IFS Centres Fund Management Regulations 2022

INTERNATIONAL FINANCIAL SERVICES CENTRES AUTHORITY (FUND MANAGEMENT) REGULATIONS, 20221 [As amended up to 11th April, 2023] In exercise of the powers conferred by sub...

INTERNATIONAL FINANCIAL SERVICES CENTRES AUTHORITY (FUND MANAGEMENT) REGULATIONS, 20221 [As amended up to 11th April, 2023] In exercise of the powers conferred by sub-section (1) of Section 28 read with sub-section (1) of Section 12 and sub-section (1) of Section 13 of the International Financial Services Centres Authority Act, 2019; Section 28C of the Securities and Exchange Board of India Act, 1992, the International Financial Services Centres Authority hereby makes the following regulations, namely: - CHAPTER I PRELIMINARY Short title and commencement 1. (1) These regulations shall be called the International Financial Services Centres Authority (Fund Management) Regulations, 2022. (2) These regulations shall come into force on the thirtieth day from the date of its publication in the Official Gazette. Definitions 2. (1) In these regulations, unless the context otherwise requires, ─ (a) “Act” means the International Financial Services Centres Authority Act, 2019 (50 of 2019); (b) “accreditation agency” means an entity permitted by the Authority to undertake the activity of accrediting accredited investors. Explanation.- For the purpose of accreditation, the Authority may specify the eligibility criteria for an accreditation agency and also the process for accreditation by such agency; (c) “accredited investor” means any person who fulfils the eligibility criteria as specified by the Authority and in the manner specified; (d) “advertisement” shall include all forms of communication issued by or on behalf of the fund management entity that may influence investment decisions of any investor/prospective investors; (e) “associate” means- (a) a company or a limited liability partnership (LLP) or a body corporate in which a director or trustee or partner of the FME or the FME or any fiduciaries as defined in regulation 17 of these regulations, either individually or collectively, hold twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be; (b) a company or a limited liability partnership or a body corporate, either individually or 1 Vide Notification No. IFSCA/2021-22/GN/REG024, dated 19th April, 2022, published in the Gazette of India, Extraordinary, Part III, Sec.4, vide No. 32, on 20th April, 2022. Page 1 of 72  collectively, hold twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be in the FME; (c) Any other company or a limited liability partnership or a body corporate, in which the entity referred in clause (b) above holds twenty percent or more of its paid-up equity share capital or partnership interest, as the case may be; (f) “body corporate” shall have the meaning assigned to it under clause (11) of Section 2 of the Companies Act, 2013 (18 of 2013) as amended from time to time; (g) “certificate of registration” means a certificate of registration granted by the Authority under Regulation 12 of these Regulations; (h) “control” shall include the right to appoint majority of the directors or to control the management or policy decisions exercisable by a person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or management rights or shareholders agreements or voting agreements or partnership agreement or in any other manner, including by holding interest, whether direct or indirect, to the extent of more than fifty percent of voting rights or interest: Provided that a director or officer of an entity shall not be considered to be in control over such entity, merely by virtue of holding such position; (i) “close ended scheme” means any scheme in which the period of maturity of the scheme is specified; (j) “compliance officer” means any senior officer, designated so and reporting to the board of directors or head of the organization in case board is not there, who is financially literate and is capable of appreciating requirements for legal and regulatory compliance under these regulations and who shall be responsible for compliance of policies, procedures, maintenance of records, monitoring adherence to the rules for the preservation of unpublished price sensitive information, monitoring of trades and the implementation of the codes specified in these regulations under the overall supervision of the board of directors of the FME or the head of an organization, as the case may be. Explanation.– For the purpose of this regulation, “financially literate” shall mean a person who has the ability to read and understand basic financial statements i.e. balance sheet, profit and loss account, and statement of cash flows; (k) “corpus” means the total amount of funds committed by investors to the fund management entity under a scheme by way of a written contract or any such document as on a particular date; (l) “discretionary portfolio manager” means a portfolio manager who under a contract relating to portfolio management, exercises or may exercise, any degree of discretion as to the investment of funds or management of the portfolio of securities of the client, as the case may be; (m) “effective date” shall mean the thirtieth day from the date of publication of these Regulations in the official gazette; (n) “family investment fund” means a self-managed fund pooling money only from a single family and has been set up in terms of these regulations; (o) “foreign jurisdiction” means a country, other than India, whose securities market regulator is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Page 2 of 72  Understanding (Appendix A signatories) or a signatory to a bilateral Memorandum of Understanding with the Authority, and which is not identified in the public statement of Financial Action Task Force as: (i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action Task Force to address the deficiencies; (p) “fund management entity” or “FME” means an entity registered with the Authority as a Fund Management Entity under any of the categories specified in these regulations; (q) “fund manager” means any individual who is appointed by the FME to manage its investments by whatever name called; (r) “fund of funds scheme” means a scheme that invests primarily in other schemes whether in IFSC or India or foreign jurisdictions; (s) “IFSC” or “International Financial Services Centre” shall have the same meaning as assigned to it under clause (g) of sub-section (1) of Section 3 of the Act; (t) “IFSCA” or “Authority” means the International Financial Services Centres Authority established under sub-section (1) of Section 4 of the Act; (u) “inspecting authority” means one or more persons authorised by the Authority to undertake inspection of the books, accounts, records and documents of a fund management entity or related entities in terms of these regulations; (v) “index scheme” means a scheme that invests in securities in the same proportion as an index of securities; (w) “investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust or a fund in which an investment is made; (x) “key managerial personnel” or “KMP” means the officers or personnel of the FME who are members of its core management team and includes members of the management one level below the executive directors of the FME, functional heads and includes ‘key managerial personnel’ as defined under the Companies Act, 2013 or any other person whom the FME may declare as a key managerial personnel; (y) "net worth" means the aggregate value of the paid-up share capital (or capital contribution) and all reserves created out of the profits, securities premium account and debit or credit balance of profit and loss account, after deducting the aggregate value of the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the balance sheet, but does not include reserves created out of revaluation of assets, write-back of depreciation and amalgamation; (z) “offer document” means any document by which a Registered FME (Retail) invites public for subscription in a retail scheme or public offer by an Investment Trust; (aa) “open ended scheme” means a scheme which is not a close ended scheme i.e. it does not have Page 3 of 72  specified maturity period; (bb) “placement memorandum” means any document by which a FME invites accredited investors or investors investing above a specified threshold to invest in a venture capital scheme or a restricted scheme or a private placement by an Investment Trust; (cc) “portfolio” means the total holdings of securities and financial assets belonging to any person; (dd) “principal officer” means a designated employee of the fund management entity responsible for overall activities of the fund management entity; (ee) “recognised stock exchange” means a recognised stock exchange in IFSC; (ff) “Registered Fund Management Entity” or “Registered FME” shall mean Registered FME (Non- Retail) and Registered FME (Retail); (gg) “restricted scheme” means a scheme under a private placement offer to only “accredited investors” or investors investing above USD 1,50,000 and it shall not have more than 1000 investors or such other number as may be specified by the Authority; (hh) “Retail scheme” means a scheme offered to all investors or a section of the investors for subscription with no ceiling as to number of investors in the scheme; (ii) “Scheme” or “fund” means a scheme of a fund management entity launched under these Regulations; (jj) “single family” means a group of individuals who are the lineal descendants of a common ancestor and includes their spouses (including widows and widowers, whether remarried or not) and children (including stepchildren, adopted children, ex nuptial children); (kk) “trust” means a trust established under the Indian Trusts Act, 1882 or under an Act of Parliament or State Legislation; (2) Words and expressions used and not defined in these regulations but defined in the Act or Acts mentioned in the First Schedule to the Act, or the Companies Act, 2013, or any rules or regulations made thereunder shall have the same meanings respectively assigned to them in those Acts, rules or regulations or any statutory modification or re-enactment thereto, as the case may be. CHAPTER II REGISTRATION OF FUND MANAGEMENT ENTITY (FME) Obligation to seek registration 3. (1) Any entity, intending to undertake the business of fund management under these regulations shall not commence operations in an IFSC unless it has obtained a certificate of registration from the Authority as a FME under any of the categories mentioned in sub-regulation (4). (2) An