Industry Odisha Bureau, Sep 07: India’s AIF industry wants foreign-control rules left unchanged. Draft FEMA rules could reshape how funds get classified. Offshore capital flowing through AIFs may face new hurdles. Regulators, meanwhile, are watching for possible regulatory arbitrage. The dispute centres on one question: who truly controls a fund?
Alternative investment funds (AIF) pool money for unlisted companies. They back startups and expanding businesses across sectors. Over 2,000 AIFs have channelled ₹6.7 lakh crore cumulatively. That scale makes them a major risk-capital source.
The disagreement stems from newly proposed rules. RBI released draft FEMA Foreign Investment Rules 2026 on July 21. Those rules would let regulators redefine “foreign controlled” status for AIFs. That single definition carries significant practical weight for funds.
Under current rules, ownership and control decide classification. An AIF stays domestic if its sponsor is Indian-owned. Its investment manager must also be Indian-controlled. This holds even when nearly all investors are offshore.
Industry representatives fear that logic may soon shift. A revised definition could weigh investor money more heavily. Funds mostly capitalised by foreigners might then be reclassified. That would place them under stricter foreign-investor rules.
Regulators have a different worry driving this review. Some foreign investors face limits in sensitive Indian sectors. Routing money through Indian-managed AIFs could bypass those limits. That possibility is what regulators call regulatory arbitrage.
Non-resident investors currently supply 40% of AIF capital. That figure explains why classification changes worry the industry. AIF representatives argue Indian managers attract global capital effectively. They say that approach has worked well for a decade.
At a recent meeting with SEBI, RBI and finance-ministry officials, industry voices pressed their case. People familiar with the discussions described a direct appeal. Tightening rules now, they argued, could slow future inflows. Officials reportedly did not respond to those specific points.
Beyond preserving the status quo, AIFs floated a carve-out. Funds backed by listed Indian financial institutions could qualify. This would apply even if foreigners hold majority equity there. Their argument rests on those institutions being regulated and listed.
The industry separately asked for simpler ownership-disclosure rules. It wants clearer standards for ultimate beneficial ownership. Ambiguity there, representatives argued, complicates compliance unnecessarily.
Regulatory-arbitrage concerns are not new to this debate. A SEBI board note from May 2024 flagged similar risks. It warned that AIF structures could enable indirect investment inflows. Investments from India’s land-neighbouring countries were a specific worry there. Officials linked that concern to Press Note 3 safeguards.
No final decision has emerged from these discussions yet. The core tension remains unresolved for now. India wants foreign capital without enabling indirect FDI evasion. Getting that balance right will shape how AIFs classify control going forward.
