The International Financial Services Centres Authority (IFSCA) has begun tightening scrutiny on GIFT City Category-III AIFs, asking fund managers to prove that newly launched schemes are genuine pooled vehicles rather than disguised family office structures, multiple people with direct knowledge told Moneycontrol.
Fund managers are being asked to share investment mandates, pooling details and the economic rationale of new Cat-III schemes to ensure they are not designed for a single family’s outbound portfolio.
“Because FIF approvals are stuck, families began using Cat-III AIFs as personal vehicles,” said one advisor. “Now the regulator wants explicit confirmation that the investor base isn’t concentrated in one family.”
So why the scrutiny has intensified now
Three advisors said IFSCA’s recent queries are aimed at establishing whether Cat-III schemes demonstrate true third-party pooling. Category-III AIFs are designed for hedge-style, long–short or dynamic strategies and offer the most flexibility in GIFT City. With FIFs frozen, some ultra-rich families might be attempting to repurpose Cat-III vehicles as quasi-family investment entities.
“When a Cat-III AIF invests predominantly overseas and mirrors offshore fund strategies but is capitalised largely by one family through its SFO — the vehicle starts to economically resemble a foreign fund,” said a senior structuring advisor. That is where RBI concerns get triggered, even though the AIF label itself meets IFSCA norms.
“This is not a formal clampdown. But there is clearly a new procedural filter,” a structuring expert said. Another advisor added, “Cat-III AIFs are not automatically attractive for every family office because they require scale and carry ongoing costs. But because FIFs are stalled, some large investors have explored Cat-III as an interim route. ”
The Family Investment Fund (FIF) applications (framework introduced in 2023) have been stuck because AD banks and the RBI have not aligned on how outward investments into FIFs should be classified under FEMA. “Every bank compliance team wants a clear circular before moving a rupee. Without a precedent, applications have been sitting for months,” said a senior advisor.
Families pivot to GAP-licensed proprietary brokers
With both the FIF path stalled and single-family AIFs attracting scrutiny, ultra-wealthy families are increasingly exploring a different approach: a proprietary trading entity registered as an IFSC broker with a Global Access Program (GAP) licence.
This is not an AIF; not a pooling vehicle; but a family-owned proprietary broker-dealer that executes global listed trades directly. “It’s not elegant, but it’s viable for global listed exposure and fits cleanly within a single-family setup. Also doesn’t solve LRS limits, but it avoids the pooling and beneficial-ownership concerns now slowing AIF and FIF pathways.” a senior industry executive.
How the GAP structure works:
- The family incorporates an IFSC broker entity.
- It obtains a proprietary-only GAP licence (USD 200,000 net-worth requirement).
- Capital is infused through LRS/OPI-compliant inflows.
- The entity trades global listed instruments through its IBU accounts — equities,
- derivatives, listed debt, and hedging strategies.
Treelife co-founder Jitesh Agarwal added a note of caution: “Families are understandably exploring cleaner and compliant routes for global diversification. Regulatory comfort is never automatic; but for the right family, this can serve as one element of a broader international investment strategy, not a standalone solution."
Why Category-III AIFs are under the microscope
- Resident Indians participate in GIFT AIFs only through the OPI route, which carries a 50 percent net-worth cap and restricts any arrangement that indirectly pools money for overseas exposure.
- GAP-licensed proprietary brokers, by contrast, operate under the ODI framework with far higher limits and no pooling requirement.
- FIFs were meant to use the same ODI route but remain stalled.
This mismatch meant some Cat-III schemes (capitalised almost entirely by one family) were beginning to mirror the economics of an FIF despite being compliant under IFSCA, raising concerns of disguised AIFs that trigger RBI sensitivities even though the AIF label itself meets all IFSC rules.
The regulator’s caution is also driven by the explosive growth of GIFT City’s Cat-III ecosystem. As of June 30, 2025, 177 Fund Management Entities were registered; 272 schemes were live; USD 22.11 billion cumulative commitments; USD 11.27 billion cumulative investments; 166 schemes were restricted Cat-III funds. The Cat-III commitments alone totalled USD 10.15 billion, nearly triple the prior year. Executives say IFSCA wants to ensure this rapidly expanding category remains true to purpose.
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