Mutual funds are not permissible investment for Cat III AIFs: Sebi's informal guidance

SEBI issued the informal guidance in response to a query from from a fund house asking if Cat III AIF could invest in mutual funds permanently

Mutual funds are not permissible investments for Category III Alternative Investment Funds (AIFs), reiterated the market regulator SEBI, in response to a query raised by Athena Alternative Investments Trust.

The fund had asked if a Cat III AIF could invest in mutual funds permanently. At present, Cat III AIFs are not allowed to invest in mutual funds, other than liquid funds as temporary investments.

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To this, the regulator issued an informal guidance on December 14.

It said that Regulation 18 of AIF Regulations allows Cat III AIFs to (a) invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products; (b) deal in goods received in delivery against physical settlement of commodity derivatives; (c) buy or sell credit default swaps in terms of the conditions as may be specified by the board from time to time; and (d) engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as may be specified by the Board.

Under Regulation 2(1)(o) of AIF Regulations, the guidance note said, “investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an AIF invests.

"Thus, investment in mutual funds is not covered under permissible investments by a Category III AIF," the note said.

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However, "the un-invested portion of the investable funds and divestment proceeds pending distribution to investors of AIFs (including Cat III AIFs) may be invested in liquid mutual funds or bank deposits or other liquid assets of higher quality such as Treasury bills, Triparty Repo Dealing and Settlement, Commercial Papers, Certificates of Deposits, etc. till the deployment of funds as per the investment objective or the distribution of the funds to investors as per the terms of the fund documents, as applicable".