Onshore Fund
A fund created by a domestic investment manager and domiciled in India, pooling capital from resident and foreign investors, registered under the SEBI (AIF) Regulations with its PPM filed through a merchant banker.
In plain language
An onshore fund is the home-grown partner of an offshore fund. The workbook defines it as a fund created by a domestic investment manager. Its job is to pool money in India from both foreign and domestic investors. It is domiciled, or based, in India. The onshore manager invests in Indian companies as chances come up.
Because it is based in India, it sits fully under Indian rules. Onshore funds seek registration under the SEBI (AIF) Regulations. They file their PPM with SEBI through a merchant banker, in the set format, for SEBI's comments (observations). The workbook's Figure 4.1 shows a typical onshore structure. It has a sponsor, settlor, trustee, investment management agreement, custodian and other service providers.
The onshore fund is also the building block for larger structures that bring foreign money into India.
How it works
How onshore funds combine with offshore vehicles (4.1.2–4.1.3)
| Structure | Role of the onshore fund |
|---|---|
| Unified | Domestic and offshore commitments pooled into the onshore AIF; the offshore fund invests into it and cannot invest in companies directly; India-based team earns fees for the entire structure; no FIPB approval, automatic route |
| Master-feeder | Onshore master fund takes direct investors plus feeder funds from, e.g., Mauritius and Singapore; management fee typically at master level, only a symbolic amount (e.g. USD 1,000) at feeder level |
| Parallel | Offshore funds invest alongside the onshore Category III AIF directly in companies; the Indian manager may give non-binding advice |
Documents at the onshore level (4.2.8). Investment Management Agreement (signed once for the trust as a whole), Indenture of Trust (determinate or indeterminate), Contribution Agreement, and Investor Side Letters.
Foreign money in an onshore fund
- Investments made by an AIF are treated as foreign investment if neither the sponsor nor the manager is Indian owned and controlled; a Category III AIF with foreign investment makes portfolio investment only in securities RFPIs may invest in (FEMA 355/2015).
- Foreign investors must be from IOSCO MMoU or bilateral-MoU jurisdictions, not on the UNSC sanctions list and not in FATF-identified jurisdictions.
- GST: an India-domiciled Category III AIF pooling overseas capital pays GST on management fees, unlike an offshore fund. AIPAC has recommended relief: exemption for AIFs with 100% foreign investment (excluding domestic sponsor commitment) managed from India, and a zero or lower rate such as 5% for AIFs with at least 50% foreign investment.
A worked example
Illustrative figures. Narmada India Equity AIF, a Category III AIF trust set up by a Mumbai manager, raises:
| Investors | Rs crore | Share |
|---|---|---|
| Resident Indian HNIs and family offices | 120 | 60% |
| Foreign investors | 80 | 40% |
| Total | 200 |
It files its PPM with SEBI through a merchant banker and registers under the AIF Regulations — an onshore fund.
GST on the management fee at 2%:
Management fee = 2% × Rs 200 crore = Rs 4 crore
GST @ 18% = Rs 72 lakh
Borne on the foreign investors' 40% share = 40% × Rs 72 lakh = Rs 28.8 lakh
Under AIPAC's recommendations (not current law): Narmada's foreign share is 40%, below the 50% line, so no relief is proposed. A sister fund with 60% foreign money would qualify for a zero or lower rate — at 5%:
5% × Rs 4 crore = Rs 20 lakh, against Rs 72 lakh at 18%
If Narmada later adds a Singapore feeder that invests into it, the structure becomes master-feeder — but Narmada itself remains the onshore master fund.
Why NISM asks about it
Chapter 4 (Category III AIF: Fund Structures and Service Providers) defines on-shore funds at 4.1.1 and uses them as the base for the unified, master-feeder and parallel structures, with a sample question on the unified structure. Chapter 2 and Chapter 5 set the foreign-investment rules, and Chapter 9 (Taxation) explains the GST disadvantage and AIPAC's recommendations.
Common exam traps
- Onshore = domiciled in India, pooling domestic and foreign money — foreign investors do not make it offshore.
- PPM is filed with SEBI through a merchant banker.
- In a unified structure the onshore AIF is the pooling vehicle, and the offshore fund cannot invest in investee companies directly.
- Management fee in a master-feeder sits at the master (onshore) level; feeders charge a symbolic amount.
- GST applies to management fees of an India-domiciled AIF even with overseas investors; AIPAC's exemption and zero/5% proposals are recommendations.
- Foreign investment status depends on who owns and controls the sponsor and manager, not merely on who the investors are.
Check yourself
1.In which structure are commitments from both domestic and offshore investors pooled into a domestic pooling vehicle, with no approval required from the Foreign Investment Promotion Board to raise capital from foreign investors?
- a)Unified
- b)Co-investment
- c)Offshore
- d)Master-feeder
Show the answer
Answer: (a) Unified
This is the workbook's own sample question. In a Unified Structure, commitments from both domestic and offshore investors are pooled into a domestic pooling vehicle (an onshore AIF), and no approval is required from the FIPB for FPIs to invest — general permission has been granted in accordance with the FDI Policy to accept foreign investments under the automatic route. The India-based investment management team can then earn management and performance fees for the entire structure at the onshore fund level.
Where this is taught
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providersintroduced here
- Series XIX-C · Chapter 8: Alternative Investment Fund Structuringintroduced here
- Series XIX-E · Chapter 6: Alternative Investment Fund Structuringintroduced here
- Series XIX-D · Chapter 5: Alternative Investment Fund Structuringintroduced here
Related terms
- AIPACSEBI's Alternative Investment Policy Advisory Committee, headed by Shri Narayan Murthy — its recommendations shape AIF valuation guidelines and proposals on Category III tax and GST.
- Merchant bankerA SEBI-registered body corporate engaged in the business of issue management — arranging the selling, buying or subscribing of securities, or acting as manager, consultant or adviser in relation to an issue.
- Parallel StructureA fund structure in which offshore investors invest through separate offshore funds that invest directly in Indian companies alongside a SEBI-registered domestic AIF.
- Unified StructureA fund structure in which commitments from domestic and offshore investors are pooled into one onshore Indian AIF, with the offshore fund investing into it rather than directly in companies.
- Master-Feeder StructureA fund structure in which offshore investors invest through a feeder fund in their jurisdiction, which invests in a domestic master fund that also accepts direct investors.
- Offshore Fund StructureA structure used when there is no intent to pool capital in India: the pooling vehicle is domiciled abroad, such as in Mauritius or Singapore, takes offshore investors' money and invests directly into Indian companies.
- Pure Domestic AIFThe simplest AIF structuring template: one pool set up and registered in India under the AIF Regulations, with every investor, the manager and the sponsor all resident in India for FEMA and tax purposes.