entity desirous of obtaining a certificate of registration as a FME in IFSC shall submit an application form in the format and manner as specified in First Schedule along with documents and application fees as may be specified by the Authority. Page 4 of 72  (3) An application, which is not complete in all respects shall be liable to be rejected as specified under these regulations. (4) The FME shall seek registration under any of the following three categories: (a) Authorised FME: The FMEs that pool money from accredited investors or investors investing above the specified threshold by way of private placement and invest in start-ups or early-stage ventures through Venture Capital Scheme. Family Investment Fund investing in securities, financial products and such other permitted asset classes shall also seek registration as an Authorised FME. (b) Registered FME (Non-Retail): The FMEs that pool money from accredited investors or investors investing above a specified threshold by way of private placement for investing in securities, financial products and such other permitted asset classes through one or more restricted schemes. Such FMEs shall also be able undertake Portfolio Management Services (including for multi-family office) and act as investment manager for private placement of Investment Trust (REITs and InvITs). Such FMEs shall also be able to undertake all activities as permitted to Authorised FMEs. (c) Registered FME (Retail): The FMEs that pool money from all investors or a section of the investors under one or more schemes for investing in securities, financial products and such other permitted asset classes through retail or restricted schemes. Registered FME (Retail) may act as investment manager for public offer of Investment Trusts (REITs and InvITs). Such FMEs shall also be able to launch Exchange Traded Funds (ETFs). Further, such FMEs shall also be able to undertake all activities as permitted to Authorised FMEs and Registered FMEs (Non-retail). Explanation.- Details of activities, investment conditions, responsibilities and obligations for each of the aforesaid category of FME have been specified in distinct Chapters under these regulations. The reference to the term “FME” under the respective Chapters shall be construed according to the permitted activities for the categories specified above. Additional conditions, responsibilities and disclosure obligations may also be specified by the Authority from time to time. Eligibility Conditions 4. For the purpose of grant of a certificate of registration, the applicant has to fulfill the conditions as specified in this Chapter. Legal form of the applicant 5. (1) The applicant shall be present in an IFSC by forming a company or LLP or branch thereof or any other form as may be permitted by the Authority: Provided that a Registered FME (Retail) shall not be permitted though LLP mode or its branch: Provided further that the branch structure is permitted only for a FME which is already registered and/or regulated by a financial sector regulator in India or a foreign jurisdiction for conducting similar activities. (2) A FME operating as branch structure in an IFSC shall comply with the following conditions:- (a) the entity shall adequately ring fence the operations of the branch in IFSC; Page 5 of 72  (b) the entity shall comply with the minimum net worth requirements specified in these regulations for its activities in IFSC which may be maintained at the parent level; (c) the entity shall maintain such minimum capital as may be specified by the Authority, which shall at all times be earmarked for IFSC and may be held in the jurisdiction of its incorporation; and (d) any other requirements as may be specified by the Authority from time to time. (3) The memorandum of association in case of a company or the LLP agreement in case of a LLP shall permit it to carry on the activity of Fund Management. (4) A Registered FME (Retail) shall have at least four (4) directors with at least fifty percent (50%) of the directors to be independent directors and not associated with the FME. Track Record and Reputation of Fairness 6. The applicant shall have a sound track record and general reputation of fairness and integrity in all its business transactions. Explanation.- For the purposes of this clause “sound track record” shall mean: (a) In case of Registered FME (Retail), FME or its holding company shall not have less than five (5) years of experience in managing Assets under Management (AUM) of at least USD 200 million with more than twenty-five thousand (25,000) investors or at least one (1) person in control of the FME holding more than twenty-five percent (25%) shareholding in the FME be carrying on business in financial services for a period of not less than five (5) years: Provided that any other criteria for sound track record may be considered by the Authority to facilitate new generation fintech companies with innovative ideas that may lead to further market development; (b) In case of Registered FME (non-retail) and Authorised FME, it shall employ such employees who shall have relevant experience as specified in these regulations. Appointment of Principal Officers and Key managerial personnel(s) (KMP) 7. (1) The applicant shall designate a principal officer who shall be responsible for overall activities of the FME including but not limited to fund management, risk management and compliance. (2) In case of Registered FME, in addition to the above, one (1) additional KMP shall be designated as Compliance and Risk Manager and shall be responsible for compliance with these regulations and ensure suitable risk management policies and practices at the FME. (3) In case of Registered FME (Retail), in addition to sub-regulations (1) and (2) above, the FME shall appoint an additional KMP who shall be designated with the responsibility of fund management. (4) The applicant shall ensure that the aforementioned principal officer and other KMPs provided under sub-regulations (2) and (3) shall be based out of IFSC and meet the following experience: (a) A professional qualification or post-graduate degree or post graduate diploma (minimum two years in duration) in finance, law, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognised by the Central Government or any State Government or a recognised foreign university or institution or Page 6 of 72  association; or a certification from any organization or institution or association or stock exchange which is recognised/ accredited by Authority or a regulator in India or Foreign Jurisdiction; and (b) An experience of at least five (5) years in related activities in the securities market or financial products including in a portfolio manager, broker dealer, investment advisor, wealth manager, research analyst or fund management. (5) The proposal on the portfolio composition shall be initiated by a person who is based in office of the FME in the IFSC. (6) The FME shall appoint other personnel commensurate to the size of its operations and activities. (7) Any appointment and changes to the KMPs appointed under sub-regulation (1), (2) and (3) of this regulation shall take place only with the prior approval of the Authority. Net worth requirements 8. (1) An entity seeking registration as a FME shall at all times comply with the net worth requirements as specified in Second Schedule of these regulations or such other amount as may be specified by the Authority. (2) An entity operating as a branch shall at all times comply with the minimum net worth requirements specified in these regulations for its activities in IFSC which may be maintained at the parent level. However, the parent entity shall ensure that adequate funds are available for branch for its day to day operations. (3) The minimum net worth requirements as stated above shall be separate in addition to the minimum net worth requirements applicable for other activities within or outside IFSC. Fit and proper requirements 9. (1) The applicant and its principal officer, directors/ partners/ designated partners, key managerial personnel and controlling shareholders shall be fit and proper persons, at all times. (2) For the purpose of sub-regulation (1), a person shall be deemed to be a fit and proper person if :- (a) such person has a record of fairness and integrity, including but not limited to- (i) financial integrity; (ii) good reputation and character; and (iii) honesty. (b) such person has not incurred any of the following disqualifications – (i) the person has been convicted by a court for any offence involving moral turpitude or any economic offence or any offence against securities laws; (ii) a recovery proceeding has been initiated against the person by a financial regulatory authority and is pending; (iii) an order for winding up has been passed against the person for malfeasance; (iv) the person has been declared insolvent and not discharged; (v) an order, restraining, prohibiting or debarring the person from accessing or dealing in financial products or financial services, has been passed by any regulatory authority, and a Page 7 of 72  period of three years from the date of the expiry of the period specified in the order has not elapsed; (vi) any other order against the person, which has a bearing on the securities market, has been passed by the Authority or any other regulatory authority, and a period of three years from the date of the order has not elapsed; (vii) the person has been found to be of unsound mind by a court of competent jurisdiction and the finding is in force; (viii) the person is financially not sound or has been categorized as a wilful defaulter; (ix) the person has been declared a fugitive economic offender; or (x) any other disqualification as may be specified by the Authority. Infrastructure Requirements 10. (1) The entity has the necessary infrastructure like adequate office space, equipment, communication facilities and manpower to effectively discharge its activities under these regulations and circulars issued thereunder. The infrastructure requirements should be commensurate to the size of its operations in IFSC. (2) The office should be dedicated, secured and accessible only by authorised person(s) of the FME. Furnishing of Information 11. (1) The Authority may require the applicant to furnish any such further information or clarification regarding itself or nature of the fund or fund management activities or any such matter connected thereto to consider the application for grant of a certificate. (2) If required by the Authority, the applicant shall