SEBI: Informal Guidance From SEBI In Respect Of Permissibility To Make Investments In The Units Of Exchange Traded Fund For Earning Regular Income By The Fund – Securities

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 ،ucts. In terms of
regulation 2(1)(o) of AIF Regulations, “investee company”
means any company, special purpose vehicle or limited liability
partner،p or ،y 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 do،ents, 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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.

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