Parallel Structure
Also written Co-investment fund structure
A fund structure in which offshore investors invest through separate offshore funds that invest directly in Indian companies alongside a SEBI-registered domestic AIF.
In plain language
In a master-feeder structure, all the money eventually sits in one Indian fund. In a parallel structure, it never does.
The workbook describes it as a structure "in which offshore investors invests through separate pooling vehicles in different jurisdictions". These offshore funds then invest directly in the investee companies alongside the domestic AIF, registered in India with SEBI, based on their own investment criteria — instead of investing in a master fund. The workbook also calls it the co-investment fund structure.
Because the offshore funds invest directly, large investors such as HNIs and institutions can reach Indian companies through them without allocating funds to a registered Category III AIF in India, as they would in a master-feeder structure.
How it works
Management. The offshore funds make independent investment decisions. The Indian AIF's investment manager can provide non-binding investment advisory services to them through an Investment Advisory Arrangement. Offshore investment managers provide the management services at the offshore-fund level, so fees in a parallel structure may be expensive compared with a master-feeder structure.
Why sponsors use it — the workbook's three advantages:
- Tax reasons — the primary advantage is the beneficial tax treatment received by investors in offshore jurisdictions who invest through the offshore funds.
- Selection of investments — if an investee company is unsuitable for an offshore fund for legal, regulatory, tax or similar reasons under its mandate and risk-return profile, that fund is free to opt out of that investment.
- Separating categories of investors — for instance, large investors paying a reduced management fee in one offshore fund, and investors paying headline rates in another.
Why they are common. Different investors have different motives for investing within the same fund.
Chapter 4's sample questions ask in which structure an offshore fund can invest directly in investee companies in India alongside an onshore Category III AIF — the answer is parallel.
A worked example
Illustrative figures. Nilgiri Capital sponsors three vehicles following the same listed mid-cap strategy:
| Vehicle | Investors | Size | Management |
|---|---|---|---|
| Nilgiri Category III AIF (India, SEBI-registered) | Indian HNIs and institutions | Rs 400 crore | Nilgiri Capital |
| Nilgiri Mauritius Fund | Offshore investors, headline fee | Rs 150 crore | Offshore manager |
| Nilgiri Singapore Fund | Two large institutions, reduced fee | Rs 250 crore | Offshore manager |
When Nilgiri Capital identifies a pharma company, each vehicle invests directly in the company:
| Vehicle | Investment (Rs crore) |
|---|---|
| Indian AIF | 30 |
| Mauritius Fund | 10 |
| Singapore Fund | 20 |
Nilgiri Capital provides the recommendation to the offshore funds under an investment advisory arrangement, but it is non-binding: the Singapore Fund's mandate excludes companies with a pending regulatory action, so for the next idea — a company under a regulatory probe — the Singapore Fund opts out while the other two invest.
The cost: the two offshore funds each pay their own offshore manager, in addition to the advisory fee flowing to Nilgiri. Under a master-feeder structure, those investors would have borne the single management fee charged at the master.
Why NISM asks about it
Chapter 4 (Category III AIF: Fund Structures and Service Providers) sets out the parallel (co-investment fund) structure at 4.1.3, with its advantages and its cost comparison against the master-feeder structure, and one of Chapter 4's sample questions asks which structure lets offshore funds invest directly alongside an onshore AIF. Expect identification questions and questions on advantages and fees.
Common exam traps
- Parallel = offshore funds invest directly in Indian companies alongside the domestic AIF. Master-feeder and unified structures route offshore money into the onshore fund instead.
- "Co-investment fund structure" is the same thing in the workbook.
- The Indian manager's advice to offshore funds is non-binding, under an investment advisory arrangement.
- Fees may be higher than in a master-feeder structure, because offshore managers provide management at the offshore level.
- Three advantages: tax treatment for offshore investors, the right to opt out of particular investments, and separating investor categories (for example by fee rate).
- Large investors need not allocate to a registered Category III AIF in India under a parallel structure.
Check yourself
1.In a Parallel Structure, what role can the Investment Manager of the Indian Category III AIF play for the Offshore Funds investing alongside it?
- a)It manages the Offshore Funds' portfolios under the onshore Investment Management Agreement
- b)It can play no role, because Offshore Funds may not receive advice from India
- c)It may provide non-binding investment advisory services under an Investment Advisory Arrangement, because the Offshore Funds make their own investment decisions
- d)It acts as the custodian for the Offshore Funds' Indian securities
Show the answer
Answer: (c) It may provide non-binding investment advisory services under an Investment Advisory Arrangement, because the Offshore Funds make their own investment decisions
The workbook says: "Since Offshore Funds make independent investment decisions, the Investment Manager of the Category III AIF in India can provide non-binding investment advisory services to the Offshore Funds, by entering into an Investment Advisory Arrangement." Option (a) is wrong because the Offshore Investment Managers manage the offshore funds, and each is paid by its own investors. For the same reason the workbook says a Parallel Structure "may be expensive, as compared to the Master Feeder Structure". Option (b) contradicts the advisory arrangement. Option (d) mixes up roles, since a custodian is a separate SEBI-registered service provider.
2.In which fund structure can an offshore fund invest directly in investee companies in India, alongside an Onshore Category III AIF?
- a)Co-investment
- b)Offshore
- c)Master-feeder
- d)Parallel
Show the answer
Answer: (d) Parallel
This is the workbook's own sample question. In a Parallel Structure, offshore investors invest through separate pooling vehicles in different jurisdictions, and those offshore funds invest directly in the investee companies alongside the domestic AIF, instead of investing in the Master Fund. Note that the workbook titles the section "Parallel Structure or Co-investment Fund Structure", so option (a) names the same thing — but the stem's wording "alongside an Onshore Category III AIF" is taken from the Parallel Structure passage, and (d) is the answer NISM marks correct.
3.In a Unified Structure, the Offshore Fund located in a tax-friendly jurisdiction:
- a)may invest either in the Onshore Category III AIF or directly in Indian investee companies, at its option
- b)cannot invest in investee companies directly, and invests in the Onshore Category III AIF through the automatic route
- c)must obtain FIPB approval before making any investment into the onshore fund
- d)is prohibited from appointing its own investment manager
Show the answer
Answer: (b) cannot invest in investee companies directly, and invests in the Onshore Category III AIF through the automatic route
The workbook is explicit: the Offshore Fund cannot invest in investee companies directly. The Offshore Fund can invest in an Onshore Category III AIF, through the automatic route and provide the investment contribution to the fund, as per the Contribution Agreement. Option (a) describes the Parallel Structure, which is precisely the opposite arrangement. Option (c) is wrong because no approval is required from the FIPB. Option (d) is wrong because both funds will have their respective Investment Managers, who are paid management fees and performance fees.
Where this is taught
- Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providersintroduced here
- Series XIX-A · Chapter 5: Alternative Investment Fund Structuringintroduced 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
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Investment Advisory AgreementThe agreement under which an offshore fund takes non-binding investment advice from an on-site Indian advisor — advice, not management, which is exactly what keeps the two roles apart.
- 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.
- Onshore FundA 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.
- 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.