appear before the Authority for personal representation. (3) If required, the Authority may undertake an inspection of the office of the applicant before the grant of a certificate of registration. Consideration of application and Grant of Certificate of Registration 12. The Authority, may on receipt of all information and on being satisfied may grant Certificate of Registration as FME to the applicant under the appropriate category, subject to the applicant paying applicable registration fee. Terms and conditions of registration 13. (1) The registration granted to a FME, shall be subject to the following terms and conditions:- (a) the FME, its CEO / Directors / Designated Partners / Partners, Principal officer / KMPs shall comply with the provisions of these regulations and circulars issued thereunder; (b) the FME shall forthwith inform the Authority, if any information or particulars previously submitted to the Authority was misleading or false in any material respect; and (c) the FME shall forthwith inform the Authority, of any material change in the information or particulars previously furnished, which have a bearing on the registration granted by the Authority. Page 8 of 72  (2) The FME which has been granted certificate of registration under a particular category cannot change its category, except with the prior approval of the Authority. Rejection of application 14. (1) If the Authority is of the opinion that the registration cannot be granted, it shall communicate the deficiencies to the Applicant giving it thirty (30) days’ time to rectify them. (2) If the Applicant fails to rectify such deficiencies to the satisfaction of the Authority within the specified time, the Authority may refuse to grant registration and shall communicate the same to the Applicant, giving reasons for such refusal. Period of validity 15. The certificate of registration of a FME shall be valid for such period as may be specified by the Authority, unless it is suspended or cancelled by the Authority or surrendered by the FME and taken on record by the Authority. Surrender of registration 16. A FME may file an application with the Authority for surrender of its certificate of registration. Constitution of the Fund / Scheme 17. (1) A FME may launch various schemes as provided under these regulations. (2) A FME prior to the filing of a scheme document shall appoint the Board of Directors in case of Company, Designated Partners in case of LLP and Trustees (including the Board in case of a Trustee company) in case of a Trust and shall hereinafter be collectively referred to as “fiduciaries”. (3) A FME shall ensure that all the fiduciaries meet with the fit and proper requirements as specified in this Chapter. (4) A FME intending to launch retail schemes shall take prior approval of the Authority for appointing any person as a fiduciary. (5) The fiduciaries shall comply with the Code of Conduct and obligations as detailed in Part B of Third Schedule. CHAPTER III SCHEMES FOR FUND MANAGEMENT PART A: VENTURE CAPITAL SCHEMES Venture Capital Schemes 18. (1) Venture Capital Schemes are schemes that can be launched by the FMEs that invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business Page 9 of 72  model or other schemes which invest in such entities and shall also include an angel fund. (2) Venture Capital Schemes under this Part shall be filed before the Authority as “venture capital fund” under Category I Alternative Investment Fund. Explanation.- The Scheme may be construed as “venture capital fund” under Category I Alternative Investment Fund as referred under the Income Tax Act, 1961, the Foreign Exchange Management Act, 1999 or rules, regulations, circulars, notifications, guidelines etc. under the respective Acts or any other relevant statute. Filing of Placement Memorandum 19. (1) A FME may launch Venture Capital schemes through a private placement by filing a placement memorandum with the Authority along with the application fees as specified by the Authority. (2) The filing of scheme documents for such venture capital schemes shall be under a green channel i.e. the schemes filed can be open for subscription by investors immediately upon filing with the Authority. (3) The validity of the placement memorandum for launch of the venture capital scheme shall be six (6) months from the date of filing with the Authority. (4) The FME shall ensure that any material changes from the information provided in the placement memorandum, shall be immediately informed to the Authority. Eligible Investors 20. (1) Venture Capital schemes shall have less than fifty (50) investors. (2) Accredited Investors or investors investing above USD 250,000 shall be permitted to invest in such schemes: Provided that in case of investors who are employees or directors or designated partners/ partners of the FME, the minimum value of investment shall be USD 60,000: Provided further that the minimum investment threshold shall not apply to an accredited investor and employees or directors or designated partners or partners of the FME. Explanation.- A Registered FME intending to launch venture capital schemes to target more than fifty (50) investors or pool money from investors investing with lower application size of USD 150,000 shall be able to do so under restricted schemes as provided under Part B of this Chapter. Nature and structure of Scheme 21. (1) Venture Capital schemes shall only be close ended schemes and the maximum tenure and the amount to be raised shall be decided upfront and disclosed in the placement memorandum. The minimum tenure of a close ended scheme shall be three (3) years. (2) Extension of the tenure of the close ended schemes may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value of their investment in the venture capital scheme: Provided that any further extension beyond two (2) years may be considered subject to express consent of the investors and exit opportunity shall be provided to remaining investors. (3) Venture capital schemes shall be constituted in IFSC as Company or LLP or Trust under the applicable Page 10 of 72  laws of India. Permissible investments 22. (1) Subject to other provisions of these regulations, a venture capital scheme may invest moneys collected under any of its schemes only in: - (a) Securities issued by unlisted entities; (b) Securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdiction; (c) Money market instruments; (d) Debt securities; (e) Securitised debt instruments, which are either asset backed or mortgage-backed securities; (f) Other venture capital schemes set up in the IFSC, India and foreign jurisdiction subject to appropriate disclosure in the placement memorandum; (g) Units of mutual funds and alternative investment funds in India, IFSC or foreign jurisdiction; (h) Investment in limited liability partnerships; or (i) Such other securities or financial products/ assets or instruments as specified by the Authority: Provided that pending deployment of money, FME may invest money in certificate of deposits, units of investment schemes such as liquid or money market schemes, money market instruments or any other securities or financial assets or instruments as may be specified by the Authority. (2) Any investment made under sub-regulation (1) shall be in accordance with the investment objective of the relevant venture capital scheme and disclosures in the placement memorandum. Investment Restrictions and Scheme Corpus 23. (1) The minimum size of the corpus in case of venture capital schemes shall be USD 5 Million. The total corpus of venture capital schemes shall not exceed USD 200 Million. (2) Venture capital scheme may invest in its associate subject to the prior approval of seventy-five percent (75%) investors in the scheme by value. (3) Venture capital schemes shall invest at least 80 percent of the AUM in investee companies incorporated for less than ten (10) years or other venture capital schemes. Disclosures to investors 24. (1) The placement memorandum for venture capital schemes shall clearly include disclosures regarding the investment objective, the targeted investors, proposed corpus, investment style or strategy, investment methodology, proposed tenure of the scheme, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the scheme. The FME and the fiduciaries shall comply with the disclosure requirements as may be specified by the Authority. (2) The FME shall ensure that the portfolio under the scheme and Net Asset Value (NAV) is disclosed to the investors at least on a yearly basis. (3) The aforesaid disclosures shall be made within one (1) month of the end of each financial year. (4) Any other material disclosure, as considered suitable by the FME or the fiduciaries, shall be informed to the investors immediately. Page 11 of 72 Borrowing 25. A venture capital scheme may borrow funds or engage in leveraging activities, subject to the following conditions:- (a) The maximum leverage by the scheme, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum; (b) The leverage shall be exercised in accordance with the disclosures in the placement memorandum and any deviation shall be subject to consent of two-thirds (2/3rd) of the investors by value; and (c) The FME employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the scheme. Valuation 26. (1) The FME and fiduciaries shall ensure compliance of investment valuation norms as specified in the Sixth Schedule. (2) In line with the investment valuation norms, the assets of the scheme may be valued by an independent third-party service provider, such as a fund administrator or custodian, registered with the Authority, a valuer registered with Insolvency and Bankruptcy Board of India or such other person as may be specified by the Authority. Computation of NAV 27. (1) The FME shall compute the NAV of each venture capital scheme at least on an annual basis. (2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended if required. Contribution by the FME in the scheme 28. (1) The FME shall ensure that under a venture capital scheme, the FME or its associate shall invest:- (a) at least 2.5% of the targeted corpus and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of less than USD 30 Million; (b) at least USD 750,000 and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of more than USD 30 Million: Provided that the contribution by the FME shall not be mandatory in case of relocation of schemes established or incorporated or registered outside India to IFSC. (2) The said contribution in proportion to investor’s investment in the scheme shall be made