The choice between an onshore AIF, an offshore fund with an India-specific mandate, or a hybrid structure with a domestic pooling vehicle has material consequences for the regulatory compliance burden, the pool of eligible investors, and ultimately the fund's ability to deploy capital efficiently into Indian assets.

This article sets out the principal structural options available to fund managers, examines the regulatory constraints that govern each, and identifies the key compliance pressure points that have emerged as SEBI has tightened its oversight of cross-border capital flows.

The principal structural options

Option 1: The onshore AIF

The most straightforward structure for an India-focused fund is a Category I, II, or III AIF registered under the AIF Regulations, with the fund domiciled in India as a trust, limited liability partnership, or company.¹ The onshore AIF may accept foreign investment subject to compliance with the Foreign Exchange Management Act, 1999 ("FEMA") and the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (the "NDI Rules").²

Foreign investors in an onshore AIF are treated as indirect foreign investors in investee companies for the purpose of the sectoral FDI caps. This treatment – confirmed by the Department for Promotion of Industry and Internal Trade's ("DPIIT") existing policy and now directly relevant in light of the 2026 amendments to the FEMA (NDI) Rules – means that the downstream investment activity of the AIF must be monitored at the portfolio company level to ensure that sectoral caps and conditions applicable to the relevant FDI route are not breached. This remains one of the most practically complex aspects of managing an India-focused onshore AIF with a predominantly foreign investor base.

Option 2: The offshore fund with an onshore investment manager

The offshore fund structure – typically a Cayman Islands exempted limited partnership or a Mauritius Global Business Company – allows fund managers to pool non-Indian investor capital outside India, while retaining an Indian investment management entity.³ The offshore fund invests into India through the Foreign Portfolio Investor ("FPI") route, the Foreign Direct Investment ("FDI") route, or through an onshore AIF acting as a downstream pooling vehicle.

This structure has been the dominant architecture for large global alternative fund managers seeking Indian exposure. Its primary advantages are the availability of a familiar legal structure for international institutional investors, the use of treaty-based tax positions (particularly through Mauritius, though materially affected by the 2016 protocol with India), and the separation of the fund vehicle from Indian regulatory oversight at the entity level.

Since 2020, however, the offshore structure has faced increased regulatory scrutiny under Press Note 3 of 2020 ("PN3"), which requires prior government approval for FDI from entities in countries sharing a land border with India – specifically China, Pakistan, Bangladesh, Nepal, Bhutan, and Myanmar.³ The 2026 amendments to FEMA (NDI) Rules have introduced further procedural requirements around beneficial ownership verification, which now apply upstream to the offshore fund vehicle.

Option 3: The hybrid structure – offshore feeder and onshore AIF

The hybrid structure pairs an offshore feeder fund (capturing international investor capital) with a domestic AIF (pooling Indian investor capital and providing the onshore investment vehicle for regulatory purposes). The offshore feeder accesses India through the FDI route into the onshore AIF, with the onshore AIF making direct portfolio investments. This architecture allows the fund to comply with AIF marketing restrictions (which prohibit the use of non-SEBI-registered intermediaries for domestic fundraising) while simultaneously accessing the international investor base through legally permissible offshore channels.⁴

The hybrid structure is operationally more complex and involves dual compliance obligations – at the offshore fund level (under the law of the domicile jurisdiction) and at the onshore AIF level (under the AIF Regulations). Managers operating this structure must maintain clear documentary separation between the two vehicles and ensure that management and control of both entities does not become conflated in a manner that triggers additional Indian regulatory obligations.

FEMA compliance: The cross-border capital framework

All three structures must contend with FEMA and the regulations made thereunder, which govern the conditions on which non-Indian investors may bring capital into India and on which returns may be repatriated. The core provisions relevant to fund structures are:

NDI Rules (FDI regime): Govern non-debt investments by persons resident outside India into Indian entities. Investments through the automatic route are permitted for most sectors up to applicable sectoral limits without prior government approval; investments through the approval route require prior consent from the Foreign Investment Facilitation Portal ("FIFP").
FEMA (Transfer or Issue of Security by a Person Resident Outside India) Regulations: Govern the mechanics of investment, including reporting requirements to the Reserve Bank of India ("RBI") through the FIRMS portal on receipt of foreign investment.
Pricing guidelines: All issuances of shares to non-residents on a non-repatriable basis must be at or above the fair market value determined under the discounted cash flow method or comparable company valuation, ensuring that no value is transferred to the foreign investor on terms that circumvent pricing norms.

