Understanding Restricted Schemes: A Comprehensive Guide
Utilized by Registered Financial Market Entities (FMEs) for various investment strategies, Restricted Schemes have garnered immense attention lately. Incorporating startup investment, social ventures, SMEs, and infrastructure, these schemes yield high business potential. This guide aims to shed light on the integral components of Restricted Schemes, offering profound insights for potential investors.
What Exactly Are Restricted Schemes?
Restricted Schemes bridge the gap between investors and potential early-stage ventures or industries that the authorities consider socially, economically crucial, and desirable. They encompass multiple domains, starting from venture capital funds to SME Funds, Special Situation Funds, and more; culminating into a comprehensive investment ecosystem.
These schemes take different paths for investments:
- Venture-based approach (Category I AIF): Investing in startups, SMEs or social ventures is a typical characteristic of this close-ended scheme.
- Complex Trading approach (Category III AIF): Under this open-ended or close-ended scheme, diverse and intricate trading strategies, including investments in listed or unlisted derivatives, are undertaken.
- Miscellaneous approach (Category II AIF): Investments that do not fit into the previous two categories fall under this close-ended scheme.
Launching a Restricted Scheme: How It Works?
Registered FMEs can launch a Restricted Scheme via private placement, a strategy that necessitates filing the placement memorandum with the IFSCA in advance. Adherence to the applicable fees and the stipulated timeline (21 working days before launch) are crucial components of this process.
Green Channeling for Restricted Schemes
Restricted Schemes targeting funds only from accredited investors can enjoy the benefits of the green channel. This direct track allows such schemes to open for subscription instantaneously after filing with the Authority.
The Formats and Types of Restricted Schemes
Restricted schemes in the International Financial Services Centres (IFSC) can be set up as a Company, Limited Liability Partnership (LLP), or a Trust, pursuant to the relevant Indian laws. While Category I and II AIFs strictly remain close-ended schemes, Category III AIFs can be either open-ended or close-ended schemes.
Close-ended schemes necessitate an upfront declaration of the maximum tenure and raised amount. The standard minimum tenure for such a scheme is one year. Tenure extensions up to two years can be sanctioned, subjected to the investors’ approval.
Identifying Potential Investors for a Restricted Scheme
A select demographic investing in Restricted Schemes includes:
- Accredited Investors (no minimum investment threshold)
- Investors committing over USD 150,000
- Employees, directors, or partners of the FME making investments exceeding USD 40,000
Restricted Schemes should comply with the IFSCA-prescribed limit of having less than 1,000 investors. Each scheme mandates a minimum corpus of USD 5 million.
Understanding the Investment Restrictions for Restricted Schemes
Open-ended Restricted Schemes’ investment in unlisted companies’ securities cannot surpass 25% of the corpus. Moreover, schemes may invest in associates only after obtaining consent from 75% of the scheme’s investors.
Borrowing and Leveraging Activities for Restricted Schemes
Restricted Schemes can borrow funds and engage in leveraging activities under specific conditions. Calculations of maximum leverage and its accompanying methodology must be disclosed in the placement memorandum. Notably, the Risk Management Framework must mirror the size, complexity, and risk profile of the scheme.
The Importance of Independent Valuation
Under investment valuation norms, a third-party service provider must conduct the scheme assets’ valuation. The frequency of computing the Net Asset Value (NAV) of each Restricted Scheme must be upheld.
Minimum Contribution Requirements for Restricted Schemes
FMEs must fulfil the minimum contribution obligations in each Restricted Scheme. Contribution requirements differ based on the type of the scheme and the targeted corpus.
Co-Investment Provisions for Restricted Schemes
The IFSCA or a segregated portfolio, through a Special Purpose Vehicle (SPV), may facilitate co-investment in permissible investments. Ensuring favorable terms for the common portfolio and making the appropriate disclosures on segregated portfolios remain paramount.
With advancements in investment strategies and open market dynamics, Restricted Schemes have offered a unique platform for high-yield capital investments. By comprehending the nuances involved in Restricted Schemes, investors can make informed decisions to maximize their returns.
