Fund Registration: What Bringing a Private Fund Onshore Requires

Registration is what turns a private arrangement into a recognised vehicle. Somebody settles the trust, names the parties, states what the fund will do, and the vehicle is entered on a register kept by the Securities and Exchange Board of India. The entry produces standing and ongoing obligation. The entry is not approval of the strategy, the terms or anybody involved.

Begin with something a great deal smaller than a fund. Suppose twenty households on a lane decide to put money together for a shared water tank. Somebody has to write down what the arrangement actually is. Somebody has to hold the money. Somebody has to decide what gets bought. And somebody has to be answerable when a household asks where its contribution went. None of those four questions can be answered until the arrangement itself exists on paper, and the order in which they get answered is not a matter of anybody's preference. The cash cannot be handed to a treasurer before there is a treasurer, and there is no treasurer until the written arrangement says who it is.

Now change one thing about the lane. Instead of twenty households who see each other every morning, imagine the money is coming from an insurance company in one city, a bank treasury in another, a university endowment, a charitable trust and a pension pool, none of whom will ever meet the others, and imagine the money stays committed for the better part of a decade. There is no lane now, nobody bumps into anybody, and an understanding that lives in somebody's head is worth nothing to a contributor sitting nine hundred kilometres away. Every one of the four questions is much harder to answer informally. The answers have to be written into instruments, the instruments have to name the parties, and the whole arrangement has to be recorded somewhere a stranger can find it.

The amounts are larger, the people are strangers to each other, and the money stays locked up for years. A private fund is that same situation carried up several orders of magnitude and written down with far more care. Registration is the step where the answers to those four questions stop being a private understanding between a few people and become a matter of record. Both the shape of that step and the order of its dependencies are set out below.

What is actually being registered, and who keeps the register?

The first thing to be clear about is what the object of the exercise is. The object is not a person, and it is not a plan. Registration attaches to a vehicle: a thing that has been brought into existence, that has parties attached to it, and that intends to do a stated kind of thing with money that other people put into it. A registerA list a regulator keeps of vehicles recognised in a stated form. is simply a list that a body keeps of vehicles it recognises in a stated form. Being on it means the entry exists and the entry says what it says. Being on the register means nothing more than that, and how much work that sentence is doing takes some unpacking.

In India the register for pooled private vehicles of this kind is kept by the Securities and Exchange Board of India, and the current text of everything attaching to it sits at sebi.gov.in. When a vehicle is settled and registered inside the country whose investors it takes, people describe it as being onshoreEstablished and registered inside the country whose investors it takes.. The word onshore does two jobs at once: it says where the vehicle sits, and it says whose rules it has walked into. Bringing a fund onshore is not one act but a sequence of them, and the sequence is the durable thing to learn.

The worked case here is Nilgiri Growth Partners Fund II, invented, managed by Nilgiri Alternatives Advisors Private Limited, invented. The fund is settled as a trust and registered as a Category II Alternative Investment Fund. The category label is worth marking for what it carries and what it does not. The label states which set of conditions the vehicle sits under, and not what those conditions are. Every condition attaching to any category, and to registration itself, is set by the Securities and Exchange Board of India, those conditions change, and the only reliable place to read them is the current text at sebi.gov.in.

The word register carries more weight in most people's heads than the thing deserves, so it helps to picture what an entry actually is. It is a row. The row says there is a vehicle, gives its name, states the form it is recognised in, and identifies the parties attached to it. The row is close to the whole of it. A reader who finds a vehicle on a register has learned that it exists, what it is called, what form it sits in and who is behind it. A reader has emphatically not learned anything at all about whether the vehicle is any good, and the gap between those two sentences is where most of the damage in this subject gets done.

Compare it with a marriage register, an object most people have a feel for. The register records that a marriage took place, on what date, between whom, witnessed by whom. Nobody has ever mistaken the existence of that entry for an opinion about whether the marriage was a good idea. The entry is a record of a fact, kept so that the fact can be checked later by somebody who was not there. A register of vehicles does exactly the same job for exactly the same reason, and it is worth carrying that intuition into everything that follows.

What has to exist before anybody can apply?

