NISM Series XIX-B · Chapter 4: Category III AIF: Fund Structures and Service Providers

L1 · Foundation

Foundation — How a Category III AIF is built and who works for it

The four legal forms a Category III AIF may take; how a trust is settled, how the trustee appoints the manager, and where the sponsor sits; open-ended versus closed-ended structures with the 3-5 year commitment period, the 2-year lock-in and the exit load; the LLP structure with its Designated Partner, and the General Partner and Limited Partner language used abroad; tax neutrality as the test of a good jurisdiction; and the four cross-border structures — offshore, onshore, unified and the master-feeder and parallel pair — with what each one does and why a sponsor would choose it.

22 min read · Worth 12% of the paper · Written from pages 74–91 of the official NISM workbook · Updated 18 September 2026

The shape of a Category III AIF

The last chapter was about money — commitments, fees, waterfalls. This chapter is about plumbing. Who signs what, who is paid by whom, and why an investor in Singapore reaches an Indian company by a route that looks so indirect.

1. Four legal forms

In practice, most are trusts. ⚠️ "Most Category III AIFs in India are formed as 'TRUST' REGISTERED UNDER INDIAN TRUSTS ACT, 1882 TO ENJOY TAX BENEFITS PROVIDED UNDER THE INCOME TAX, 1961".

2. How the structure is assembled

⚠️ "The Category III AIF is FORMED BY A SPONSOR, WITH A MINIMUM CONTRIBUTION AND ADEQUATE SKIN-IN-THE-GAME".

The sequence, step by step:

Step	⚠️ What happens
1	⚠️ "An AIF formed as a trust requires a 'SETTLOR' TO SETTLE THE TRUST, WHO IN TURN APPOINTS THE TRUSTEE BY EXECUTING THE TRUST DEED."
2	⚠️ "The trustee then ENTERS INTO AN INVESTMENT MANAGEMENT AGREEMENT WITH THE MANAGER TO DELEGATE ITS POWERS in respect of management and administration of the AIF."
3	⚠️ "Once the Fund is formed, IT APPLIES FOR REGISTRATION WITH SEBI AND SEEKS FOR CAPITAL COMMITMENTS FROM INVESTORS, DOMESTIC OR FOREIGN."
4	⚠️ "After receiving the investment contribution and identifying suitable investments, THE FUND CAN INVEST DIRECTLY IN THE INVESTEE COMPANIES."

⚠️ Who appoints the service providers: "THE INVESTMENT MANAGER OR SPONSOR APPOINTS THE SERVICE PROVIDERS, SUCH AS: CUSTODIAN for the purpose of safekeeping the securities on behalf of the investors, FUND ADMINISTRATOR for maintenance of accounts and investor reporting, REGISTRAR AND TRANSFER AGENTS for recording the buying and selling of units of the funds by investors, OTHER PROFESSIONALS, SUCH AS AUDITORS, TAX ADVISORS, LEGAL PROFESSIONALS AND FINANCIAL ADVISORS".

Note the direction of every arrow. The settlor creates the trust. The trustee holds it. The manager runs it under a delegation from the trustee. The sponsor puts in the skin-in-the-game. Four roles, and in a trust structure they are genuinely separate people even where the same group is behind them.

2.1 The LLP variant

⚠️ "In a limited liability partnership structure (LLP), THE SPONSOR OF THE CATEGORY III AIF IS THE DESIGNATED PARTNER AND IS RESPONSIBLE IN RESPECT OF ALL STATUTORY COMPLIANCES STIPULATED FOR THE LLP".

You will see "GP" and "LP" constantly in global fund literature. They mean manager and investor.

3. Open-ended and closed-ended

3.1 Open-ended

⚠️ "In an OPEN-ENDED fund structure, INVESTORS CONTRIBUTE CAPITAL AT THE TIME OF SUBSCRIPTION. The open-ended schemes OFFER UNITS TO INVESTORS ON A CONTINUOUS BASIS. Hence, investors CAN BUY UNITS OR SELL UNITS FROM THE AIF AT ANY TIME, THEREBY MAKING THE CORPUS OF THE FUND VARIABLE. Open-ended schemes PERMIT INVESTORS TO REDEEM CAPITAL AT REGULAR INTERVALS, VIZ. MONTHLY, QUARTERLY OR SEMI-ANNUALLY".

