NISM Series XIX-E · Chapter 6: Alternative Investment Fund Structuring

L1 · Foundation

Pooling and the Three Legal Shells

Why AIFs pool money at all, the six things a pooling structure must get right, how offshore investors choose a pooling jurisdiction, and the three legal forms an AIF can take in India - trust, LLP and company - with the reasons the trust wins.

16 min read · Worth 10% of the paper · Written from pages 119–134 of the official NISM workbook · Updated 18 September 2026

Pooling and the Three Legal Shells

What "structuring" means

The term "alternative investment fund structuring" refers to both the CONSTITUTIONAL aspects of the AIF and the INVESTMENT ROUTING options for investors in such funds.

So there are two questions in this chapter. First, what legal body holds the money? Second, which path does the money travel to reach an Indian company?

The second question matters because AIFs have become an important investment route for FOREIGN investors to invest in India.

The regulatory direction since 2012: after the SEBI (AIF) Regulations 2012, the regulatory slant has been towards promoting HOME-GROWN investment managers, by allowing Indian managed and sponsored AIFs with a mix of foreign investors. The workbook says it is presently perceived that the AIF route is the MOST CONVENIENT route for large offshore financial investors to tap alternative investments in India. For domestic investors, the AIF regime is an effective platform to avail the expertise of alternate fund managers.

6.1 The principle of pooling

When a group of investors with common investment objectives needs investment management, there are two ways to do it:

	(a) Individual Portfolio Management	(b) Pooled Asset Management
Corpus	Each investor's corpus is kept DISTINCT	No individual corpus. Contributions are pooled into a COMMON corpus
Contract	A portfolio management agreement with the manager	Investors hold a share of the common pool
Decisions	Discretionary (manager decides) or non-discretionary (investor takes the call)	The manager decides for the whole pool
Outcome	As many investment outcomes as there are investors	One outcome, shared by all
Also called	A customised service at individual investor level	"Blind pool investment"

What pooling buys you

Economies of scale - individual corpuses are combined into a large common fund
A better, broad-based strategy with a larger pool of assets, giving risk diversification
Higher risk-taking capability, bringing the possibility of better returns, enjoyed by all investors in the pool
Regulatory efficiency in compliance management

That last benefit has a precise example. For offshore investors with an India focus, if the funds are pooled OUTSIDE India, the requirement to obtain a PAN and file domestic tax returns in India falls only on the OFFSHORE FUND - not on each offshore investor. Without pooling, every foreign investor who invested directly would need its own PAN and Indian tax filing.

Pooled investment vehicles are fundamental to fund structuring in the AIF industry, as much as they are to the mutual fund industry.

6.2 Six pooling considerations

1. The pool needs its own legal identity

The pool must have a distinct legal identity, separate from its investors, the manager, the sponsor and service providers. Under the SEBI AIF Regulations there are three possibilities:

Option	Law	Who is who
(a) Trust	Indian Trusts Act, 1882	-
(b) Limited Liability Partnership	Limited Liability Partnership Act, 2008	An LLP between the investors and the investment manager
(c) Private or public limited company	Companies Act, 2013	Investors as SHAREHOLDERS, and representatives of the manager as DIRECTORS in executive capacity

2. Limited liability

The pool should have LIMITED LIABILITY, so it does not end up taking higher risks than those underlying its investment objectives. All three alternatives above give limited liability.

3. Tax neutrality

Pooling should not put an investor in a comparatively ADVERSE position on tax, compared with investing at individual level. This matters most when an income stream is tax-free at investor level because of the investor's status, but taxable at fund level. Since the result depends on tax law, the structure must be optimised as nearly as possible towards tax neutrality.

4. Regulatory compliance

The pool must comply with SEBI, foreign investment law and RBI regulations, corporate law and other compliance requirements.

5. Not too complex

The structure should not be so complex that it looks like it is exploiting regulatory and tax arbitrage. It should seem genuine and not obfuscate why the pool exists. In India, complicated structures are likely to be scrutinised under the GENERAL ANTI-AVOIDANCE RULES (GAAR), which let tax authorities re-characterise transactions on grounds of LACK OF COMMERCIAL SUBSTANCE. The workbook notes GAAR came into effect from April 1, 2017.

6. Choosing a jurisdiction - the offshore investor's six tests

Test	What the workbook says
(a) A good tax treaty	India is a HIGH TAX jurisdiction compared with several countries. Optimising Indian tax partly offsets the currency loss from rupee depreciation. Pooling in a country with a Double Taxation Avoidance Agreement (DTAA) with India is of primary importance
(b) A good BIPA	A Bilateral Investment Promotion Agreement (the workbook's example is Singapore) protects the investor's financial interests in India in the event of hostilities or other repatriation risks, and gives investment incentives
(c) A recognised capital market	Luxembourg, Singapore, Tokyo, DIFC, ADGM or GIFT City, so the vehicle can be listed or used for other strategic opportunities
(d) Wealth preservation	A sound political system, legal framework and enforcement, and a stable currency, in addition to tax advantage
(e) AML and CFT "equivalent jurisdiction"	Based on standards of the Financial Action Task Force (FATF), an inter-governmental international agency overseeing money laundering and terror financing. Selecting a FATF-compliant jurisdiction has become a NECESSITY
(f) Rising regulatory rigour	As SEBI (AIF) Regulations become stricter, managers face greater supervision and accountability, so disclosure norms and fiduciary-driven rules must be built in

6.3 The anatomy of an AIF - three constitutional options

Alternative 1 - the Trust (the most preferred)

A private trust is the MOST PREFERRED option for a domestic fund structure. It is created under the Indian Trusts Act, 1882. Under the SEBI (AIF) Regulations, a body corporate set up under an Act of Parliament or State Legislature is also included for this purpose.

