AIFs seek status quo as 'foreign control' rules go for a recast
Local alternative investment funds have warned regulators about proposed changes. These changes could significantly impact capital inflows into India's economy. The draft rules aim to curb indirect foreign ownership in sensitive sectors. Industry officials requested the status quo on existing regulatory definitions. This move seeks to maintain India's attractiveness for foreign investment.
Mumbai: Private equity and venture capital funds have warned the government and financial regulators that altering the definition of foreign control for local funds could severely impact capital inflows. These local funds, known as alternative investment funds (AIFs), have become a significant source of risk capital over the past decade.
They met with senior officials from the Securities and Exchange Board of India (SEBI), Reserve Bank of India (RBI), and the Ministry of Finance about two weeks ago, according to two people familiar with the discussions.
The AIF industry's main concern is the draft Foreign Exchange Management Act (FEMA) Rules 2026, released by RBI on July 21, 2026. The draft allows regulators to modify the criteria that determine if an AIF is foreign-controlled. Currently, an AIF with predominantly offshore investors is considered domestic if its sponsor and investment manager are Indian-owned and controlled.
However, there is a fear that changing the definition of foreign control to curb indirect ownership by foreign investors could negatively affect AIFs. This could lead to restrictions and additional formalities for AIFs, even if they are managed and sponsored by Indians.
AIFs have requested a specific exemption for funds whose sponsors and managers are listed Indian financial institutions, regardless of foreign ownership in the institution. Private banks and Non-Banking Financial Companies (NBFCs), which are regulated by the RBI, should be considered domestic AIFs if more than 50% of their equity is held by foreigners. The regulatory officials, however, did not address the issue of regulatory arbitrage or react to the AIF industry's points regarding the draft norms.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