3.2 Closed-ended

⚠️ "CLOSED-ENDED funds are OFFERED TO INVESTORS FOR A LIMITED TIME PERIOD, as specified by the Investment Manager in the Placement Memorandum. Closed-ended funds REQUIRE INVESTORS TO MAKE A CAPITAL COMMITMENT FROM TIME TO TIME, WITHIN THE SPECIFIED COMMITMENT PERIOD".

⚠️ "Most Category III AIFs in industry would have A LOCK-IN PERIOD OF 2 YEARS, POST WHICH INVESTORS WOULD BE PERMITTED TO REDEEM THEIR CAPITAL BY PAYING AN EXIT LOAD, FOR REDEMPTION/EXITS BETWEEN PERIODS OF 2-3 YEARS FROM THE COMPLETION OF THE LOCK-IN PERIOD".

The workbook's worked example: ⚠️ "A Category III AIF launches a CLOSED-ENDED SCHEME FOR 5 YEARS, with an option given to investors TO EXIT FROM THE SCHEME AFTER EXPIRY OF A LOCK-IN PERIOD OF 2 YEARS, BY PAYING AN EXIT LOAD. For exits made after the completion of lock-in period, TILL THE END OF THE FUND TENURE, EXIT LOAD WILL BE PAID BY THE INVESTOR, AS PER THE REDEMPTION GATES SPECIFIED BY THE MANAGER IN THE PRIVATE PLACEMENT MEMORANDUM".

4. Choosing a jurisdiction — tax neutrality

Read that definition carefully. Tax neutrality is not about paying less tax than a direct investor would. It is about paying no more. The fund vehicle should be invisible for tax purposes — it should neither add a layer nor subtract one.

⚠️ "India follows SOURCE-BASED TAXATION ON CAPITAL GAINS. Accordingly, OFFSHORE FUND STRUCTURES ARE USED FOR OFFSHORE INVESTORS TO INVEST INTO INDIA TO AVOID DOUBLE TAXATION ON THE SAME INCOME STREAM".

⚠️ "Offshore Funds are formed in countries which have BILATERAL INVESTMENT PROMOTION AND PROTECTION AGREEMENTS (BIPA) WITH INDIA. This provides offshore investors an access to several reliefs, including FAIR AND EQUITABLE TREATMENT, PROTECTION AGAINST EXPROPRIATION, CAPITAL REPATRIATION, AN EFFICIENT DISPUTE RESOLUTION FRAMEWORK and other rights and reliefs. INVESTMENTS MADE BY OFFSHORE FUNDS IN INDIA ARE REGULATED BY SEBI".

4.1 The LRS limit

⚠️ "This limit IS REVISED UNDER THE FEMA LAWS AND IS OF IMPORTANCE WHEN RESIDENT INDIAN INVESTORS ARE INVESTING IN OFFSHORE FUNDS".

5. The four cross-border structures

5.1 Offshore Fund Structure

⚠️ "The OFFSHORE INVESTMENT MANAGER CAN TAKE DOMESTIC INVESTMENT ADVICE for making such investments in India".

5.2 Onshore Fund Structure

⚠️ "An ONSHORE FUND is created by A DOMESTIC INVESTMENT MANAGER, TO POOL CAPITAL AT THE DOMESTIC LEVEL FROM FOREIGN INVESTORS AND DOMESTIC INVESTORS. The Onshore Fund is DOMICILED IN INDIA, with capital commitments from RESIDENT INVESTORS IN INDIA AS WELL AS FOREIGN INVESTORS".

5.3 Unified Structure

⚠️ "The Offshore Fund is located in a TAX-FRIENDLY FOREIGN JURISDICTION LIKE SINGAPORE, MAURITIUS, LUXEMBOURG. The Offshore Fund THEN DIRECTLY INVESTS IN THE ONSHORE CATEGORY III AIF, registered in India with SEBI... BOTH FUNDS WILL HAVE THEIR RESPECTIVE INVESTMENT MANAGERS, WHO ARE PAID MANAGEMENT FEES AND PERFORMANCE FEES".

5.4 Master-Feeder Structure

⚠️ "Direct investors CAN BE DOMESTIC INVESTORS OR FOREIGN INVESTORS, IN THE FORM OF INSTITUTIONAL INVESTORS, HIGH NET WORTH INDIVIDUALS, BANKS, SOVEREIGN WEALTH FUNDS, FAMILY OFFICES, INSURANCE COMPANIES, PENSION FUNDS, LARGE CORPORATES, FUND OF FUNDS".

