SEBI: Informal guidance from SEBI in respect of permissibility to make investments in the units of exchange traded fund for earning of regular income by the fund

The Securities and Exchange Board of India (SEBI) has issued an informal guidance under the Securities and Exchange Board of India (Informal Guidance) Scheme, 2003 (Informal Guidance Scheme) on whether a category III alternative investment fund (Cat III AIF) can make investments in the units of exchange traded fund (ETF) for earning regular income by the Cat III AIF.

The informal guidance notes that in terms of regulation 18 of the SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations), a Cat III AIF can invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products. In terms of regulation 2(1)(o) of AIF Regulations, “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 makes an investment.

Further, the informal guidance notes that in terms of regulation 2(1)(jb) of the SEBI (Mutual Funds) Regulations, 1996, an ETF is a scheme of a mutual fund that invests in securities in the same proportion as an index of securities and the units of ETF are mandatorily listed and traded on exchange platform. Accordingly, investment in mutual fund schemes including ETF is not covered under the permissible investments by a Cat III AIF. However, in terms of regulation 15(1)(f) of AIF Regulations, un-invested portion of the investable funds and divestment proceeds pending distribution to investors of AIFs (including Cat III AIFs) may be invested in the mutual fund scheme, 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.

Kindly note that any informal guidance issued by a department of SEBI under the Informal Guidance Scheme is not to be construed as a conclusive decision of any question of law or fact by SEBI or construed as an order of the SEBI under section 15T of the SEBI Act, 1992 and shall not be appealable.

Please click here to read the informal guidance.

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