by the FME or its associate entity within forty-five (45) days and maintained on ongoing basis: Provided that the period of forty-five (45) days may be extended subject to the satisfaction of the Authority. (3) The said contribution if brought in by FME shall be included for the purpose of net-worth requirements as detailed under Chapter II. (4) The said contribution shall be exempted if: (a) at least two-thirds (2/3rd) of the investors in the scheme by value permits waiver of such contribution; (b) at least two-thirds (2/3rd)of the investors in the scheme are accredited investors; or Page 12 of 72  (c) the scheme is a fund of fund scheme investing in a scheme which has similar such requirements. Co-investment and Leverage 29. (1) A venture capital scheme may co-invest in permissible investment under these regulations through a special purpose vehicle (SPV) under a framework specified by the Authority or through a segregated portfolio by issuing a separate class of units. (2) The FME shall ensure that:- (a) The investments by such segregated portfolios shall, in no circumstance, be on terms more favourable than those offered to the common portfolio of the venture capital scheme; and (b) Appropriate disclosures have been made in the placement memorandum regarding creation of segregated portfolio. (3) A SPV mentioned in sub-regulation (1) may undertake leverage as disclosed in the placement memorandum. PART B: RESTRICTED SCHEMES (NON-RETAIL SCHEMES) Restricted Schemes (Non-Retail Schemes) 30. (1) Restricted Schemes are schemes that may be launched by Registered FMEs for various investment strategies for:- (a) investing in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds, ESG Funds, Special Situation funds (as detailed in Part D of this Chapter) and such other Schemes/Funds as may be specified by the Authority. Schemes falling under this clause shall be a close ended scheme and filed before the Authority as Category I Alternative Investment Fund. Explanation I.- The Scheme may be construed as Category I Alternative Investment Fund as referred under the Income Tax Act, 1961, the Foreign Exchange Management Act, 1999 or rules, regulations, circulars, notifications, guidelines etc. under the respective Acts or any other relevant statute. Explanation II.- Venture capital funds under this Part shall not be required to comply with conditions specified for venture capital schemes as provided under Part A of Chapter III of these regulations. (b) investment for undertaking diverse or complex trading strategies including investment in listed or unlisted derivatives and for permitted investments under longevity finance. The Schemes under this clause shall be filed before the Authority as Category III Alternative Investment Fund. Such schemes may be launched as open ended or close ended as provided under this Chapter. Explanation.- The Scheme may be construed as Category III Alternative Investment Fund as referred under the Income Tax Act, 1961, the Foreign Exchange Management Act, 1999 or rules, regulations, circulars, notifications, guidelines etc. under the respective Acts or any other relevant statute. Such schemes shall be launched as open ended or close ended as provided under this Chapter. Page 13 of 72  (c) investment which does not fall under the clause (a) and (b) above. The Schemes under this clause shall be filed before the Authority as Category II Alternative Investment Fund. Such scheme shall be launched as close ended as provided under this Chapter. Explanation.- The Scheme may be construed as Category II Alternative Investment Fund as referred under the Income Tax Act, 1961, the Foreign Exchange Management Act, 1999 or rules, regulations, circulars, notifications, guidelines etc. under the respective Acts or any other relevant statute. Eligible FMEs and Filing of Placement Memorandum 31. (1) A Registered FMEs may launch restricted schemes through a private placement by filing the placement memorandum with the Authority along with the application fees as specified by the Authority before twenty-one (21) working days of launch of the scheme. (2) The Authority may endeavor to communicate its comments, if any, to the FME within twenty-one (21) working days of receipt of satisfactory response and the FME shall ensure that the comments are duly incorporated in the placement memorandum prior to launch of the scheme. Provided that the validity of the placement memorandum for launch of the scheme shall be six (6) months from the date of filing with the Authority or the date of observation letter of Authority, whichever is later. (3) The requirement under sub-regulation (2) shall not be applicable for restricted schemes soliciting money only from accredited investors i.e. such restricted schemes shall be under a green channel and can open for subscription from investors immediately upon filing with the Authority. (4) The FME shall ensure that any material changes from the information provided in the placement memorandum, shall be immediately informed to the Authority. Eligible Investors 32. (1) Restricted schemes shall have less than one thousand (1000) investors or such number as may be specified by the Authority. (2) Accredited Investors or investors investing above USD 150,000 may invest in such schemes: Provided that in case of investors who are employees or directors or designated partners or partners of the FME, the minimum value of investment shall be USD 40,000: Provided further that the minimum investment threshold shall not apply to an accredited investor and employees or directors or designated partners or partners of the FME. Nature and Structure of Scheme 33. (1) Restricted schemes may be launched as open ended or close ended schemes. In case of a close ended scheme, the maximum tenure and amount to be raised should be decided upfront and disclosed in the placement memorandum. The minimum tenure of a close ended scheme shall be one year. (2) Extension of the tenure of the close ended restricted schemes may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value of their investment in the restricted scheme: Provided that any further extension beyond two (2) years may be considered subject to express consent of the investors and exit opportunity shall be provided to other investors. Page 14 of 72  (3) Restricted schemes shall be constituted in IFSC as Company or LLP or Trust under the applicable laws of India. Permissible investments 34. (1) Subject to other provisions of these regulations, a restricted scheme may invest moneys collected under any of its schemes only in:- (a) Securities issued by unlisted entities; (b) Securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdiction; (c) Money market instruments; (d) Debt securities; (e) Securitised debt instruments, which are either asset backed or mortgage-backed securities; (f) Other investment schemes set up in the IFSC, India and foreign jurisdiction subject to appropriate disclosure in the placement memorandum; (g) Derivatives including commodity derivatives subject to suitable disclosures in the placement memorandum; (h) Units of mutual funds and alternative investment funds in India and foreign jurisdiction; (i) Investment in limited liability partnerships; or (j) Such other securities or financial products/assets or instruments as specified by the Authority: Provided that pending deployment of money, FME may invest money in certificate of deposits, units of investment schemes such as liquid or money market schemes, money market instruments or any other securities or financial assets or instruments as may be specified by the Authority. (2) Any investment made under sub-regulation (1) shall be in accordance with the investment objective of the relevant scheme and disclosures in the placement memorandum. (3) In addition to the above, a close ended scheme may invest up to twenty percent (20%) of the corpus in other physical assets such as real estate, bullion, art or any other physical asset as may be specified by the Authority from time to time. Investment Restrictions and Scheme Corpus 35. (1) In case of an open ended scheme, the maximum investment in securities of unlisted companies should not exceed twenty- five percent (25%) of the corpus of the schemes. (2) The minimum size of the restricted schemes shall be USD 5 Million. (3) Restricted schemes may invest in its associate subject to the prior approval of seventy-five percent (75%) investors in the scheme by value. Disclosures to investors 36. (1) The placement memorandum for restricted schemes shall clearly include disclosures regarding the investment objective, the targeted investors, proposed corpus, investment style or strategy, investment methodology, proposed tenure of the scheme, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the scheme. The FME and the fiduciaries shall comply with the disclosure requirements as may be specified by the Authority. Page 15 of 72  (2) Any material deviation or alteration to the fund strategy should be made with the consent of at least two-thirds (2/3rd) of investors by value. (3) The FME shall ensure that the NAV is disclosed to the investors at least on a monthly basis in case of an open ended scheme and half-yearly in case of a close ended scheme. (4) The FME shall ensure that the portfolio under the scheme is disclosed to the investors at least on a quarterly basis within one month from the end of the quarter. (5) Any other material disclosure as considered suitable by the FME or the fiduciaries shall be informed to the investors immediately. Borrowing 37. A restricted scheme may borrow funds or engage in leveraging activities, subject to the following conditions:- (a) The maximum leverage by the scheme, along with the methodology for calculation of leverage, shall be disclosed in the placement memorandum; (b) The leverage shall be exercised in accordance with the disclosures in the placement memorandum and any deviation shall be subject to consent of 2/3rd of the investors by value; and (c) The FME employing leverage shall have a comprehensive risk management framework appropriate to the size, complexity and risk profile of the fund. Valuation 38. (1) The FME and fiduciaries shall ensure compliance of investment valuation norms specified in the Sixth Schedule. (2) In line with the investment valuation norms, the assets of the scheme may be valued by an independent third-party service provider such as a fund administrator or custodian registered with the Authority, a valuer registered with Insolvency and Bankruptcy Board of India or such other person as may be specified