⚠️ Why a feeder is needed at all: "For many investors, INVESTING DIRECTLY IN A FUND REGISTERED WITH SEBI IN INDIA MIGHT BE TAX-EFFICIENT AND REGULATORY-EFFICIENT. THESE INVESTORS ARE 'DIRECT INVESTORS.' However, for another group of investors, THAT MIGHT NOT BE THE MOST EFFICIENT WAY. To address the tax/regulatory issues specific to that group, SUCH AS MAURITIUS AND SINGAPORE INVESTORS, THE SPONSOR NEEDS TO SET UP A FEEDER VEHICLE/FUND IN THAT JURISDICTION".

5.5 Parallel Structure (Co-investment Fund Structure)

⚠️ "Through a parallel structure, HNIs AND INSTITUTIONAL INVESTORS CAN ALSO INVEST IN THE INVESTEE COMPANIES, THROUGH THE OFFSHORE FUNDS. Therefore, LARGE INVESTORS DO NOT NEED TO ALLOCATE FUNDS TO A REGISTERED CATEGORY III AIF IN INDIA, LIKE IN A MASTER-FEEDER STRUCTURE".

⚠️ "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".

⚠️ Three advantages of a Parallel Structure:

#	⚠️ Advantage
1	⚠️ TAX REASONS — "the BENEFICIAL TAX TREATMENT RECEIVED BY INVESTORS IN OFFSHORE JURISDICTIONS, who invest through the Offshore Funds"
2	⚠️ SELECTION OF INVESTMENTS — "If a particular investee company IS NOT SUITABLE TO AN OFFSHORE FUND due to any LEGAL, REGULATORY, TAX OR OTHER SIMILAR REASONS as per their stated investment mandate and risk-return profile, THEY ARE FREE TO OPT-OUT OF THAT PARTICULAR INVESTMENT"
3	⚠️ SEGREGATING INVESTOR CATEGORIES — "LARGE INVESTORS PAYING REDUCED MANAGEMENT FEE MIGHT BE PLACED IN ONE OFFSHORE FUND, WHILE ALL THE OTHER INVESTORS WHO PAY HEADLINE MANAGEMENT FEE RATES MIGHT BE PLACED IN A SEPARATE ONE"

⚠️ "Parallel Structures are common as DIFFERENT INVESTORS HAVE DIFFERENT MOTIVES OF INVESTING, WITHIN THE SAME FUND".

6. The distinction that carries the marks

Structure	⚠️ Where the offshore money lands
⚠️ OFFSHORE	⚠️ Offshore Fund → INVESTEE COMPANIES. No pooling in India at all.
⚠️ UNIFIED	⚠️ Offshore Fund → ONSHORE CATEGORY III AIF → investee companies. The Offshore Fund CANNOT invest in investee companies directly.
⚠️ MASTER-FEEDER	⚠️ Offshore investors → FEEDER FUND → DOMESTIC MASTER FUND → investee companies. Direct investors also enter the Master Fund.
⚠️ PARALLEL	⚠️ Offshore Funds → INVESTEE COMPANIES DIRECTLY, ALONGSIDE the onshore AIF. They do NOT go through the Master Fund.

Read the middle two rows together. In a unified structure the offshore vehicle must route through the Indian fund. In a parallel structure it must not — it goes straight to the company, side by side with the Indian fund. That single reversal is the most heavily examined point in this chapter.

Think of it like this

The landowner, the temple trust and the priest

An old Chettinad family gives land and money to build a temple. The family member who hands over the property is the settlor — once he has settled it, the property is no longer his.

The trust he creates now owns the temple. A board of trustees holds it and is answerable for it.

The trustees do not conduct the daily worship themselves. They appoint a priest under a written arrangement setting out what he may decide and what must come back to them. That is the Investment Management Agreement, and the priest is the Manager.

And the family member who also puts his own money into the temple fund every year, alongside the devotees' offerings, is the Sponsor with skin in the game.

Four roles, one temple. Ask "who settled it, who holds it, who runs it, who has money at risk", and the fund structure answers itself.

The society flat and the serviced apartment

A closed-ended fund is like buying a flat in a co-operative society under construction. You commit today, pay in instalments as the builder calls for money, and you cannot simply hand back the keys next month. There is a minimum period before you may sell, and if you sell early you lose something — a transfer fee to the society.

An open-ended fund is a serviced apartment. Move in this week, move out next quarter, and the building's occupancy keeps changing. The corpus is variable because people join and leave continuously.

The Category III AIF may be either. Which one Aparna picks decides whether her capital is stable enough to run a three-year strategy.

The customs green channel

When a foreign investor wants to put money into an Indian fund, the old picture in most people's minds is a queue at a government counter waiting for a stamp.

