The committee, headed by UTI Mutual Fund chairman UK Sinha, has recommended some tax incentives to retail investors for investment in DIFs. “Considering the long-term and closed ended nature of the proposed DIFs, the Committee believes that it will be extremely important to provide some tax incentives to retail investors to motivate them to invest in DIFs and, therefore, help in and benefit from infrastructure creation in the country,” it said. The Committee, which submitted its report to Sebi today, also believes that without the tax incentives no retail investor would be motivated to invest in a DIF. It has, however, added that such tax benefits should be available only to the original investors. Presenting the report, the panel observed that the proposed DIFs will need to be structured differently from the current mutual fund schemes, as these will largely invest in unlisted companies, with longer gestation periods.

“Venture capital funds have the ability to invest in such unlisted and longer tenure projects, but have minimum contribution requirements, thus leaving out retail investors. DIFs can be structured to fill this gap and can be uniquely positioned to benefit both the ongoing infrastructure initiatives as well as potential retail investors,” the Committee said. In terms of investments, it has suggested that DIFs should be allowed to invest up to 100 per cent of their funds in unlisted securities, including both equity and debt instruments. Exposure to listed companies, however, should be limited to 10 per cent of the NAV at the time of making the investment. Further, DIFs may be allowed to take control of the asset, if they so desire, and own up to 100 per cent of the paid up capital of a company. The Committee has suggested several safeguards to protect the interests of investors.

On fees and expenses, the panel has observed that “in light of the unique nature of DIFs like requirement of dedicated teams for the management of such schemes, requirement of in-depth research because of companies being unlisted and information not being easily available, higher level of monitoring of investments, the fee structure of such funds will have to be different from that of existing MF schemes, in line with global practices.

“The Committee suggested that the maximum overall permissible expense ratio for DIFs, including investment management fees be an additional 1 per cent over and above that specified in mutual fund regulations. Additionally, the DIFs should also be allowed to charge a performance fee after providing a certain minimum return to the unit holders, as per global practices,” it said.

On valuations, the Committee recommended that DIFs should report the fund NAV at the time of each asset valuation and also at quarterly intervals. About valuations, it believes that current Sebi guidelines to value unlisted equity shares will need to be suitably amended for the proposed asset class. The proposed DIFs should engage an approved consultant to value the assets semi-annually. Such an approved list can be drawn up by Sebi-registered rating agencies. The Committee proposes that DIFs can be launched by all Sebi-registered Asset Management Companies (AMCs), but should have a dedicated team for managing the funds and their trustees should be satisfied in this respect. On investor profiles, the panel suggested that all individuals, companies, corporates, institutions and financial institutions (FIs) should be eligible to make investment in such MFs.

The profile of DIFs in terms of tenure, risks and returns are also complimentary to the liability side of insurance companies and pension funds. Therefore, the government/ concerned regulators may also consider modifying the investment guidelines for insurance/ pension funds and provident funds so that they can invest directly in such type of MFs, as it will serve the twin purpose of meeting the sectors’ capital needs and managing risk-return requirements of insurance companies.