AIF Fund Structures – Onshore | Offshore | Unified | Master-Feeder | Parallel

AIF fund structures determine where capital is pooled, which regulator governs the pool, and how tax falls on the investor. Six arrangements are in common use in India: a pure domestic onshore fund, a pure offshore fund investing into India directly, a unified structure pooling both domestic and offshore money into a single onshore AIF, a co-investment structure running onshore and offshore pools side by side, a master-feeder structure with jurisdiction-specific feeders investing into an Indian master fund, and a parallel structure where feeders invest directly into investee companies alongside the AIF. The choice turns on tax neutrality, on whether investors want to select their own deals, and on where the management fee can be earned.

Table of Contents

1. The Principle of Pooling
2. Onshore and Offshore Funds
3. The Unified Structure
4. The Co-Investment Structure
5. Master-Feeder and Parallel Structures
6. The Four Structures Compared
7. Buy-Out Structures
8. Frequently Asked Questions

Check out NISM's Alternative Investment Fund Managers, the official NISM workbook for the Series XIX-C Certification Examination, published by Taxmann. The structuring chapter sets out the anatomy of an AIF constitution, works through each fund structure with a schematic, and closes with a comparative table setting pure domestic, pure offshore, parallel and unified structures side by side on pooling vehicle, applicable regulations, investor type and routing of investment.

1. The Principle of Pooling

Every question about AIF structure reduces to one: where does the money sit before it reaches the investee company.

A pooling vehicle collects capital from multiple investors and deploys it collectively. Where that vehicle is domiciled decides which regulator supervises it, which tax regime applies to the returns flowing through it, and whether the investment manager earning fees on it is inside India or outside.

The governing consideration when selecting a jurisdiction is tax neutrality. A structure is tax neutral when investors are not subject to any higher tax than they would have been had they invested directly. That is the benchmark, and structures that fail it need a compelling non-tax reason to exist.

India follows source-based taxation on capital gains, which is why offshore structures exist at all. Without them, an offshore investor risks being taxed twice on the same income stream.

2. Onshore and Offshore Funds

2.1 The onshore fund

An onshore fund is created by a domestic Investment Manager to pool capital at the Indian level, taking commitments from resident investors and foreign investors alike. The fund is domiciled in India and the onshore Manager invests into Indian investee companies as opportunities arise.

Onshore funds must register under the SEBI (AIF) Regulations and file the PPM with SEBI through a merchant banker in the prescribed format for SEBI’s observations. The workbook depicts this as the typical onshore fund structure.¹

2.2 The offshore fund

An offshore fund structure is used where there is no intention to pool capital at the Indian level at all. The pooling vehicle is domiciled in an offshore jurisdiction such as Mauritius or Singapore. Offshore investors commit to that fund, which then invests directly into Indian investee companies. The offshore Investment Manager can take domestic investment advice when making those investments.

Jurisdiction selection is not arbitrary. Offshore funds are typically formed in countries with a Bilateral Investment Promotion and Protection Agreement with India, which gives offshore investors access to fair and equitable treatment, protection against expropriation, capital repatriation, an efficient dispute resolution framework and other reliefs. Investments those funds make into India remain regulated by SEBI.

2.3 The constraint on resident investors

Resident Indians investing into offshore funds are governed by the Liberalised Remittance Scheme. The RBI permits remittance abroad of up to USD 250,000 per person per financial year for any permissible current or capital account transaction, or a combination, subject to the conditions in FEMA.

The limit is revised from time to time under FEMA and it is the practical ceiling on how much a resident investor can place into an offshore vehicle.²

3. The Unified Structure

In a unified structure, commitments from both domestic and offshore investors are pooled into a single domestic vehicle, being an onshore AIF.

The offshore fund sits in a tax-friendly jurisdiction such as Singapore, Mauritius or Luxembourg. It invests into the onshore AIF rather than into investee companies, so the AIF has both domestic investors and the offshore fund on its register. Both funds have their own Investment Managers, and both Managers are paid management and performance fees.