Waiving FME Contribution to Restricted Schemes: The Criteria
Yes, it is possible for an FME to be exempted from contributing to a Restricted Scheme. However, certain prerequisites must be met:
- A minimum of two-thirds of the investors in the scheme (by value) must permit the waiver of this contribution.
- At least two-thirds of the investors in the scheme must be accredited investors.
- The scheme must be a fund of fund scheme investing in a scheme with similar contribution requirements.
Restricted Scheme: Number of Investors
Restricted Schemes are designed to target a specified number of investors dictated by IFSCA, with a preferred limit of fewer than 1,000 investors. This restriction is in place to maintain a balanced investment portfolio and prevent overcrowding, ensuring an optimal return on investment.
Minimum Corpus in a Restricted Scheme
Mandatory stipulations dictate that each Restricted Scheme maintain a minimum corpus of USD 5 million. This safeguard is to ensure that the scheme has sufficient funds for efficient operation and management of investments, providing financial security to both the managers and the investors of a Restricted Scheme.
Investment Restrictions for a Restricted Scheme
Restricted Schemes must adhere to stringent guidelines regarding investment practices. For instance, an open-ended Restricted Scheme can invest in securities of unlisted companies, however, this should not account for more than 25% of the total scheme corpus. Furthermore, Restricted Schemes are permitted to invest in associates, providing they have obtained the approval of 75% of the investors in the scheme.
Leverage and Borrowing in Restricted Schemes
Restricted Schemes can borrow funds and partake in leveraging activities, considering specific limits and restrictions are adhered to. All schemes must disclose the maximum leverage achievable, along with the methodology used to calculate the leverage in the placement memorandum. Any deviations from these declared measures require the consent of two-thirds of investors based on their investment’s value. Furthermore, an adequate risk management framework should be employed, reflecting the scheme’s size, complexity and risk profile.
The Valuation of Assets in Restricted Schemes
Third-party service providers duly registered with the Authority should conduct the valuation of the assets of a Restricted Scheme. This could include a fund administrator, custodian, or a value registered with the Insolvency and Bankruptcy Board of India. This independent valuation ensures an impartial and accurate assessment of the scheme’s assets.
The Frequency of Computing NAV of Each Restricted Scheme
The Net Asset Value (NAV) of each open-ended Restricted Scheme must be computed at least on a monthly basis while for a close-ended Restricted Scheme it is requisite on a half-yearly basis. The procedures and methodology applied to calculate the NAV should be well-documented, regularly verified, and modified if needed.
Understanding the working procedures, limitations and the requisite qualifications concerning Restricted Schemes, one can fully harness the enormous potential they hold in the investment domain.
Obligatory FME Contribution to Restricted Schemes
The FME’s minimum contribution in a Restricted Scheme varies depending on whether it is a close-ended or open-ended scheme and the targeted corpus. Key regulations include:
- For a close-ended scheme:
- For a targeted corpus of less than USD 30 Million, the contribution should be at least 2.5% and no more than 10%.
- For a targeted corpus of more than USD 30 Million, the contribution ought to be at least USD 750,000 and not exceed 10%.
- In case of an open-ended scheme:
- If the targeted corpus is less than USD 30 Million, the contribution should be no less than 5% and no more than 10%.
- If the targeted corpus is more than USD 30 Million, the investment should be at least USD 1,500,000 but not cross 10%.
Additionally, relocation of schemes established outside India to IFSC does not necessitate the FME contribution. Whatever the contribution amount, it must be made within 45 days from the launch of the scheme and maintained consistently.
Co-investing in Restricted Schemes
Co-investing in permissible investments under the regulations through a Special Purpose Vehicle (SPV) or through a segregated portfolio is allowed for Restricted Schemes. It’s critically important that the investments by such segregated portfolios never receive terms more favorable than those offered to the Restricted Scheme’s common portfolio. Full disclosure must be provided in the placement memorandum regarding the creation of segregated portfolios.
By fully understanding and adhering to the regulations associated with Restricted Schemes, investors and FMEs alike can make informed decisions, armed with all the necessary knowledge to optimize their investments and returns. Exceptionally positioned to benefit early-stage startups, SMEs, social ventures and infrastructure endeavors, Restricted Schemes provide excellent platforms for potent, profitable investments.