In a Unified Structure, there is no such queue. "No approval is required from the Foreign Investment Promotion Board" — general permission has already been granted under the FDI Policy, and the money comes in through the Automatic Route.

It is the green channel at the airport. You still have to be carrying permitted goods, and you are still accountable for them — but you do not stop to ask anyone's permission on the way through.

The milk collection centre and the direct supplier

A dairy in Anand buys milk two ways.

Some large farms deliver directly to the dairy. They are the direct investors in a Master Fund.

Small farmers in outlying villages cannot each drive to the dairy, so the co-operative sets up a village collection centre. Milk is pooled there, then sent on to the dairy in one tanker. That centre is a Feeder Fund in Mauritius or Singapore — it exists because reaching the dairy directly is inefficient for that particular group, not because the milk is different.

And notice where the money is counted. "Management fees typically are charged at the master fund level" — the collection centre takes only a token amount, "e.g., USD 1000". The dairy does the real accounting.

Two contractors on the same construction site

A Parallel Structure is not a supply chain at all. It is two contractors working side by side on the same site.

The Indian AIF builds Tower A. The Mauritius fund builds Tower B on the same plot, at the same time, to broadly the same drawings. Neither sends materials through the other. Both deal with the client — the investee company — directly.

And because the Mauritius contractor has his own foreman on site, "the fee structure in a Parallel Structure may be expensive, as compared to the Master Feeder Structure". Two full site teams cost more than one.

The advantage he gets for that cost is the right to walk away from a particular building — "if a particular investee company is not suitable to an Offshore Fund... they are free to opt-out of that particular investment." A feeder fund investor has no such choice; whatever the master fund buys, he owns a slice of.

The wedding hall booked without a broker

A family in Surat cannot walk into the municipal office and book the community hall themselves. The rules say the application must come through a registered agent who verifies the papers and signs a certificate that everything stated is true.

That is the Merchant Banker. A Category III AIF "shall file the Private Placement Memorandum with SEBI through a SEBI registered Merchant Banker only", and he "conducts independent due diligence of all the disclosures and its adequacy in the PPM and also provides a due diligence certificate."

But once the hall is booked, a small change — shifting the function from 7 p.m. to 8 p.m. — can be intimated to the office directly. Likewise, "intimation with respect to specific change in the terms of PPM may not be required to be submitted through a merchant banker and may be filed directly with SEBI."

And the agent must be an outsider: he "shall not be an associate of the AIF, its sponsor, manager or trustee." A family member vouching for the family is not verification.