Here is the part that survives every change of rule, in every country, in every decade, and it is worth more than any figure that could be memorised. Things must exist before other things can. A party is a party to something, and until the something exists there is nothing to be a party to, so a vehicle needs a constituting instrument before it can have parties. Answerability is a property of a named person or a named company and not of a gap, so parties must be identified before anybody can be answerable for anything. And nobody can consent to a blank, so the terms must be settled before an investor can be asked to agree to them. The ordering is structural rather than regulatory. Nothing in it depends on a rule, so it is safe to teach in full and it will still be true long after any particular condition has been rewritten.

A dozen ordinary situations show the same thing. An invitation is a description of arrangements, and a description needs something to describe, so a wedding invitation cannot be printed before the date and the venue are settled. A cheque cannot be signed on an account that has not been opened. A treasurer cannot be elected for a welfare association that has not been formed. In each case the impossibility is not a rule somebody wrote down and could rewrite tomorrow, but the shape of the thing itself.

The ladder above carries two different kinds of claim on one picture. Steps one to six and step nine are structural, and each of them needs the product of the one above it, so they would hold if there were no regulator in the world. Steps seven and eight are the registration itself, and where exactly they sit in the sequence, along with everything that has to be true before either can happen, is set by the Securities and Exchange Board of India and is read at sebi.gov.in. In Nilgiri Growth Partners Fund II the vehicle existed first, the entry came after it, and the first rupee was called after that.

Two different kinds of before get run together, and only one of them is durable. The first is logical dependency: A must come before B because B is impossible without A. Naming a trustee before there is a trust is not merely irregular, it is meaningless, in the way that appointing a captain of a team that has not been formed is meaningless. The second kind is procedural ordering: A comes before B because somebody decided it should. Procedural ordering is real, it matters enormously in practice, and it is set by the regulator. Everything set out here about order is the first kind, and where the second kind takes over the source is named instead.

Working out of order goes wrong in ordinary life all the time, and the way it goes wrong is instructive. A description written before the thing it describes exists becomes a description of an intention, and intentions change. Anybody who has seen a brochure for a building that was later built differently knows the shape of the problem. In a fund the equivalent is a document circulating with terms in it that no executed instrument yet contains, and the discipline of the ladder is what stops that: each rung produces the thing the next rung needs, so nothing further up can be a wish.

Which parties have to be named, and what does each one do?

Naming the parties is the second thing registration is for, and the one most readers never think about. Registration is where the answer to who is answerable for what gets fixed and written down somewhere other than in the private papers of the people involved. Fixing that answer is why the process exists at all, rather than being paperwork for its own sake. In the invented vehicle worked through here, three parties carry three different jobs, and keeping them apart is most of the battle.

The trusteeThe party holding the assets for the beneficiaries. is Nilgiri Trusteeship Services Private Limited, and it holds the assets. The investment managerThe party making the investment decisions. is Nilgiri Alternatives Advisors Private Limited, and it makes the decisions. The sponsorThe party standing behind the manager. is Nilgiri Financial Holdings Private Limited, and it stands behind the manager. Holding the property and deciding what to do with it are deliberately in different hands, and that separation is the single most useful structural fact about this kind of vehicle. If one party both held the money and decided where it went, who to ask when something goes wrong would have exactly one answer and no check on it.

The sponsor is the party most readers cannot place, so it is worth a moment. Ask what a contributor of Rs 1,00,00,00,000 is entitled to ask: the manager makes the decisions, so who stands behind the manager? A manager is a company like any other, and companies are not permanent, so a blank answer means the arrangement has a hole in it. Naming a sponsor is how the answer stops being a blank. In this case the sponsor, Nilgiri Financial Holdings Private Limited, is also the party holding the manager's own commitment to the fund. Having a sponsor makes nothing safe. The point is that who stands behind the manager has a named answer instead of an awkward silence.

There is a fourth set of parties, and any account of registration has to name them because they are the reason the vehicle exists. Nilgiri Growth Partners Fund II has commitments of Rs 5,00,00,00,000. Twelve investors committed Rs 4,90,00,00,000 of that between them, and the manager itself committed Rs 10,00,00,000. The manager's Rs 10,00,00,000 is exactly 2.0 per cent of Rs 5,00,00,00,000 and makes the manager the thirteenth committing party. The sponsor is the entity that holds the manager's share of it. Whenever a percentage appears in this subject, the useful question is what it is a percentage of, and here the denominator is the whole Rs 5,00,00,00,000 rather than the investors' Rs 4,90,00,00,000. Both numbers are correct and they answer different questions, which is how the wrong one gets quoted.

