Table of Contents
Chapter 5: Alternative Investment Fund Structuring
At its conceptual core, an Alternative Investment Fund is a collective pooling vehicle. Individual investors pool their capital commitments into a centralized legal vehicle to achieve economies of scale, access high-ticket unlisted transactions, diversify risk across dozens of private enterprises, and access professional managerial expertise that is inaccessible to individual investors acting in isolation.
Permitted Legal Forms of an AIF in India
Under Regulation 3 of the SEBI AIF Regulations, an AIF can be established in one of three primary legal forms:
- Contributory Irrevocable Trust (under the Indian Trusts Act, 1882).
- Limited Liability Partnership (under the Limited Liability Partnership Act, 2008).
- Body Corporate / Company (under the Companies Act, 2013).
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| COMPARATIVE ANALYSIS OF AIF LEGAL FORMS |
+--------------------------+------------------------------+--------------------+---------------------+
| STRUCTURAL ATTRIBUTE | DETERMINATE TRUST | LLP | COMPANY |
+--------------------------+------------------------------+--------------------+---------------------+
| Regulatory Prevalence | **Dominant (>90% of AIFs)** | Moderate (~8%) | Rare (<2%) |
+--------------------------+------------------------------+--------------------+---------------------+
| Governing Act | Indian Trusts Act, 1882 | LLP Act, 2008 | Companies Act, 2013 |
+--------------------------+------------------------------+--------------------+---------------------+
| Operational Flexibility | High; governed by Trust Deed | Moderate; partner | Low; rigid statutory|
| | and contractual agreements. | filings with MCA. | board resolutions. |
+--------------------------+------------------------------+--------------------+---------------------+
| Capital Reduction & | Highly seamless; redemptions | Complex; requires | Punitive; strict NCLT|
| Return of Capital | and distributions via units. | capital reduction. | capital reduction. |
+--------------------------+------------------------------+--------------------+---------------------+
| Investor Anonymity | High; LP register maintained | Low; partner names | Low; public filings |
| | confidentially by RTA/Trustee| visible in MCA. | on MCA21 portal. |
+--------------------------+------------------------------+--------------------+---------------------+
| Tax Pass-Through Clarity | Clear statutory status under | Ambiguous pass- | Double taxation risk|
| | Section 115UB of IT Act. | through treatment. | at entity level. |
+--------------------------+------------------------------+--------------------+---------------------+
Why the Trust Form Dominates the Indian AIF Industry
The Indenture of Trust is the vehicle of choice for over 90% of Indian AIFs due to three decisive commercial and legal advantages:
- Contractual Freedom and Multi-Class Structuring: Trusts provide maximum flexibility to issue multiple classes of units (Class A for institutional LPs, Class B for retail HNIs, Class C for Sponsor/GP) with differentiated fee arrangements and waterfall priorities.
- Frictionless Capital Distributions: Unlike a company—which requires NCLT court approvals to reduce share capital or distribute capital—a Trust can draw down capital and distribute realized capital and dividends immediately upon asset disposal.
- Tax Neutrality: Under Section 115UB of the Income-tax Act, 1961, determinate trusts registered as Category I or II AIFs enjoy complete pass-through taxation, eliminating entity-level corporate tax drag.
The constitution of an AIF is established through an interconnected web of legal charters, fiduciary contracts, and governance committees designed to maintain strict fiduciary oversight while empowering the Investment Manager to execute investment decisions swiftly.
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| AIF LEGAL CONSTITUTIONAL ARCHITECTURE |
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| |
| [ SETTLOR ] -------- Settles nominal trust capital (₹10,000) -------> [ INDENTURE OF TRUST ] |
| | |
| v |
| [ TRUSTEE ] <------- Holds legal title & fiduciary ownership --------- [ THE AIF TRUST ] |
| | ^ |
| | Executes Investment Management Agreement (IMA) | |
| v | |
| [ INVESTMENT MANAGER ] <--- Manages pipeline, diligence & exits -----------------+ |
| | | |
| +-- Advises / Reports to -----------------------------------+ | |
| | | | |
| v v v |
| [ INVESTMENT COMMITTEE ] [ LP ADVISORY COMMITTEE ] [ INVESTORS ] |
| • Approves investments • Resolves conflicts • Sign Contri- |
| • Evaluates divestments • Approves key-man waivers bution Agmt. |
| |
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Key Fiduciary and Operational Bodies
- The Corporate Trustee: Regulated by SEBI, the Trustee owes an undivided fiduciary duty of care and loyalty to the unit-holders. The Trustee monitors the Investment Manager's adherence to the defined investment strategy, ensures that portfolio concentration limits are not breached, signs definitive transaction agreements, and oversees periodic compliance filings with SEBI.
- The Investment Committee (IC): Formed by the Investment Manager, the IC consists of senior managing partners, operating partners, and independent industry experts. Every proposed portfolio investment and exit must receive formal, documented approval from the IC before capital is disbursed.
- The Limited Partner Advisory Committee (LPAC): A governance committee composed of representatives of major institutional investors (LPs). The LPAC does not make commercial investment decisions; its statutory and contractual remit is strictly focused on:
- Reviewing and approving transactions involving potential conflicts of interest (e.g., transactions between the AIF and affiliates of the Manager or Sponsor).
- Granting waivers for Key-Person events (e.g., if a founding partner ceases to dedicate substantial business time to the fund).
- Approving proposed deviations or amendments to the Private Placement Memorandum.
To accommodate diverse pools of domestic and foreign institutional investors who face differing tax, currency, and regulatory environments, fund sponsors employ sophisticated multi-tier structuring templates.
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| MASTER-FEEDER AIF STRUCTURE |
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| |
| +-------------------------+ +--------------------------+ |
| | DOMESTIC INVESTORS | | OFFSHORE INVESTORS | |
| | (Indian HNIs & Instis) | | (Foreign Instis & NRIs) | |
| +------------+------------+ +------------+-------------+ |
| | | |
| | Contributes INR | Contributes USD |
| v v |
| +-------------------------+ +--------------------------+ |
| | DOMESTIC AIF (INDIA) | | OFFSHORE FEEDER FUND | |
| | (Registered with SEBI) | | (Mauritius, Singapore, | |
| +------------+------------+ | or GIFT City IFSC) | |
| | +------------+-------------+ |
| | | |
| | | Subscribes to units |
| | v |
| | <=================================================+ |
| | (Pools 100% of capital at Domestic Master AIF Level) |
| v |
| +--------------------------------------------------------------------+ |
| | DOMESTIC INVESTEE COMPANIES | |
| +--------------------------------------------------------------------+ |
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Common Structuring Templates
- Master-Feeder Structure: An offshore feeder fund (often registered in GIFT City IFSC, Mauritius, or Singapore) pools foreign investor capital in foreign currency (USD) and invests directly into the Indian domestic Master AIF as a single institutional investor. This aggregates international and domestic capital into a single unified balance sheet while offering foreign investors standard offshore governance.
- Parallel Fund Structure: The Manager establishes two distinct legal funds simultaneously—one domestic AIF in India for local investors and one offshore fund for foreign investors. Both funds co-invest alongside each other in identical portfolio companies in strict pro-rata proportion to their respective capital commitments.
- Co-Investment Vehicles (CIV): Specialized SPVs or dedicated AIF schemes established alongside the main fund. When an exceptional deal exceeds the main fund's single-company concentration cap (25%), the Manager offers select anchor LPs the opportunity to co-invest directly in the SPV alongside the main fund, typically with zero or reduced management fees and carry.