Two practical features:

The Act lets the management team write specific governance terms agreed between manager and investors.
A trust cannot sue or be sued like other legal entities. It is represented by its TRUSTEE, who sues or is sued for and on behalf of the trust.

The kinds of trust under the Indian Trusts Act:

Pair	One side	Other side
Purpose	Private trust - administers family properties and inheritance	Public trust - serves the general public, usually with a charitable motive
Can the settlor take it back?	Revocable - trust property can revert to the settlor	Irrevocable - ownership is permanently vested in the trust
Are shares fixed?	Determinate - each beneficiary's share is clearly demarcated	Indeterminate - no demarcation; the trustee allocates benefits as he determines fit

For an AIF, an "IRREVOCABLY SETTLED, DETERMINATE TRUST" is considered more appropriate, primarily for CLEAR TAX TREATMENT.

How determinacy is achieved: investors and their beneficial interests must be ascertainable from the "indenture of trust" or "trust deed" at ALL TIMES. This is why the corpus is divided into UNIT CAPITAL, and investors are allotted a specific number of units representing their determinate share.

Alternative 2 - the LLP

An LLP under the Limited Liability Partnership Act, 2008 has legal entity status with limited liability distinct from its partners.

The LLP is liable to the full extent of its assets, but each partner's liability is limited to the agreed contribution.
It therefore has elements of both a corporate structure and a partnership firm.
No personal liability of a partner EXCEPT in the case of FRAUD.
A partner is not liable for another partner's misconduct or negligence - there is no joint and separate liability, unlike a normal partnership.
The partners' relationship is governed by the LLP agreement.

Who the partners are: the contributing investors and the sponsor or investment manager. Investors are non-managing or passive partners who contribute capital and do not take part in day-to-day management. The manager is appointed through an investment management agreement. Every LLP must have at least TWO designated partners, responsible for its conduct and compliance.

The LLP is the MOST POPULAR structure in FOREIGN countries. India's AIF Regulations allow it, and tax law treats an LLP as a taxable entity.

The three downsides in India:

Higher compliance requirements than a trust.
All investors become partners, so entry and exit is cumbersome - the LLP deed must be updated on the Ministry of Corporate Affairs (MCA) website.
Investor details come into the PUBLIC DOMAIN. The secrecy maintained at trust level is lost at LLP or company level.

Alternative 3 - the Company (the least preferred)

A company under the Companies Act, 2013 is the LEAST preferred, because of cumbersome management and compliance requirements, especially for public limited companies.

And a numerical clash that is examined: companies are restricted in private placements to NOT MORE THAN 200 investors, while the AIF Regulations permit a fund or scheme up to 1,000 investors (accredited investors excluded from the count).

Why the trust wins

Most AIFs formed in India follow the trust structure, because it:

has operational advantages and a favourable regulatory framework
reduces the cost of compliance
gives flexibility to form its own system of governance and reporting
allows bespoke investment arrangements between managers and beneficiaries, which helps attract private capital

Think of it like this

Pooling is the shared auto, portfolio management is the private cab

Six office-goers going from the station to the same business park can each book a cab, or share one auto. Each cab takes its own route and arrives at its own time - as many outcomes as passengers. The shared auto has one route, one driver and one fare split six ways, so it is cheaper per head and can afford a better vehicle. That is pooling: no individual corpus, one manager deciding for all, economies of scale and a shared outcome. The price is that nobody chooses the route - which is exactly why pooled investing is called a blind pool.

The offshore fund is the housing society secretary who files one form

When a housing society pays property tax, the secretary files one return for the whole building. If each of the 80 flat owners had to deal with the municipality separately, there would be 80 forms and 80 chances of error. An offshore fund pooling foreign investors does the same job in India: only the offshore fund needs a PAN and files Indian tax returns, not each investor behind it. That is the regulatory efficiency the workbook credits to pooling.

A determinate trust is a tiffin carrier with named boxes

A dabbawala carries many tiffins in one crate, but each box has a name and a code, so everyone knows exactly whose lunch is whose at every moment. An indeterminate arrangement would be one big pot from which the carrier serves each person what he thinks fit. The tax officer, like the hungry clerk, wants to know exactly what belongs to whom. That is why an AIF trust is irrevocable and determinate, and why its corpus is cut into units - each unit is a named box.