The manager being a committing party has a structural consequence worth noticing without reading anything into it. The manager therefore appears twice in the arrangement: once as the party that decides, and once as a party whose own money moves with the decisions. Appearing twice is a fact about the vehicle and nothing more. Drawing conclusions from a two per cent slice has left description behind, so the double appearance makes the arrangement neither safer, better aligned nor worth anybody's money. Concretely, when the registration names the parties, one of the names is on both sides of the table.

Now the awkward part, and any honest account of this subject has to carry it. The whole vocabulary of this business talks about a general partner, limited partners and a limited partnership agreement. The vehicle has none of those things as a matter of Indian law. The vehicle is a trust. The economics of this kind of fund were designed in that form somewhere else and were imported wholesale while the legal form was not. And so every document, every meeting and every conversation about it uses the partnership words anyway. The general partner's role here is discharged by the manager and the trustee between them.

Both things are true at once, and a reader who insists on picking one will misread every document they touch. A reader who decides the partnership words are simply wrong will be baffled by an entire industry that keeps using them and by contracts that define them carefully. A reader who decides the vehicle is a partnership because everybody talks like it is will look for a general partner in the instruments and find nobody occupying that chair. The correct position is that the words describe the economics and the instruments describe the vehicle, and each is read for what it actually governs. Notice that a capital account and a carried interest survive the translation untouched, and the reason they do is that both are creatures of contract rather than of legal form: the parties can simply agree to them in any vehicle they like.

Which document creates the fund, and which one only describes it?

Three documents matter here, and the three do completely different jobs. People confuse them for that reason. The indenture of trustThe instrument that creates a trust and binds its parties. is the instrument that actually creates the vehicle. Before it is executed there is no fund, no trustee and nothing to register. The contribution agreementThe contract an investor signs to commit money. is what one investor signs to commit money, and it binds that investor and nobody else. The placement memorandum describes both of those, and the parties, and what the fund intends to do. The document a reader is handed first is almost always the memorandum, and it is the only one of the three that creates nothing and binds nobody.

Think of a builder's brochure for a housing project against the sale deed for a flat in it. The brochure is glossy, complete, and describes the whole arrangement clearly. The brochure also transfers nothing to anybody. The deed is short, dull and decisive. In a private fund the memorandum is the brochure and the instruments are the deed, and a reader who checks only the brochure has read a description of arrangements rather than the arrangements themselves. Anybody assessing a private fund eventually has to put the description next to the instrument that binds and see whether the two say the same thing.

The three documents also answer three different questions. Sorting them by question is cleaner than trying to remember their names. Ask does this vehicle exist, and in what form and the instrument that settles the trust is the only document that answers. The twelve investors of this fund each signed their own contribution agreement, so ask what has this particular investor agreed to and only that investor's agreement answers. Ask what is this fund and what does it intend to do and the memorandum answers, at length and readably, and creates nothing. A reader who knows which question they are asking always knows which document to open.

One consequence of that follows immediately, and it is the reason the distinction earns its place in an account of registration. The parties named to a regulator are named because instruments appointed them, not because a memorandum described them. If a memorandum said one thing and the executed instrument said another, the instrument would govern and the memorandum would simply be inaccurate. The structure of the memorandum itself, and the order in which a reader works through its sections, is covered separately.

What does being on the register actually produce?

Four things, and they are worth stating flatly because the fifth thing everybody assumes is not on the list. The vehicle now exists in a stated form. Its parties are named and recorded. Things the vehicle must keep doing now attach to it, and it cannot shrug them off by changing its mind. And who is answerable for what now has a recorded answer, available to somebody other than the people who wrote the documents. Every one of those four is about identity and obligation, and not one of them is about quality.

An ongoing obligationSomething the vehicle must keep doing once registered. is the part people underestimate most. A reader tends to picture registration as a gate walked through once, after which the vehicle is inside and the matter is closed. Registration is much closer to taking on a standing duty: from the entry onwards, the vehicle keeps doing things, keeps telling people things, and keeps being the kind of thing it said it was. Those obligations are therefore treated below as a category rather than as a list.