by the Authority. Computation of NAV 39. (1) FME shall compute the NAV of each restricted scheme at least on a monthly basis: Provided that in case of a close ended restricted scheme the computation of NAV shall take place at least half-yearly. (2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended, if required. Contribution by the FME in the scheme 40. (1) The FME shall ensure that under a restricted scheme, the FME or its associate shall invest :- (a) In case of a close ended scheme, (i) at least 2.5% of the targeted corpus and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of less than USD 30 Million; (ii) at least USD 750,000 and not exceeding 10% of the targeted corpus in a scheme with Page 16 of 72  targeted corpus of more than USD 30 Million: (b) In case of open-ended scheme, (i) at least 5% of the targeted corpus and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of less than USD 30 Million; (ii) at least USD 1,500,000 and not exceeding 10% of the targeted corpus in a scheme with targeted corpus of more than USD 30 Million: Provided that the contribution by the FME shall not be mandatory in case of relocation of funds /schemes established or incorporated or registered outside India to IFSC. (2) The said contribution in proportion to investor’s investment in the scheme shall be made by the FME or its associate entity within forty-five (45) days and maintained on ongoing basis: Provided that the period of forty-five (45) days may be extended subject to the satisfaction of the Authority. (3) The said contribution if brought in by FME shall be included for the purpose of net-worth requirements as detailed under Chapter II. (4) The said contribution shall be exempted if :- (a) at least two-thirds (2/3rd)of the investors in the scheme by value permits waiver of such contribution; (b) at least two-thirds (2/3rd) of the investors in the scheme are accredited investors; or (c) The scheme is a fund of fund scheme investing in a scheme which has similar such requirements. Co-investment and Leverage 41. (1) A restricted scheme may co-invest in permissible investments under these regulations through a SPV under a framework specified by the Authority or through a segregated portfolio by issuing a separate class of units. (2) The FME shall ensure that:- (a) The investments by such segregated portfolios shall, in no circumstance, be on terms more favourable than those offered to the common portfolio of the restricted scheme; and (b) Appropriate disclosures have been made in the placement memorandum regarding creation of segregated portfolio. (3) A SPV mentioned in sub-regulation (1) may undertake leverage as disclosed in the placement memorandum. PART C: RETAIL SCHEMES Retail Schemes 42. Retail Schemes are schemes that shall be launched by Registered FMEs (Retail) for pooling money from all investors or a section of investors through an offer document for investment as per its stated investment objective in various permissible investments. Eligible FMEs and Filing of Offer Document 43. (1) No scheme shall be launched unless a draft offer document is filed with the Authority along with the applicable application fees at least twenty-one (21) working days before the launch of the scheme. Page 17 of 72  (2) The validity of the offer document for launch of the scheme shall be twelve (12) months from the date of observation letter of Authority. (3) The FME shall ensure that the comments of the Authority are incorporated in the offer document prior to launch of the scheme. (4) The FME shall ensure that any material changes from the information provided in the draft offer document are informed to the Authority immediately. (5) No retail scheme shall be filed with the Authority unless it has been approved by the fiduciaries. Minimum number of Investors 44. Retail schemes shall have at least twenty (20) investors with no single investor investing more than twenty five percent (25%) in a scheme: Provided that the condition shall be complied within a maximum period of six (6) months from the closure of the offer. Nature and Structure of Scheme 45. (1) Retail schemes could be open ended or close ended. In case of a close ended schemes, the maximum tenure shall be decided upfront and disclosed in the offer document. The minimum tenure of a close ended scheme shall be three (3) years. (2) Extension of the tenure of the close ended schemes may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value of their investment in the scheme and the approval of the Authority. (3) Retail schemes shall be constituted in IFSC as Company or Trust under the applicable laws of India. (4) Retail schemes may be launched for various investment strategies including for investment in Social Ventures, Infrastructure, ESG sectors (ESG schemes), specific sectors (sectoral schemes), certain themes such as infrastructure (thematic schemes), certain asset class (equity schemes, debt schemes, etc.) or a combination thereof or towards certain solution (retirement schemes, schemes for children education, etc.) subject to such terms and conditions as may be specified by the Authority. Permissible investments 46. (1) Subject to other provisions of these regulations, a retail scheme may invest moneys collected under any of its schemes only in:- (a) Securities listed or to be listed or traded on stock exchanges in IFSC, India or foreign jurisdictions; (b) Securities issued by unlisted entities; (c) Money market instruments; (d) Debt securities; (e) Securitised debt instruments, which are either asset backed or mortgage-backed securities; (f) Other investment schemes set up in the IFSC, India and foreign jurisdiction subject to appropriate disclosure in the offer documents; (g) Derivatives including commodity derivatives only for the purpose of hedging subject to suitable disclosures in the offer document; Page 18 of 72  (h) Units of mutual funds and alternative investment funds in India and foreign jurisdiction; or (i) Such other securities or financial products/ assets or instruments as specified by the Authority: Provided that pending deployment of money, FME may invest money in certificate of deposits, units of investment schemes such as liquid or money market schemes, money market instruments or any other securities or financial assets or instruments as may be specified by the Authority. (2) Any investment made under sub-regulation (1) shall be in accordance with the investment objective of the relevant retail scheme and disclosures in the offer document. Investment Restrictions and Scheme Corpus 47. (1) In case of an open-ended schemes, the maximum investment in unlisted securities should not exceed fifteen percent (15%) of the total AUM of the schemes. (2) The minimum amount of investment by an investor in case of close ended schemes investing more than fifteen percent (15%) in unlisted securities, shall be USD 10,000: Provided that a close ended scheme shall not invest more than fifty percent (50%) in unlisted securities. Explanation.- For retail schemes investing less than fifteen percent (15%) in unlisted securities, the minimum amount of investment of USD 10,000 shall not be applicable. (3) Retail schemes shall not invest more than ten percent (10%) of its AUM in securities of a single company: Provided that the retail scheme may invest up to fifteen percent (15%) in a single company with the prior approval of the fiduciaries: Provided further that the limit on single company shall not be applicable in case of Index schemes. (4) Retail schemes shall not invest more than twenty five percent (25%) of its AUM in a single sector: Provided that in case of a financial services sector the amount shall not exceed fifty percent (50%) of the AUM of the scheme: Provided further that the limits on sectoral caps shall not apply in case of a sectoral or thematic or an Index Scheme. (5) Retails schemes shall not invest more than twenty-five percent (25%) of the AUM in its associate. (6) The minimum size of the retail schemes shall be USD 5 Million. Disclosures 48. (1) The offer document for retail schemes shall clearly include all disclosures which are material for investors to make a decision regarding investing in such schemes. (2) The disclosures in the offer document shall inter-alia include disclosures regarding the investment objective, the targeted investors, proposed corpus, investment style or strategy, investment methodology, proposed tenure of the scheme, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the scheme. The FME and the fiduciaries shall comply with the disclosure requirements in the offer document as may be specified by the Authority. (3) Any material deviation or alteration to the fund strategy should be made with the consent of at least two-thirds (2/3rd) of investors by value. Page 19 of 72  (4) The FME shall ensure that the NAV is disclosed to the investors on a daily basis in case of an open- ended scheme and weekly basis in case of a close ended scheme. (5) The FME shall ensure that the portfolio under the scheme is disclosed to the investors at least on a quarterly basis within one (1) month from the end of the quarter. (6) Any other material disclosure as considered suitable by the FME or the fiduciaries shall be informed to the investors immediately. Borrowing 49. A retail scheme shall not borrow except to meet temporary liquidity needs for the purpose of redemption : Provided that the retail scheme shall not borrow more than twenty percent (20%) of the AUM of the scheme and the duration of such a borrowing shall not exceed a period of six (6) months. Valuation 50. (1) The FME and fiduciaries shall ensure compliance with the investment valuation norms as specified in the Sixth Schedule. (2) In line with the investment valuation norms, the assets of the scheme may be valued by an independent third-party service provider such as a fund administrator or a custodian, registered with the Authority, a valuer registered with Insolvency and Bankruptcy Board of India or such other person as may be specified by the Authority. Computation of NAV 51. (1) The FME shall compute the NAV of each retail scheme on a daily basis: Provided that in case of a close ended retail scheme the computation of NAV shall take place at least on a weekly basis. (2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended. Contribution by the FME in the scheme 52. (1) The FME shall ensure that under a retail scheme, the FME or its associate shall invest at least, lower of one percent (1%) of the AUM of the scheme or USD 200,000: Provided that the contribution by the FME