manager / Investment Manager is an Indian 'owned and controlled' entity.

  • Sponsor / Manager Organization: For sponsors or managers / investment managers organized in a form other than companies, SEBI shall determine whether the sponsor or manager or investment manager is foreign owned and controlled. Notably, the amendments provide that since ownership and control cannot be determined in an LLP under the extant FDI policy, an LLP shall not act as sponsor or manager/investment manager.


Presently, many domestic funds are managed by entities set up as LLPs in view of the ease of compliance and favourable tax treatment available to LLPs as compared to a corporate structure. It is unclear as to what the blanket ban or restriction on a sponsor or a manager being an LLP is intended to cover. A question arises as to whether this restriction means that such AIFs which with manager or a sponsor organised in the form of a LLP would not be eligible to accept foreign contribution or would it mean that the exemption of downstream foreign investment benefit will not be available to such AIFs.

The above explanation on the non-determinability of 'control' in an LLP appears to conflict with the provisions of the Press Note dated 10 November 2015 issued by the Department of Industrial Policy & Promotion (DIPP) in which it is stated that the government has specifically determined the criteria for adjudging ownership and control in an LLP for the purposes of downstream investment.

  • Category III AIFs: An Alternative Investment Fund Category III with foreign investment shall make portfolio investment in only those securities or instruments in which a Registered Foreign Portfolio Investor is allowed to invest under the principal Regulations.


The availability of the benefit of the amendments to Category III AIFs is a welcome step and a pleasant yet unexpected surprise for the industry. Category III AIFs are permitted to employ complex and diverse trading strategies and employ leverage including through investments in listed or unlisted derivatives. A Category III AIF registration is suitable for hedge fund strategies employing leverage due to which it was unclear as to how would the regulator view such entities for foreign investments. The amendments place Category III AIFs with foreign investments at par with registered FPIs and prescribe that investments made by such AIFs with foreign investments shall conform to the securities or instruments in which FPIs are permitted to invest.

  • Reporting: Investment Vehicles receiving foreign investment shall be required to make such report and in such format to RBI or to SEBI as may be prescribed by them from time to time. In view of this, it is expected that SEBI and the RBI are likely to prescribe additional reporting requirements for Investment Vehicles with foreign investments in due course.

While these amendments took much longer than expected (the first announcement in this regard was made in February 2015 along with the annual Budget 2015) the form in which they have come provides cheer to the industry and are welcomed whole-heartedly. Following this set of liberalisation, the industry expectations are set that the deduction of tax at a rate of 10% on distributions by AIFs for foreign investors or tax exempt investor be removed in the forthcoming budget. If that were to be the case, it would surely encourage Indian fund managers to relook at the need for setting up offshore management and pooling structures, thereby ensuring the Governments vision of retaining talent in India and 'Manage in India'.


[1] As per the Consolidated Foreign Direct Investment Policy 2015 (FDI Policy), a company is considered as 'Owned' by resident Indian citizens if more than 50% of the capital in it is beneficially owned by resident Indian citizens and / or Indian companies, which are ultimately owned and controlled by resident Indian citizens. Further, the FDI Policy defines 'Control' to include the right to appoint a majority of the directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholders agreements or voting agreements.

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at

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