The LLP is a glass-walled office, the trust is a closed cabin

In a glass-walled office anyone walking past can see who is sitting inside. An LLP works like that: every investor is a partner, the deed is updated on the MCA website, and investor details come into the public domain. A trust is the closed cabin - the trustee deals with the outside world and the beneficiaries stay private. The workbook says it plainly: the secrecy maintained at trust level is lost at LLP or company level. Add the paperwork of updating the deed each time someone joins or leaves, and the choice most Indian AIFs make becomes obvious.

GAAR is the building inspector who looks behind the fake wall

A builder can put up a thin decorative wall so a large hall looks like two rooms on the approved plan. A careful inspector taps the wall, finds it hollow, and taxes the hall as one room. GAAR lets Indian tax authorities do the same with fund structures - re-characterise a transaction that lacks commercial substance. The lesson for structuring is the workbook's fifth consideration: a structure that looks built only for tax arbitrage invites the inspector.

Key terms in this chapter

AIF structuring: Both the constitutional aspects of an AIF (its legal form) and the routing options through which investors, including offshore investors, invest in it.
BIPA: Bilateral Investment Promotion (and Protection) Agreement - a treaty giving reliefs such as fair and equitable treatment, protection against expropriation, capital repatriation and dispute resolution. The workbook's example is Singapore.
Blind pool investment: Another name for pooled asset management, where investors contribute to a common corpus and the manager selects the investments.
Closed-ended fund: A fund offered for a limited period, calling committed capital within a commitment period (typically 3-5 years from final close) and not permitting redemption before expiry except in extraordinary circumstances.
Designated partner: A partner responsible for the conduct and compliances of an LLP; every LLP needs at least two. In an AIF LLP, the sponsor is the designated partner.
Determinate trust: A trust in which the share of each beneficiary is clearly demarcated. An irrevocably settled, determinate trust is considered most appropriate for an AIF for clear tax treatment.
DTAA: Double Taxation Avoidance Agreement - a tax treaty that avoids taxing the same income both in India and in the investor's country; of primary importance when choosing a pooling jurisdiction.
FATF: The Financial Action Task Force - an inter-governmental international agency overseeing money laundering and terror financing, whose standards underpin equivalent-jurisdiction lists under AML and CFT laws.
FVCI: Foreign Venture Capital Investor registered with SEBI - giving flexibility in entry and exit pricing, exemption from post-IPO lock-in, exemption from the Takeover Code for shares of a company, and QIB status.
GAAR: General Anti-Avoidance Rules, which let Indian tax authorities re-characterise transactions lacking commercial substance. Effective from April 1, 2017 as per the workbook.
General Partner and Limited Partners: In most foreign jurisdictions, the manager of the fund is the General Partner (GP) and the investors subscribing to the fund are Limited Partners (LPs).
Individual portfolio management: A customised service where each investor's corpus is kept distinct and managed under a portfolio management agreement, on a discretionary or non-discretionary basis - so there are as many outcomes as investors.
Irrevocable trust: A trust in which ownership of the property is permanently vested with the trust and cannot revert to the settlor.
Liberalised Remittance Scheme: The RBI scheme allowing resident Indians to remit up to USD 2,50,000 per person per financial year for permissible current or capital account transactions, relevant when residents invest in offshore funds.
Master-feeder structure: A subordinated structure in which offshore investors invest through a feeder fund into a domestic master fund that also takes direct investors; management fees are charged at master level.
Offshore fund structure: A structure used when there is no intent to pool capital in India - the pooling vehicle is domiciled abroad (e.g. Mauritius or Singapore) and invests directly into Indian companies.
Onshore fund: A fund created by a domestic manager and domiciled in India, pooling capital from resident and foreign investors, registered under the SEBI (AIF) Regulations.
Open-ended fund: A fund offering units continuously with no fixed maturity and a variable corpus, permitting redemption at regular intervals such as monthly, quarterly or semi-annually. Only Category III AIFs may be open-ended.
Parallel structure: Also called the co-investment fund structure - offshore funds invest directly in investee companies alongside the domestic AIF, can opt out of individual deals, and may cost more than master-feeder.
Place of Effective Management (POEM): The risk that an offshore fund's Indian advisory office is treated as its permanent establishment, so its effective management is held to be in India. Managed by restricting the advisory office's scope in documentation.
Pooling: Combining contributions of investors into a common corpus managed by an investment manager, with no individual corpus - giving economies of scale, diversification and compliance efficiency.
Settlor: The person who settles an AIF trust and appoints the trustee by executing the trust deed.
Skin-in-the-game: The manager bearing financial risk by investing in the AIF alongside other investors, so both share a common risk-return objective.
Tax neutrality: The principle that pooling should not put investors in a worse tax position than if they had invested directly or individually.
Trust deed (indenture of trust): The document setting up the AIF as a trust, from which investors and their beneficial interests must be ascertainable at all times.
Unified structure: A structure pooling commitments from domestic and offshore investors into a domestic AIF; the offshore fund invests in the onshore AIF under the automatic route and cannot invest in companies directly.
Unit capital: The division of a trust AIF's corpus into units allotted to investors, representing each investor's determinate share.

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Original explanatory writing based on the official NISM workbook for Series XIX-E, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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