shall not be mandatory in case of relocation of funds /schemes established or incorporated or registered outside India to IFSC. (2) The said contribution shall be made by the FME or its associate within forty-five (45) days and maintained on ongoing basis: Provided that the period of forty-five (45) days may be extended subject to the satisfaction of the Authority. (3) The said contribution if brought in by FME shall be included for the purpose of net-worth requirements as detailed under Chapter II. (4) The said contribution shall be exempted if the scheme is a fund of fund scheme investing in a scheme which has similar such requirements. Page 20 of 72  PART D: SPECIAL SITUATION FUNDS 53. A Registered FME may launch a special situation fund in accordance with the provisions of this Chapter. Definitions 54. For the purpose of this part of Chapter III, (1) “special situation asset” includes:- (a) stressed loan available for acquisition in terms of Clause 58 of Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 as amended from time to time or as part of a resolution plan approved under the Insolvency and Bankruptcy Code, 2016 or in terms of any other policy of the Reserve Bank of India or IFSCA or Government of India issued in this regard from time to time; (b) security receipts issued by an Asset Reconstruction Company registered with the Reserve Bank of India; (c) securities of investee companies: (i) whose stressed loans are available for acquisition in terms of Clause 58 of the Master Direction – Reserve Bank of India (Transfer of Loan Exposures) Directions, 2021 as amended from time to time, a resolution plan approved under the Insolvency and Bankruptcy Code, 2016, or any other policy of the Reserve Bank of India or IFSCA or Government of India issued in this regard from time to time; (ii) against whose borrowings, security receipts have been issued by an Asset Reconstruction Company registered with the Reserve Bank of India; (iii) whose borrowings are subject to corporate insolvency resolution process under Chapter II of the Insolvency and Bankruptcy Code, 2016; (iv) who have disclosed all the defaults relating to the payment of interest or repayment of principal amount on loans from banks / financial institutions/ Systemically Important Non- Deposit taking Non-Banking Financial Companies/ Deposit taking Non-Banking Financial Companies and /or listed or unlisted debt securities and such payment default is continuing for a period of at least ninety (90) calendar days after the occurrence of such default: Provided that in case of sub-clauses (iii) and (iv), the credit rating of the financial instruments or credit instruments or borrowings of the company has been downgraded to “D” or equivalent; (d) Any other asset as may be specified by the Authority from time to time. (2) “special situation fund” means a scheme that invests in special situation assets in accordance with its investment objectives and may act as a resolution applicant under the Insolvency and Bankruptcy Code, 2016. Filing of Placement Memorandum 55. (1) A Registered FME may launch a special situation fund through a private placement memorandum by filing the memorandum with the Authority along with the application fees at least 21 working days before Page 21 of 72  launch of the scheme. (2) The Authority may endeavor to communicate its comments, if any, to the FME within twenty-one (21) working days of receipt of satisfactory response and the FME shall ensure that the comments are duly incorporated in the placement memorandum prior to launch of the scheme. Provided that the validity of the placement memorandum for launch of the scheme shall be six (6) months from the date of filing with the Authority or the date of observation letter of Authority, whichever is later. (4) The FME shall ensure that any material changes in the placement memorandum are informed to the Authority immediately. Nature and Structure of Scheme 56. (1) A special situation fund shall be close ended and the minimum tenure of a special situation fund shall be three (3) years. (2) The maximum tenure of a special situation fund shall be disclosed upfront in the placement memorandum. (3) Extension of the tenure of the close ended special situation fund may be permitted up to two (2) years subject to approval of two-thirds (2/3rd) of the investors by value: Provided that any further extension beyond two (2) years may be considered subject to express consent of the investors and exit opportunity shall be provided to other investors. (4) A special situation fund shall be constituted in IFSC as a company or LLP or Trust under the applicable laws of India. Permissible Investments 57. A special situation fund shall invest only in special situation assets. Scheme corpus, eligible investors, investment conditions 58. (1) A special situation fund shall have the minimum corpus as may be specified by the Authority from time to time. (2) A special situation fund shall accept such eligible investors as may be specified by the Authority from time to time. (3) A special situation fund shall comply with such additional investment conditions as may be specified by the Authority from time to time. Borrowing 59. A special situation fund shall not borrow or engage in any leveraging activities other than to meet day- to-day operational requirements. Other requirements 60. (1) The norms regarding disclosures, valuation, computation of NAV, contribution by the FME in the scheme as applicable to a close ended restricted scheme under Chapter III of these regulations shall apply to a special situation fund. (2) A special situation fund shall be considered as a category under restricted schemes and accordingly a Page 22 of 72  special situation fund shall additionally comply with such requirements as may be specified by the Authority for close ended restricted schemes from time to time. CHAPTER IV EXCHANGE TRADED FUNDS (ETFs) Exchange Traded Funds 61. (1) Only Registered FMEs (Retail) shall launch Exchange Traded Funds (ETFs) by filing the draft offer document with the Authority along with the application fees at least twenty-one (21) working days before launch of the ETF. (2) The validity of the offer document for the launch of the ETF shall be twelve (12) months from the date of observation letter of Authority. (3) The FME shall ensure that the comments of the Authority are duly incorporated in the offer document prior to launch of the ETF. (4) The FME shall ensure that any material changes from the information provided in the draft offer document are informed to the Authority immediately. (5) ETF shall be mandatorily listed and traded on a recognised stock exchange and shall include: (a) Equity Index based ETFs (b) Debt Index based ETFs (c) Commodity based ETFs (d) Hybrid ETFs (investing in 2 or more asset class) (e) Actively Managed ETF (f) Any other ETFs subject to approval of the concerned recognised stock exchange and the authority (6) No scheme for ETF shall be filed with the Authority unless it has been approved by the fiduciaries: Provided that in case of ETFs falling under clause (e) and (f) of sub-regulation (5) above prior approval of recognised stock exchange(s) where such ETF is intended to be listed shall be obtained. (7) An ETF in IFSC shall use the identifier ‘IFSC ETF’ which identifies it as an ETF listed and traded on recognised stock exchanges. The identifier shall be used at all places including its name, offer document, and all advertising material. Equity Index based ETF 62. (1) A FME may launch an ETF replicating an Equity Index of IFSC or Indian or foreign jurisdiction. (2) An Equity Index based ETF that seeks to replicate a particular index shall ensure that such index complies with the following norms:- (a) The index shall have a minimum of ten (10) stocks as its constituents; (b) For a sectoral/ thematic index, no single stock shall have more than thirty five percent (35%) weight in the index; and (c) For other than sectoral/ thematic indices, no single stock shall have more than twenty-five percent Page 23 of 72  (25%) weight in the index. (3) Equity Index based ETF shall replicate the underlying index to the extent of at least ninety-five percent (95%) of total assets. Debt Index based ETF 63. (1) The FME may launch an ETF replicating a Debt Index of IFSC or Indian or foreign jurisdiction. (2) A debt index based fund that seeks to replicate a particular index shall ensure that such index complies with the following norms:- (a) The index shall have a minimum five (5) issuers as its constituents; (b) No single issuer shall have more than twenty-five percent (25%) weight in the index; and (c) The rating of the constituents of the index shall be investment grade: Provided that clauses (a) and (b) shall not apply to index based funds investing in Government securities. (3) Debt index based ETF shall replicate the underlying index to the extent of at least ninety percent (90 %) of total assets: Provided that if the ETF is not able to replicate the index due to non-availability of issuances of the issuer forming part of the index, the FME may consider such deviations that would lead to least possible tracking error and shall be in line with the disclosures in the offer document. Commodity oriented ETFs 64. (1) Commodity based ETFs shall invest at least ninety percent (90%) in the specified commodity or commodity related security / instrument as specified by the Authority. (2) For participation in commodity based ETF, FME shall ensure that a KMP with five (5) years of experience in dealing with commodities, is designated as a Fund Manager. Gold ETF 65. (1) In case of a Gold ETF, at least ninety percent of the AUM should be invested in Gold or bullion instruments such as Bullion Depository Receipts with underlying Gold and Exchange Traded Commodity Derivatives (ETCD) with gold as the underlying: Provided that the exposure to ETCDs having gold as the underlying shall not exceed ten percent (10%) of AUM of the scheme: Provided further the limit of ten percent (10%) shall not be applicable to Gold ETFs where the intention is to take delivery of the physical Gold and not to rollover its position to next contract cycle. (2) Gold ETFs shall be benchmarked against the price of spot Gold at the recognised stock exchange or any other benchmark price as may be specified by the Authority and FMEs shall endeavor to have tracking error as low as possible. (3) The FMEs shall ensure that for investment in physical Gold, the Gold should be supplied by a refiner certified for complying with OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. (4) Physical Gold shall be stored with a vault registered with the Authority. (5) Physical verification of gold underlying the Gold ETF units shall be carried out by an independent Page 24 of 72  agency capable of undertaking such activities and reported to the Board of FME and fiduciaries on half yearly basis. Silver ETF 66. (1) In case of a Silver ETF, at least ninety percent (90%) of the AUM should be invested in Silver or bullion instruments such as Bullion Depository Receipts with underlying Silver and Exchange Traded Commodity Derivatives (ETCD) with silver as the underlying. Provided that the exposure to ETCDs having silver as the underlying shall not exceed ten percent (10%) of AUM of the scheme. Provided further the limit of ten percent (10%) shall not be applicable to Silver ETFs where the intention is to take delivery of the physical silver and not to rollover its position to next contract cycle. (2) Silver ETFs shall be benchmarked against the price of spot Silver at a recognised stock exchange or any other benchmark price as may be specified by the Authority and the FMEs shall endeavor to have tracking error as low as possible. (3) The FMEs shall ensure that for investment in physical Silver, the silver should have supplied by a refiner certified for complying with OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas. (4) Physical Silver shall be stored with a vault registered with the Authority. (5) Physical verification of silver underlying the Silver ETF units shall be carried out by an independent agency capable of undertaking such activities and reported to the Board of FME and fiduciaries on half yearly basis. Actively Managed ETFs 67. (1) Actively managed ETFs are ETFs for which the FME has discretion over the composition of its portfolio, subject to the stated investment objectives and policies. (2) An actively managed ETF shall disclose in its offer document, and all advertising material that it is an actively managed ETF and shall disclose how it will meet the stated investment policy including, where applicable, its intention to outperform an index. (3) Draft offer document for Actively Managed ETFs shall be filed with the recognised stock exchange(s) where such ETF is intended to be listed and also with the Authority. Market Makers 68. (1) A FME shall appoint a market maker who shall be responsible for liquidity in the trading of ETF by way of providing two way quotes. (2) Market Makers shall be permitted to create units and seek redemptions directly from the FME. (3) Recognised Stock Exchange(s) may provide a simplified framework for authorisation of intermediaries registered with the Authority as market makers. (4) Recognised Stock Exchange(s) shall also provide detailed rules for market makers viz. maximum spread, minimum quantity, if any, incentives, margining, net-settlement etc. Page 25 of 72 Computation of NAV 69. (1) A FME shall compute the NAV of each ETF on a daily basis and publish the same on its website and the inform the same to the recognised stock exchange, where it is listed for disclosure on the website of such recognised stock exchange. (2) The procedure and methodology for calculating the NAV should be fully documented, and such documentation should be regularly verified and amended, if required. Redemption of ETFs to Investors 70. Investors other than market makers may also directly approach the FME for redemption of ETFs, and no exit load shall be charged if : (a) Traded price (based on closing price) of the ETF units is at discount of more than five percent (5%) of NAV for continuous thirty (30) trading days; or (b) No quotes are available on the recognised stock exchange for five (5) consecutive trading days; or (c) Total bid size on the recognised stock exchange is less than higher of one percent (1%) of the total units valued at NAV in ETF or USD 2,500 in value, averaged over a period of seven (7) consecutive trading days. Disclosures 71. (1) The offer document for ETFs shall clearly include all disclosures which are material for investors to make a decision regarding investing in such ETFs. (2) The disclosures in the offer document shall inter-alia include disclosures regarding the investment objective, the targeted investors, investment style or strategy, investment methodology, proposed fees and expenses, risk management practices, KMPs of the FME and other relevant details of the FME and the ETF. The FME and the fiduciaries shall comply with the disclosure requirements in the offer document as may be specified by the Authority. (3) Any material deviation or alteration to the fund strategy should be made with the consent of at least two-thirds (2/3rd) of investors by value. (4) The FME shall ensure that the NAV is disclosed to the investors on a daily basis and the manner of such disclosure shall be detailed in the offer document. (5) The FME shall ensure that the portfolio under the ETF is disclosed to the investors and the manner of such disclosure shall be detailed in the offer document. (6) Any other material disclosure as considered suitable by the FME or the fiduciaries shall be informed to the investors immediately. Page 26 of 72  CHAPTER V ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) 72. (1) A FME managing AUM above USD 3 Billion as at the close of a financial year or any other threshold of AUM as may be specified by the Authority, shall: (a) establish policy on governance around material sustainability-related risks and opportunities; (b) disclose in its annual report how the FME identifies, assesses and manages material sustainability- related risks; (c) establish and disclose in its annual report the process of factoring sustainability-related risks and opportunities into fund manager’s investment strategies and processes, including, where relevant, data and methodologies used; and (d) comply with any other sustainability related requirements as may be specified by the Authority. (2) A FME that launches a scheme related to ESG, shall make full disclosure regarding investment objective, investment policy, strategy, material risk, benchmark, etc., in the manner as may be specified by the Authority. (3) All scheme documents filed by FME with the Authority under Chapter III shall disclose whether sustainability related risks are incorporated in the decision making. The FME shall provide details when sustainability related risks are incorporated in the decision making. A negative statement shall be included when sustainability related risks are not incorporated in the decision making. CHAPTER VI OTHER FUND MANAGEMENT ACTIVITIES PART A: PORTFOLIO MANAGEMENT SERVICES Eligible FME and Clients 73. (1) A Registered FME may offer Portfolio Management Services to its clients in terms of these regulations. (2) A FME in its capacity as a portfolio manager may have the following categories as clients: (a) a person resident outside India; (b) a non-resident Indian; (c) a non-individual resident in India who is eligible under FEMA to invest funds offshore, to the extent of outward investment permitted; and (d) an individual resident in India who is eligible under FEMA to invest funds offshore, to the extent allowed under the liberalised remittance scheme (LRS) of Reserve Bank of India. (3) A FME operating as a portfolio manager in an IFSC shall be permitted to invest in securities and financial products in an IFSC, India or Foreign Jurisdiction: Provided that in case of a discretionary portfolio management service, it shall invest in the securities listed or to be listed or traded on the stock exchanges, money market instruments, units of investment scheme and other financial products as specified by the Authority from time to time. Page 27 of 72 Disclosures 74. (1) The FME shall provide a disclosure document to the client, prior to entering into a portfolio management agreement with the client. (2) The FME shall ensure that a copy of disclosure document is available on its website. (3) The disclosure document referred to in sub-regulation (1) shall inter-alia contain details pertaining to the services offered, risk factors, client representation, financial performance, performance of portfolio manager, auditor observations, nature of expenses, taxation, investor grievance redressal mechanism and litigations by the regulatory authorities against the portfolio manager and its principal officers, directors/ partners/ designated partners and key managerial personnel. Portfolio Management Agreement. 75. (1) A FME shall enter into a written agreement with the portfolio management client that clearly defines the inter se relationship and sets out their mutual rights, liabilities and obligations relating to management of portfolio including details pertaining to investment objectives, risk factors, terms of fees, period of the contract, etc. (2) Notwithstanding anything contained in the agreement between the FME and the client, the funds or securities can be withdrawn by the client before the maturity of the contract under the following circumstances, namely- (a) voluntary or compulsory termination of portfolio management services by the FME or the client; (b) suspension or cancellation of the certificate of registration of the FME by the Authority; or (c) bankruptcy or liquidation of the FME. Report to the Client 76. (1) The FME shall periodically furnish a report to the portfolio management client in terms of the agreement between it and the client which shall inter-alia contain details relating to composition and value of the portfolio, transactions undertaken during the period of the report, beneficial interest received during the period of the report, expenses incurred in managing the portfolio and details of risk relating to the securities recommended by the portfolio manager for investment or disinvestment. (2) The report referred to in sub-regulation (1) may be made available online with restricted access to each client. Dealing with Client Funds 77. (1) A FME shall not accept from the client, funds or securities worth less than USD 150,000 in case of a portfolio management agreement: Provided that the minimum investment threshold shall not apply to an accredited investor. Provided further that the existing portfolio managers registered with the Authority and having clients with funds or securities worth less than USD 150,000 shall be grandfathered in the manner as may be specified by the Authority. Page 28 of 72  2 [(2) The funds of a client availing portfolio management services (other than those availing only advisory services) may be maintained