The commercial attraction is straightforward. The India-based investment management team earns management and performance fees on the entire structure at the onshore level, rather than seeing that economics leak offshore.

On approvals, foreign portfolio investors do not require approval from the Ministry of Finance or the RBI to invest into a unified structure. General permission has been granted under the FDI Policy to accept foreign investment under the automatic route, and the offshore fund contributes to the AIF under the Contribution Agreement.

One constraint defines the structure: the offshore fund cannot invest in investee companies directly. Its route into India is through the onshore AIF.

4. The Co-Investment Structure

The co-investment structure separates what the unified structure combines.

The Sponsor raises capital into two separate pools, one in India and one offshore. Each has its own investors subscribing to its own units, and each has its own Investment Manager earning management and performance fees.

The onshore fund is managed by an India-based Manager, and the offshore Manager has the option of entering into an Investment Advisory Arrangement with that domestic Manager for recommendations on domestic opportunities. The offshore fund then invests directly into the investee companies or target securities of the domestic AIF, under a co-investment arrangement with the onshore fund.

The difference from the unified structure is where the offshore money lands. In a unified structure it enters the AIF. Here it goes straight to the investee company, alongside the AIF.

5. Master-Feeder and Parallel Structures

Both use feeder funds. They differ on what the feeder invests in, and that difference drives everything else.

5.1 Master-feeder

A master-feeder is a subordinated structure. Offshore investors invest through a feeder fund, which in turn invests into the domestic master fund. The master fund, registered in India, also accepts direct investment.

Direct investors may be domestic or foreign, and include institutional investors, high net worth individuals, banks, insurance companies, pension funds, large corporates and funds of funds. For many of these, investing straight into a SEBI-registered Indian fund is both tax-efficient and regulatory-efficient.

For others it is not, and that is why feeders exist. Where a specific group of investors, typically those in Mauritius or Singapore, faces tax or regulatory friction on a direct route, the Sponsor sets up a feeder vehicle in that jurisdiction to make the investment attractive to that group.

The fee mechanics are distinctive. Management fees are typically charged at master fund level. At feeder level only a symbolic fixed amount is charged, for example USD 1,000. The real management fee reaches the feeder indirectly, through the NAV the master fund allocates to it.

5.2 Parallel

In a parallel structure, offshore investors invest through separate feeder funds in each jurisdiction, and those feeders invest directly into the investee companies rather than into a master fund. The feeders sit alongside the onshore AIF rather than underneath it.

Because the feeders make independent investment decisions, the Investment Manager of the Indian AIF can provide investment advisory services to them under an Investment Advisory Arrangement.

Large investors therefore do not need to allocate to a registered Indian AIF at all, which is the principal structural difference from master-feeder.

5.3 Why sponsors choose parallel

Three reasons, and they are worth separating because they serve different parties.

• Tax. Investors in offshore jurisdictions receive the beneficial tax treatment available through their own feeder
• Deal selection. Investors can independently choose which underlying investment to participate in. Where an investee company does not fit a feeder’s stated mandate or risk-return profile, that feeder can opt out of the deal. This is not possible in a master-feeder, where the master decides
• Investor segmentation. Sponsors use feeders to place different categories of investor into different vehicles. Large investors paying a reduced management fee can sit in one feeder while investors paying headline rates sit in another

The cost is fee load. Because the Manager at feeder level is providing investment management services to its own investors, the fee structure in a parallel arrangement can be more expensive than in a master-feeder. What investors buy for that is the ability to make diversified decisions across jurisdictions offering tax benefits.