Key terms in this chapter

Advisory Agreement: The agreement signed where an offshore fund delegates investment advisory responsibilities to a separate onshore entity, which advises on deal sourcing, assessment, execution and post-investment management.
Automatic Route: The route under the FDI Policy by which foreign investment enters a unified structure without approval from the Foreign Investment Promotion Board, general permission having already been granted.
BIPA: Bilateral Investment Promotion and Protection Agreement — a treaty giving offshore investors fair and equitable treatment, protection against expropriation, capital repatriation and an efficient dispute resolution framework. Offshore funds are formed in countries having a BIPA with India.
Closed-ended Fund: A structure offered for a limited time period, with commitment periods typically of 3 to 5 years from the final closing date, permitting no redemption before expiration except in extraordinary circumstances.
Custodian: The SEBI-registered entity safekeeping the fund's securities and goods received on physical settlement of commodity derivatives, responsible for settlement and for the correctness of the dematerialised accounts. Must be appointed before the scheme's first investment.
Designated Partner: In an LLP structure, the sponsor of the Category III AIF, responsible for all statutory compliances stipulated for the LLP.
Determinate Trust: A trust where the individual shares of the beneficiaries are expressly stated in the trust deed and are identifiable and ascertainable as on the date of the deed.
Distributor: An individual or institution such as a distribution company, broking company or bank that sells Category III AIF schemes. A distributor may be empanelled with more than one AIF but must assess suitability for each client on a case-to-case basis.
Fund Administrator: The provider maintaining the fund's books, accounting for accruals, computing NAV, handling regulatory and tax reporting, reconciliations and reports. Fund accounting is not a regulated function in India and may be outsourced, bundled with custody or done in-house.
General Partner (GP): The name given to the manager of a fund in most foreign jurisdictions.
Indenture of Trust: The document establishing the trust under the Indian Trusts Act, 1882 and ascertaining whether the trust is determinate or indeterminate.
Indeterminate Trust: A trust whose beneficiaries' shares are not ascertainable. It is treated as an association of persons and tax is charged on the entire income of the trust at the maximum marginal rate.
Investment Management Agreement: The agreement by which the trustee appoints the investment manager and delegates management powers other than those retained in the Indenture of Trust. It is signed once for the trust as a whole, not at each scheme launch.
Investor Side Letter: A document recording exemptions or preferential treatment sought by large investors, such as a reduced management fee or participation in investment committees.
Large Value Fund: A fund in which each investor commits a minimum capital contribution of Rs 25 crore, or USD 3 million equivalent for non-INR commitments. Such funds are exempt from the PPM audit requirement.
Liberalised Remittance Scheme (LRS): The RBI scheme allowing Indian residents to remit abroad up to USD 2,50,000 per person per financial year for permissible current or capital account transactions, subject to FEMA, 1999.
Limited Partner (LP): The name given in most foreign jurisdictions to investors subscribing to units in the fund.
Master-Feeder Structure: A subordinated structure where offshore investors invest through a feeder fund which in turn invests in the domestic master fund, alongside direct investors. Management fees are charged at the master fund level.
Merchant Banker: The SEBI-registered intermediary through whom a Category III AIF must file its PPM at registration or on any new scheme launch. He conducts independent due diligence, provides a due diligence certificate, and must not be an associate of the AIF, sponsor, manager or trustee.
Most Favoured Nation (MFN) Clause: A protection right ensuring no other investor is placed in a better position than the holder. Because the manager owes a fiduciary duty to all investors, differential rights are usually delivered through a separate class of units instead.
Offshore Fund Structure: A structure used when there is no intent to pool capital in India. The pooling vehicle is domiciled in a jurisdiction such as Mauritius or Singapore and invests directly into Indian investee companies.
Onshore Fund: A fund created by a domestic investment manager and domiciled in India, pooling capital from both resident and foreign investors, registered under the SEBI (AIF) Regulations with its PPM filed through a merchant banker.
Open-ended Fund: A structure offering units continuously so investors can buy or sell at any time, making the corpus variable, with redemption permitted at regular intervals such as monthly, quarterly or semi-annually.
Order Management System (OMS): The core trading system used in a Category III AIF, alongside a real-time price terminal and databases such as Bloomberg and Reuters, giving real-time data on fund-level and firm-level positions.
Parallel Structure: Also called a co-investment fund structure — offshore investors invest through separate pooling vehicles in different jurisdictions which then invest directly in investee companies alongside the domestic AIF, rather than through a master fund.
PPM Audit: The mandatory yearly audit of compliance with the terms of the PPM, conducted by internal or external auditors or legal professionals, reported to the trustee or board or designated partners, the manager's board and SEBI within six months of financial year end.
Private Placement Memorandum (PPM): The offer document made by the Category III AIF at both onshore and offshore level to attract capital commitments, containing all material information about the fund. SEBI prescribes a mandatory template setting the minimum level of disclosure.
Registrar and Transfer Agent (RTA): The service provider overseeing issue of units, partly-paid units, transfers, full and partial redemption calls and payment of exit load and fees. Appointment is compulsory because RTAs act as collecting agents for stamp duty on AIF units.
Settlor: The person who settles a trust and, in turn, appoints the trustee by executing the trust deed. In an AIF formed as a trust, the settlor is the starting point of the whole structure.
Skin-in-the-game: The phrase used to ensure that the manager also bears financial risk by investing in the Category III AIF along with other investors, and manages the fund to achieve a common risk-return objective.
Standard Setting Forum for AIFs (SFA): The pilot forum with which SEBI prepared the standard reporting format for the PPM Audit Report, and which reviews the format periodically in consultation with SEBI.
Subscription Agreement: An offshore document setting out the terms on which an investor subscribes to securities issued by an offshore fund, recording his capital commitment and his representations and warranties, including being qualified under law and fit and proper.
Tax Neutrality: The principle that investors in a fund are not subject to any higher taxes than if they were to invest directly. It is the primary test of a suitable jurisdiction for setting up a fund.
Trustee: The party that holds the trust and enters into the Investment Management Agreement with the manager, delegating powers of management and administration of the AIF.
Unified Structure: A structure pooling domestic and offshore commitments into a domestic vehicle. The offshore fund invests into the onshore AIF through the automatic route and cannot invest in investee companies directly; no FIPB approval is required.
Wrapper: A supplement attached to the domestic fund's Private Placement Memorandum when distributed at offshore locations in a unified structure, so that private placement requirements in jurisdictions outside India are met.

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

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