INDIA Law and Practice Contributed by: Tejesh Chitlangi, Sushreet Pattanayak, Pooja Mehta and Anita Jain, IC Universal Legal
of a trust, a company or an LLP, while “retail schemes” can be set up in the form of a trust or a company. Trust structures have been consistently adopted by the industry as the default standard for both Domestic AIFs and GIFT Funds due to their operational flexibility, for confidentiality reasons and because regulatory compliance require - ments are less stringent versus those for struc - tures such as an LLP or a company. Domestic AIFs and GIFT Funds set up as trusts would be governed by the Indian Trusts Act, 1882, would be governed by the Companies Act, 2013 (“Companies Act”) if set up as companies, and would be governed by the Limited Liability Partnership Act, 2008 (“LLP Act”) if set up as LLPs, in addition to the AIF Regulations and the FM Regulations, respectively. On making an investment, “units” are issued to the investors, evidencing beneficial interest in a particular scheme of a Domestic AIF or a GIFT Fund. Choice of structure for managers The managers of both Domestic AIFs and GIFT Funds are mostly structured in the form of an LLP or a company. For GIFT Funds, the manag - er may be structured as the branch of an entity which is already registered and/or regulated by a financial sector regulator in India or a foreign jurisdiction for conducting similar activities. LLPs have relatively fewer compliance and reg - ulatory requirements compared to companies. The costs incurred setting up and maintaining an LLP are also lower. LLPs are beneficial in cases where stakeholders wish to regularly withdraw profits since, once the LLP has discharged tax on its income, the distributions received by part -
ners from the LLP are free of tax. However, LLPs are subject to a higher tax rate than companies. Companies may be preferred if the stakehold - ers do not intend to regularly withdraw profits as dividends, as tax on the distribution of dividends additionally applies to the recipients. 2.1.2 Common Process for Setting Up Investment Funds Domestic AIFs To begin the process of registration, the entity to be registered as a Domestic AIF must be set up under the applicable law. • For private trusts, the trust deed is entered into between the settlor and the trustee, and is registered in accordance with the Registra - tion Act, 1908. • For companies and LLPs, incorporation is required under the Companies Act and LLP Act, respectively. The typical timeline for incorporation of a company or an LLP is three to six weeks. Thereafter, the applicant is required to obtain a Permanent Account Number (PAN) and make an application via the SEBI Intermediary Portal (SI Portal) along with necessary documents and information. Some of the key requirements are as follows: • AIF Regulations specify that an entity or an individual must be designated as a sponsor; the manager entity can also act as a sponsor. • The manager entity would need to have a key investment team that meets the criteria of educational qualification and certification, as prescribed under the AIF Regulations. • The manager/sponsor entity should be able to demonstrate adequate net worth to maintain the continuing interest specified (for Category I Domestic AIF – Angel Funds: 2.5% of the
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