in- (a) a specific bank account of the FME in a Banking Unit; (b) a specific bank account of the client in a Banking Unit, a bank in India or a Foreign Jurisdiction; or (c) any other manner as may be specified by the Authority. Provided that when the funds are maintained in the specific bank account of a client, the FME operating as portfolio manager shall ensure that it is duly authorised to operate the said bank account either by itself or through a custodian and that it shall provide the details of all such bank accounts including transactions carried out thereunder, to the Authority, whenever directed to do so.] (3) A FME shall segregate each portfolio management client’s holding in securities in separate accounts: Provided that this sub-regulation shall not apply if the investments of the clients are in jurisdictions permitting omnibus account structure. In such cases, FME shall ensure that the investment using omnibus structure is pursuant to prior consent of the clients; and adequate checks are in place to ensure that the clients’ securities are earmarked separately. (4) The funds received from the clients, investments or disinvestments, all the credits to the account of the client like interest, dividend, bonus or any other beneficial interest received on the investment and debit for expenses, if any, shall be properly reflected in the client’s accounts. (5) The FME shall act in a fiduciary capacity in respect of the client’s funds and shall not derive any direct or indirect benefit out of the client’s funds or securities. (6) The FME shall not borrow funds or securities on behalf of the client. Investment Restrictions 78. (1) The money or securities accepted by the FME shall be invested or managed in terms of the portfolio management agreement between the FME and the client. (2) The FME shall not use the portfolio of its clients for investment in derivatives, unless express consent has been obtained from its clients. (3) The FME shall not while dealing with clients’ funds indulge in speculative transactions i.e., it shall not enter into any transaction for purchase or sale of any security which is periodically or ultimately settled otherwise than by actual delivery or transfer of security except the transactions in derivatives. (4) A FME shall, ordinarily purchase or sell securities separately for each portfolio management client. However, in the event of aggregation of purchases or sales for economy of scale, inter se allocation shall be done on a pro rata basis and at weighted average price of the day's transactions. The FME shall not keep any open position in respect of allocation of sales or purchases effected in a day. (5) The FME shall segregate each clients' funds and portfolio of securities and keep them separately from its own funds and securities and be responsible for safekeeping of clients' funds and securities. 2 Substituted by Notification No. IFSCA/2022-23/GN/REG034, dated 11th April, 2023 (w.e.f. 13.04.2023). Before substitution, it stood as under: “(2) A portfolio manager shall keep the funds of all clients in a separate account to be maintained by it in a Banking Unit.” Page 29 of 72  (6) The FME shall not hold the securities belonging to the portfolio account, in its own name on behalf of its clients either by virtue of contract with clients or otherwise: Provided that this sub-regulation shall not apply if the investments of the clients are in jurisdictions permitting omnibus account structure. In such cases, FME shall ensure that the investment using omnibus structure is pursuant to prior consent of the clients; and adequate checks are in place to ensure that the clients’ securities are earmarked separately. (7) The FME operating as a portfolio manager (except those providing only advisory services) shall appoint a custodian in respect of securities managed or administered by it. General Obligations 79. (1) The FME shall charge an agreed fee from the clients for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return and the fee so charged may be a fixed fee or a return based fee or a combination of both. (2) The FME in its capacity as a discretionary portfolio manager shall individually and independently manage the funds of the client in accordance with the needs of the client, in a manner which does not partake the character of a retail fund, whereas a non-discretionary portfolio manager shall manage the funds of the client in accordance with the directions of the client. (3) The FME shall ensure that any person or entity involved in the distribution of its services is carrying out the distribution activities is in compliance with these regulations and the circulars and directions issued thereunder by the Authority from time to time. (4) The FME shall report its performance uniformly in the disclosures to the Authority, advertising material and reports to the clients and on its website. (5) The portfolio accounts managed and administered by the FME in its capacity as a portfolio manager shall be audited annually and a copy of the certificate shall be given to the client. Advisory Services 80. A FME as part of its portfolio management services shall enter into an agreement with prospective clients for providing advisory services, provided: (a) it complies with the Regulation 43 to 50 of the IFSCA (Capital Market Intermediaries) Regulations, 2021. (b) It complies with the code of conduct under the IFSCA (Capital Market Intermediaries) Regulations, 2021; and (c) Advisory services are for a portfolio not less than USD 150,000. Multi-Family Office 81. (1) A FME may also provide services to multi-family office under a portfolio management agreement as detailed in this Chapter. (2) The Authority may prescribe additional conditions, additional permissible investment, etc., for FMEs providing services to multi-family office under a portfolio management agreement. Page 30 of 72 Page 31 of 72  PART B: INVESTMENT TRUST Investment Trust in IFSCs 82. (1) Any person from IFSC or India or a foreign jurisdiction desirous to operate an Investment Trust in the IFSCs shall obtain registration with the Authority. (2) An Investment Trust is permitted to raise funds through: (a) Public issue with units listed on a recognised stock exchange in IFSC; (b) Private placement with units listed on a recognised stock exchange in IFSC; or (c) Private placement whose units are not proposed to be listed on any recognised stock exchange. (3) The recognised stock exchange(s) in IFSC shall specify the detailed framework including on initial disclosure requirements in the offer document, continuous obligations and disclosure requirements, trading, clearing and settlement etc. for Investment Trust whose units are listed or proposed to be listed on a recognised stock exchange(s). The Investment Trust shall comply with the requirements specified by the recognised stock exchange(s). Definitions 83. (1) For the purpose of this Part of Chapter VI:- (a) "eligible infrastructure project" means an infrastructure project which, prior to the date of its acquisition by, or transfer to, the InvIT, satisfies the following conditions,– (i) For PPP projects,– (a) the Infrastructure Project is a completed and revenue generating project; (b) the Infrastructure Project, which has achieved commercial operations date (COD) and does not have the track record of revenue from operations for a period of not less than one year; or (c) the Infrastructure Project is a pre-COD project; (ii) In non-PPP projects, the infrastructure project has received all the requisite approvals and certifications for commencing construction of the project; (b) "governing board” shall mean a group of members appointed or nominated by the LLP to act in a manner similar to the board of directors in case of a company; (c) “holdco” or “holding company” means a company or LLP or any other structure as approved by the Authority:- (i) in which Investment Trusts holds or proposes to hold controlling interest and not less than fifty one per cent of the equity share capital or interest and which in turn has made investments in other SPV(s), which ultimately hold the infrastructure assets or property(ies), as the case may be; (ii) which is not engaged in any other activity other than holding of the underlying SPV(s), real estate/properties or infrastructure projects, as the case may be, and any other activities pertaining to and incidental to such holdings; (d) “Investment Trust” shall mean a REIT or an InvIT, as the case may be; Page 32 of 72 (e) “investment management agreement” means an agreement between the trustee and the investment manager which lays down the roles and responsibilities of the investment manager towards the Investment Trust; (f) “investment manager” means a Fund Management Entity registered under these regulations which manages assets and investments of the Investment Trust and undertakes activities of the Investment Trust; (g) “InvIT” or 'Infrastructure Investment Trust' shall mean the trust registered as such under these regulations; (h) "InvIT assets” means assets owned by the InvIT, whether directly or through a holdco and/ or SPV, and includes all rights, interests and benefits arising from and incidental to ownership of such assets; (i) “parties to the Investment Trust” shall include the sponsor(s), fund management entity, trustee and project manager(s), if applicable; (j) “PPP project” means an infrastructure project undertaken on a Public- Private Partnership basis; (k) “pre-COD project” means an infrastructure project which: i. has not achieved commercial operation date as defined under the relevant project agreements including the concession agreement, power purchase agreement or any other agreement of a similar nature entered into in relation to the operation of a project or any agreement entered into with the lenders; and ii. has,– a. achieved completion of at least fifty percent of the construction of the infrastructure project as certified by an independent engineer of such project; or b. expended not less than fifty percent of the total capital cost set forth in the financial package of the relevant project agreement; (l) “project implementation agreement" or "project management agreement” means an agreement between the project manager, the concessionaire SPV and the trustee which sets out obligations of the project manager with respect to execution of the project and/or management: Provided that in case of PPP projects, such obligations shall be in addition to the responsibilities as under the concession agreement or any such agreement entered into with the con