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

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.

Also read: How a proposed change in Special Situations Fund norms could end roundtripping through AIFs

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".