Procedure for investment fund for availing benefit under section 9(12) read with Schedule I to Act

Look-through (sub-rule 1). Where an institutional entity invests directly in a fund, the number of members and participation interest are determined by looking through the entity if it independently meets paragraphs 1(1)(c), (e), (f) and (g) of Schedule I, was set up solely to pool and invest funds, and is resident in (or established, incorporated or registered in) a country or territory with a section 159 agreement or one the Central Government notifies.

Tolerances (sub-rule 2). A fund keeps its eligibility despite non-fulfilment of paragraphs 1(1)(c), (d) and (e) if the lapse is for reasons beyond its control and lasts no more than ninety days; or lasts no more than eighteen months from set-up or to final closing, whichever is earlier, with bona fide efforts to meet the conditions; or arises because the fund is being wound up, for up to one year from the start of winding up; and a delay of up to ninety days in furnishing the statement under paragraph 1(4) is tolerated.

Controlling a business (sub-rule 3). A fund controls or manages a business if it directly or indirectly holds rights giving it more than 26% of the total share capital, voting power or interest in the entity.

Minimum remuneration to the fund manager (sub-rules 4 to 6). For a Category-I foreign portfolio investor of the kind the rule specifies, 0.10% of the asset under management. In other cases, 0.30% of the asset under management; or, where the manager is entitled only to income- or profit-linked remuneration, 10% of profits above the specified hurdle rate; or, where the fund also pays another manager, 50% of the management fee after operational expenses. A fund paying less may apply to the Member, Central Board of Direct Taxes under rule 275(2) for approval of the lower amount, and rule 275(3) to (12) apply to that application.

Report and related tests (sub-rules 7 to 10). The fund manager obtains, in addition to any report under section 172, an accountant's report on the activity undertaken for the fund, in Form No. 172 by the specified date, which is treated as a report under section 172. A fund manager is not a connected person of the fund merely because it manages the fund. A fixed remuneration is left out of the profits in paragraph 1(3)(d) if the paragraph 1(1)(m) conditions are met and it was agreed in writing at the start. "Asset under management" is the annual average of the monthly average of the opening and closing balances of the value of the part of the fund the manager manages; "management fee" is the amount in an accountant's certificate; "specified hurdle rate" is a pre-defined threshold beyond which the fund pays a share of profits.