Understanding Restricted Schemes: A Comprehensive Guide for Investors
Introduction
Restricted Schemes have gained significant attention as Registered Financial Market Entities (FMEs) have utilized them for various investment strategies. These schemes offer high business potential, encompassing startup investments, social ventures, SMEs, and infrastructure. In this guide, we will provide profound insights into the integral components of Restricted Schemes to empower potential investors.
What Exactly Are Restricted Schemes?
Restricted Schemes act as bridges, connecting investors with potential early-stage ventures or industries that authorities deem socially and economically crucial. They create a comprehensive investment ecosystem, incorporating venture capital funds, SME Funds, Special Situation Funds, and more.
Key Features:
- Venture-based approach (Category I AIF): This close-ended scheme enables investments in startups, SMEs, and social ventures.
- 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 through private placement, which involves filing the placement memorandum with the IFSCA in advance. It is crucial to adhere to the applicable fees and the stipulated timeline (21 working days before launch) during this process.
Green Channeling for Restricted Schemes
Restricted Schemes targeting funds exclusively from accredited investors can benefit from 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 Companies, Limited Liability Partnerships (LLPs), or Trusts, according to 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.
Close-ended schemes require an upfront declaration of the maximum tenure and raised amount. The standard minimum tenure for such schemes is one year, with the potential for extensions up to two years, subject to investor 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 fewer than 1,000 investors. Additionally, each scheme mandates a minimum corpus of USD 5 million.
Understanding the Investment Restrictions for Restricted Schemes
Open-ended Restricted Schemes can invest a maximum of 25% of the corpus in securities of unlisted companies. Furthermore, investments in associates require 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. The maximum leverage and its methodology must be disclosed in the placement memorandum. It is crucial to establish a Risk Management Framework that aligns with the scheme’s size, complexity, and risk profile.
The Importance of Independent Valuation
The valuation of scheme assets must be conducted by a third-party service provider registered with the Authority. This independent valuation ensures accurate and unbiased assessment of the scheme’s assets. The Net Asset Value (NAV) of each Restricted Scheme must be computed at regular intervals in accordance with established norms.
Minimum Contribution Requirements for Restricted Schemes
FMEs must fulfill the minimum contribution obligations for each Restricted Scheme, which vary based on the type of scheme and the targeted corpus.
Co-Investment Provisions for Restricted Schemes
Co-investment in permissible investments is facilitated through the IFSCA or a segregated portfolio using a Special Purpose Vehicle (SPV). Ensuring favorable terms for the common portfolio and providing appropriate disclosures on segregated portfolios are paramount.
Conclusion
Restricted Schemes offer a unique platform for high-yield capital investments, empowering investors to maximize returns. By understanding the nuances involved in Restricted Schemes, investors can make informed decisions and leverage the enormous potential they hold in the investment domain.
Key Takeaways:
- Restricted Schemes bridge the gap between investors and early-stage ventures or industries.
- These schemes can be categorized into venture-based, complex trading, and miscellaneous approaches.
- Registered FMEs can launch a Restricted Scheme through private placement.
- Green channeling allows Restricted Schemes to open for subscription quickly.
- Restricted Schemes can be set up as Companies, LLPs, or Trusts in accordance with relevant laws.
- Identifying potential investors involves considering accredited investors, individuals making significant investments, and FME personnel.
- Investment restrictions and borrowing activities are governed by specific guidelines.
- Independent valuation is crucial for assessing scheme assets accurately.
- Minimum contribution requirements and co-investment provisions ensure effective participation in Restricted Schemes.
By following these guidelines, investors and FMEs can confidently explore and benefit from the potential offered by Restricted Schemes.