Standing is the least visible of the four and the one that makes practical life possible, so the word is worth unpacking. A vehicle recognised in a stated form can be dealt with by other people as that thing. Somebody opening an account for it, auditing it, holding assets for it or contracting with it now knows exactly what they are dealing with, and does not have to take the word of the person sitting opposite them. Before the entry, the vehicle is an arrangement between the people who signed it. After the entry, it is a thing the rest of the world can point at.

Where does a reader most often go wrong here?

Fault one has a plain everyday shape. A stall that appears on a municipal list is on a list. Nobody has tasted the food. The list records that the stall exists, where it is and who runs it. All of that is genuinely useful, and it says nothing whatever about the cooking. Reading a fund's registration as a comment on its quality is exactly the same mistake, and it is made constantly because the word registered sounds reassuring.

Fault two hides inside the way people speak. Categories are numbered, and numbers usually invite a reader to arrange things on a scale. Here they do not. A number in this context is a label saying which set of conditions a vehicle sits under, in the same way that a platform number at a station is a label rather than a score. Nilgiri Growth Partners Fund II and Nilgiri Real Assets Fund I both carry the same category label and one of them buys unlisted companies while the other buys property and infrastructure. Nothing about the shared label says a single thing about either.

Fault three is the quietest, and it is why conditions are left to the source. Suppose an explanatory account printed a threshold, and suppose the figure was correct on the day it was written. A reader learns it. Two years later that reader is in a room where somebody is making a decision, and the figure comes out with the confidence that memory gives anything learned early. A remembered number arrives without a date attached to it, so nobody in that room has any way of knowing the figure moved. The failure is not that the account was wrong when it was written. The failure is that it taught something with a shelf life as though it had none.

Which questions does the fund's own paperwork settle, and which does it not?

One distinction carries everything else, and once it is in hand almost any question about a private fund sorts into one of two piles in a few seconds. Some questions are settled by the fund's own documents, negotiated between its own parties, and written down where anybody with the papers can read them. Other questions are settled somewhere else entirely, by a body that was not in the room, and can be changed without asking the fund at all. The term, the fee, the type of waterfall and the key-person clause belong to the fund; whether the vehicle may exist in this form at all does not.

Take one example from the left column that catches people out. Nilgiri Growth Partners Fund II drew Rs 2,50,00,000 of set-up expenses at formation, and its documents cap those expenses at 0.50 per cent of commitments. A reader meeting that figure often assumes it must be a limit somebody imposed from outside. It is not. The cap is one this fund's own parties negotiated and wrote into their own papers, and a different fund could have written a different one. A number in a fund's documents is that fund's number, and reading it as a rule that applies everywhere is one of the most common errors in this whole subject. The same goes for its ten-year term, its two possible one-year extensions, its five-year investment period and its 2.00 per cent fee whose basis steps down at Year 6. Every one of those is a term this invented fund agreed with its own investors.

There is a single test that sorts almost every question correctly, and it takes about two seconds once it is learned. Ask whether the parties in the room could have written this differently if they had wanted to. If yes, it is the fund's own and the answer is in its documents. If no, it belongs to somebody who was not in the room. The fund's papers are downstream of that somebody, so no amount of reading them will settle it. The test survives every rewrite of every condition, and is worth more than any table of current requirements would be.

The right-hand column of that table is a set of questions left to the source rather than a set of gaps. Every one of them has an answer today, and every one of those answers is set by the Securities and Exchange Board of India, written at sebi.gov.in, and liable to change. A copied-out answer would look like knowledge and behave like a liability.

What has to keep happening after the entry is made?

Registration is not an event that finishes. Registration starts a set of things that have to keep running for as long as the vehicle exists. The requirements themselves are set by the regulator and they move, so the durable way to hold them is as categories rather than as a list. Four categories cover it: who holds the property, who decides, who has to be told what, and who else has to be told.

The third of those has a shape visible on the invented fund. An investor in Nilgiri Growth Partners Fund II receives six things: a capital account statement each quarter, an unaudited quarterly report within a period the fund's own documents fix, an audited annual report, a letter from the manager alongside the quarterly numbers, a notice for every capital call and every distribution, and an annual report from the independent valuation agent. Every one of those six is a term of this fund's own documents, and being a term of its own documents is why they can be named. What the vehicle must report to the body that registered it is a separate question, set by the regulator. That second question is read at sebi.gov.in, where the current text sits and where it changes.