6. The Four Structures Compared

Feature	Pure Domestic	Pure Offshore	Parallel	Unified
Pooling vehicle	In India	Foreign jurisdiction	Both in India and abroad	Both in India and abroad, including GIFT City
Number of pooling vehicles	One	One	Two	Two
Applicable SEBI regulations	AIF Regulations	FVCI Regulations3	AIF Regulations and FVCI Regulations	AIF Regulations
Investors in the fund	Domestic investors in India	Foreign investors	Foreign and domestic investors	Foreign and domestic investors
Routing of investment	Domestic AIF invests in domestic investee companies	Foreign pooled vehicle invests into domestic investee companies directly from abroad	Both the domestic AIF and foreign investors invest into domestic investee companies	Domestic AIF invests in domestic investee companies
Feeder fund	Not applicable	Possible but not mandatory	Possible but not mandatory	Possible but not mandatory

7. Buy-Out Structures

Where an AIF acquires control of a company rather than taking a minority position, the transaction takes one of three forms.

Management Buy-Out (MBO). The existing management team of a business acquires it from the parent company, with the support of a buy-out firm. The people running the business become its owners.

Leveraged Buy-Out (LBO). Debt is used to fund a substantial part of the acquisition. In one sense every buy-out is leveraged, since all involve debt, but the term now carries two connotations: a very large transaction, frequently with multiple business activities, and a transaction not initiated by a management team. It is best understood as an industrial acquisition where the acquirer happens to be a buy-out firm.

Management Buy-In (MBI). A group of experienced executives acquires a business they do not currently run, operating in the same sector as the one they came from. Where an MBO puts existing managers in charge, an MBI installs new ones.

The capital structure sits above these. Senior debt takes priority over other layers of debt both on repayment and on liquidation. Mezzanine is convertible unsecured debt sitting between the equity and the senior debt layers.

Firms setting up a fund and choosing between these structures, or working through the tax and regulatory consequences of a particular jurisdiction, can take specific questions to Taxmann Advisory. For the FEMA provisions, the FDI Policy position and the SEBI regulations referred to here, see Taxmann.com | Research. To check a provision while drafting, Taxmann.ai answers questions directly from Taxmann’s research database.

8. Frequently Asked Questions

8.1 What is the difference between an onshore and an offshore AIF structure?

An onshore fund is domiciled in India, pools capital from resident and foreign investors at the Indian level, and must register under the SEBI (AIF) Regulations. An offshore fund is domiciled abroad, typically in Mauritius or Singapore, pools only offshore capital, and invests into Indian investee companies directly without pooling in India.

8.2 What is a unified fund structure?

A structure in which commitments from both domestic and offshore investors are pooled into a single onshore AIF. The offshore fund invests into the AIF rather than into investee companies, which lets the India-based management team earn fees on the whole structure at onshore level.

8.3 What is the difference between a master-feeder and a parallel structure?

In a master-feeder, feeder funds invest into a domestic master fund, which makes the investment decisions. In a parallel structure, the feeders invest directly into investee companies alongside the AIF and make their own decisions, which lets each feeder opt out of a deal that does not suit its mandate.

8.4 How are management fees charged in a master-feeder structure?

Typically at the master fund level. At feeder level only a symbolic fixed amount is charged, such as USD 1,000. The management fee reaches the feeder through the NAV the master fund allocates to it.

8.5 How much can a resident Indian invest in an offshore fund?

Up to USD 250,000 per person per financial year under the RBI’s Liberalised Remittance Scheme, for any permissible current or capital account transaction or a combination, subject to the conditions in FEMA. The limit is revised from time to time.

8.6 What is the difference between an MBO and an MBI?

In a management buy-out the existing management team buys the business it already runs from the parent company. In a management buy-in a group of experienced executives from outside acquires a business operating in the same sector they came from.

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1. SEBI (Alternative Investment Funds) Regulations, 2012, as amended.
2. Foreign Exchange Management Act, 1999, and the Liberalised Remittance Scheme issued by the Reserve Bank of India.
3. SEBI (Foreign Venture Capital Investors) Regulations, 2000.