Investment Advisory Agreement

An offshore fund investing into India needs people on the ground. There are two ways to get them, and the choice of document is the choice of legal position.

Delegate the management, and you sign an Investment Management Agreement — the manager decides.

Take advice, and you sign an Investment Advisory Agreement — the Indian advisor recommends, and the offshore fund's board or investment manager decides.

The agreement contains the general terms under which such an investment advisor renders advice in respect of the transactions for the fund's board. The offshore investment manager remains responsible to the offshore investors; the local advisor supplies advice in deal assessment, execution and post-investment management.

The structure decides whether the document appears at all. In a parallel structure, the offshore funds invest directly into Indian investee companies alongside the domestic AIF and make their own investment decisions — so the Indian AIF's investment manager can provide non-binding investment advisory services to them under an investment advisory arrangement. In a unified structure, where domestic and offshore commitments are pooled into one onshore AIF, the India team earns management fee and performance fee at the onshore fund level instead, and no advisory agreement is needed for that money.

Two commercial consequences follow. First, advisory fees are paid by the investment manager, not charged to the fund — the workbook is explicit that investment advisors are paid advisory fees from the investment manager for their services. Second, the advice is genuinely non-binding: the investment manager may choose to execute it or leave it.

The chain can be longer than one link. There may be an offshore advisor coupled with an on-shore sub-advisor, depending on the type of fund and the complexity of its structure, strategy or management. Where an investment advisor exists, it must appear in the PPM — in the Section IV structure diagram and in the Section V governance structure.

Domestic funds do not generally have the practice of appointing investment advisors at all.

Meridian India Opportunities, a Mauritius-pooled fund with commitments of USD 140 million, runs a parallel structure alongside Meridian India Fund I, a Rs 700 crore Category II AIF in Mumbai.

The Indian manager signs an Investment Advisory Agreement with the offshore fund. Under it the Mumbai team screens deals, runs diligence, builds the papers and recommends — and the offshore board in Port Louis votes.

A deal comes up: Rs 240 crore into a speciality chemicals company. The onshore AIF takes Rs 90 crore as a portfolio decision of its manager. The offshore fund is recommended Rs 150 crore and its board takes Rs 110 crore, declining the rest because the investee sits outside its own mandate.

That gap — Rs 150 crore recommended, Rs 110 crore taken — is the agreement working exactly as drafted. Had the offshore fund wanted the Mumbai team to simply commit the Rs 150 crore, it would have needed a different document, a different fee and a different set of regulatory consequences in India.

Chapter 13 (Legal Documentation and Negotiations), section 13.7.4, lists it among the support services agreements; Chapter 7 section 7.1.4.10 covers investment advisors as service providers and says who pays them; Chapter 8 names the Investment Advisory Arrangement in the parallel structure. The examinable skill is matching a document to its parties and to the structure it belongs in.

• The advice is non-binding. The manager may choose to execute it or leave it — that is the workbook's wording, and it is the whole legal point.
• The advisor is paid by the investment manager, not out of the fund. An advisory fee charged to the AIF is a different and more awkward arrangement.
• It is not the IMA. The IMA is between the trustee, on behalf of the AIF, and the investment manager, and it delegates the trustee's management powers.
• It is an offshore-structure document. Domestic funds do not generally appoint investment advisors.
• In a parallel structure the Indian manager advises the offshore fund; in a unified structure it manages one pooled onshore fund and the question does not arise.
• An offshore advisor plus an onshore sub-advisor is a normal arrangement, not a red flag.