The fourth category, what the vehicle has to tell the body that recorded it, is where the detail moves fastest, and it is also where the shape is easiest to see even without the detail. A register is only useful if what it records stays true. A vehicle whose parties changed years ago, whose form changed, or which stopped doing what it said it would do, would make its own entry misleading, and a misleading entry is worse than no entry at all. So the obligation to keep the record current is not an administrative nuisance bolted on afterwards. Keeping the record current is what makes the register mean anything. What exactly has to be reported, in what form and how often, is set by the Securities and Exchange Board of India and is read at sebi.gov.in.

Where do the conditions live?

Most readers arrive wanting a number. How small can an investor's commitment be, how much must the manager put in, how long can the vehicle run, how many investors is it allowed to have. Every one of those is exactly the right question to ask, and every one is answered at the source rather than here.

The reason is not caution for its own sake. A condition of that kind is set by the Securities and Exchange Board of India, is written down at sebi.gov.in, and changes. The moment a condition matters is the moment somebody acts on it, so a remembered condition is out of date exactly when it matters. A figure learned here and repeated in a meeting two years later arrives with no warning that it moved in the meantime. Neither the ladder of dependencies set out above nor the split between the fund's own questions and everybody else's is a condition at all, so both will still be true.

There is a second body worth knowing about, and the same discipline applies to it. Where the subject is a company rather than a fund, meaning its directors, its charges, its filings or its constitutional documents, the relevant record sits with the Ministry of Corporate Affairs at mca.gov.in. The second record matters here because the manager, the trustee and the sponsor in this worked case are all companies in their own right, each with its own filings, quite separately from anything the fund itself does. Naming which record answers which question is a real skill. Reciting what either record currently says is not, and it goes stale.

Consider what a reader actually walks away with. A vehicle has to exist before it can have parties, and parties have to be named before anybody can be answerable. Which three parties do which three jobs, and why holding and deciding sit in different hands. Which of the three documents creates the fund. Which one binds a single investor and which one binds nobody. An entry on a register is a record of identity and obligation rather than a verdict on quality. And the two-second test for sorting any question into the fund's pile or somebody else's. Not one of those six things can go out of date, and every one of them is worth more in a real conversation than a half-remembered threshold.

What does an analyst check first in a fund's papers?

One first pass over the papers turns all of this from correct into useful. Analysts at an investment office, credit teams at a lender looking at a fund as a counterparty, and the staff of an endowment or a charitable trust all end up doing the same first pass over a set of private fund papers, and it is not the pass most people expect. Those readers are not reading for the strategy first. The first pass looks for whether the vehicle is what it says it is and who they would actually be dealing with.

The order goes like this. First, find the instrument that constitutes the vehicle and confirm the vehicle described in the memorandum is the same one that instrument creates. Second, find the three parties by name, and check that the entity described as making the decisions is the entity the contract actually appoints. Third, note what form the vehicle is recorded in and take every condition attaching to that form to the source rather than to the memorandum's summary of it. Fourth, put the memorandum's description of the terms next to the instrument that binds, and read the instrument where the two differ. Fifth, ask what the vehicle has to keep doing and who is answerable for each of those things. The step almost everybody skips is the fourth one, because a description of a term is easier to read than the term.

Each of those five steps has a tell, meaning a thing that should slow a reader down. On the first step, the tell is a memorandum that describes the vehicle without ever naming the instrument that constitutes it. On the second, it is a description of the manager that names a group rather than the specific company being appointed. Groups do not sign contracts and companies do. On the third, it is a summary of what a form requires, written by somebody with an interest in how it reads. On the fourth, it is a term described in words in one document and in a defined term in another, where the two do not obviously match. On the fifth, it is an obligation with no named party attached to it. An obligation like that ends up being nobody's job.

A household reading its own papers uses a smaller version of the same procedure without ever calling it that. A buyer of a flat eventually stops reading the brochure and asks to see the title documents, the approvals and the name of the entity actually being contracted with, and asks who is answerable for the lift and the water once the family has moved in. The buyer is running the same five steps: what is the thing, who are the parties, what form is it recognised in, does the description match the instrument, and what keeps having to happen afterwards. The reason the procedure transfers so cleanly is that it was never about funds in the first place; it is about the difference between a description and a binding arrangement.

The procedure stops short of forming a view on whether the fund is any good. Judging a fund is a different exercise entirely and is covered separately.