Master-Feeder Structure

A Category III AIF in India wants money from investors around the world. For some of them, investing directly in a SEBI-registered Indian fund is tax-efficient and regulatory-efficient. For others — the workbook's examples are investors in Mauritius and Singapore — it is not.

The master-feeder structure solves this. The workbook describes it as "a subordinated structure in which offshore investors invest through a feeder fund, which in turn invests in the domestic master fund". Direct investments are also accepted in the master fund, which is registered in the domestic jurisdiction — India.

So the master fund holds the portfolio and is managed in India; the feeders exist only to collect money from particular groups of offshore investors in a form that suits them, and pass it into the master.

Who invests where.

• Direct investors in the master fund — domestic or foreign: institutional investors, high net worth individuals, banks, sovereign wealth funds, family offices, insurance companies, pension funds, large corporates, funds of funds and others — for whom investing directly in a SEBI-registered fund is efficient.
• Feeder funds — set up by the sponsor in a jurisdiction such as Mauritius or Singapore to address the tax and regulatory issues specific to that group of investors. The feeder invests in the onshore master.

Fees. Management fees are typically charged at the master fund level. At the feeder level, usually only a symbolic fixed absolute amount is charged — the workbook's example is USD 1,000. The management fee charged by the master is passed on to the feeder fund managers, by mutual understanding, through the NAV allocated to the relevant feeder by the master.

Comparison with a parallel structure. In a parallel structure, offshore funds invest directly in investee companies alongside the Indian AIF and have their own offshore managers, so fees may be more expensive than in a master-feeder structure, where management happens once at the master.

Offshore documentation. An offshore fund needs its own subscription agreement setting out investors' capital commitments and representations and warranties; where it delegates advisory functions onshore, an investment advisory agreement; and where a domestic fund's PPM is distributed offshore, a wrapper — a supplement that helps achieve compliance with private placement rules in the foreign jurisdiction.

Illustrative figures. Arabian Sea Opportunities Fund, a SEBI-registered Category III AIF, is the master. It charges a management fee of 1.5% a year on NAV.

Management fee at master = 1.5% x Rs 600 crore = Rs 9 crore a year
Fee at each feeder       = symbolic fixed amount (e.g. USD 1,000)

The Rs 9 crore is borne across the master's NAV, including the Rs 200 crore contributed by the two feeders. By mutual understanding, part of the fee attributable to the feeders is passed on to the feeder managers through the NAV the master allocates to each feeder.

Had the sponsor instead used a parallel structure — Mauritius and Singapore funds investing directly in Indian companies with their own offshore managers — each offshore fund would carry a full management layer of its own, which is why the workbook says parallel structures may be more expensive.

Chapter 4 (Category III AIF: Fund Structures and Service Providers) covers the master-feeder structure at 4.1.3 alongside the parallel structure, after offshore, onshore and unified structures at 4.1.1 and 4.1.2, and lists the offshore documentation in 4.2.8. Expect questions on who invests at which level, where management fees are charged, and how master-feeder differs from parallel and unified structures.

• Feeder invests in master; master invests in companies. Feeders do not invest directly in investee companies — that is the parallel structure.
• The master fund is the domestic, SEBI-registered fund and also accepts direct investors, domestic or foreign.
• Management fees are charged at the master level; feeders usually charge only a symbolic fixed amount.
• Parallel structures may be more expensive than master-feeder structures because offshore managers provide management services at the offshore-fund level.
• The workbook's descriptions of master-feeder and unified structures overlap — in both, an offshore vehicle invests into an onshore Indian AIF. Distinguish them by the workbook's own emphasis: master-feeder is framed around feeders for specific investor jurisdictions plus direct investors in the master; unified is framed around pooling domestic and offshore commitments in one onshore vehicle under the automatic route.
• Mauritius and Singapore are the workbook's feeder jurisdictions.