The 2026 amendments to the FEMA (NDI) Rules are particularly relevant for fund structures with multi-layered ownership. The amendments introduce a standard operating procedure ("SOP") for investment approvals under PN3, establishing timelines and documentation requirements for the prior approval process – a development that reduces procedural uncertainty for funds with investors from land-bordering jurisdictions, even if it does not alter the substantive approval requirement.⁵

FATF and AML compliance: A growing compliance dimension

India's mutual evaluation by the FATF – completed in 2024 – resulted in India being placed in the regular follow-up category, reflecting overall compliance with most FATF recommendations. The evaluation noted India's robust KYC framework but identified gaps in the beneficial ownership verification regime for legal entities and legal arrangements, including investment funds.⁶

For fund managers, the practical consequence of the FATF evaluation is a heightened expectation from institutional investors – particularly global pension funds and sovereign wealth funds – around the robustness of the AML/KYC framework at both the fund and investment manager level. Incoming institutional due diligence questionnaires now routinely require detailed disclosure of the fund manager's AML policies, its beneficial ownership verification procedures, and the identity of the fund's compliance officer.

The AIF Regulations require each AIF to appoint a compliance officer and to implement a Prevention of Money Laundering Act, 2002 ("PMLA") compliant anti-money laundering programme. The 2026 Master Circular reinforces these obligations and confirms that they apply equally to offshore feeder vehicles that invest into India through onshore AIFs, to the extent that the offshore vehicle is managed or controlled by an Indian entity.

Tax considerations and structural incentives

The Mauritius route – historically the most common offshore structuring choice for India-focused funds – has undergone material change since the India-Mauritius Double Taxation Avoidance Agreement was amended by the Protocol of 10 May 2016, which phased out capital gains tax exemptions on shares acquired after 1 April 2017.⁷ Investors in Mauritius-domiciled funds investing into listed Indian equities acquired post-2017 are now subject to Indian capital gains tax at the applicable rate.

For funds investing primarily in unlisted equities (the majority of private equity and venture capital funds), the capital gains position is determined by the specific facts of each investment and the applicable treaty provisions. Managers must obtain specific tax advice on each investment to confirm the applicable treatment, particularly where the investee company holds assets that are predominantly derived from Indian real estate, which may trigger the immovable property look through provisions of applicable tax treaties.

The gift deed structure – under which an Indian investor makes a gift of AIF units to a non-resident family member – has been used in some structures to achieve tax efficiency, but SEBI has been increasingly alert to structures that use transfers of AIF units to achieve regulatory or tax outcomes that would not otherwise be available, and managers should treat any such structure with appropriate caution.

Implications for fund managers

Managers considering a new India-focused fund raise should assess the following key parameters at the outset:

Investor base composition: The dominant domicile of target investors will materially influence the optimal structure. A predominantly US or European institutional investor base may favour the offshore-feeder-plus-onshore-AIF architecture; a predominantly domestic Indian investor base may weigh in favour of a straightforward onshore AIF.
Sectoral mandate and FDI sensitivity: Funds with a mandate to invest in sectors subject to FDI caps – financial services, broadcasting, defence – must map the downstream investment constraints before settling on a structure, as the treatment of indirect foreign investment through the AIF will determine the permissible aggregate exposure.
Timeline and regulatory risk: The GARUDA framework and the PPM fast-track mechanism (discussed in the companion article on the 2026 Master Circular) reduce the timeline for onshore AIF registration materially. However, where the fund structure involves offshore feeder vehicles that require prior government approval under PN3, the overall timeline to first close must account for the FIFP approval process.
Compliance infrastructure: Both the onshore AIF and the offshore fund manager require compliance infrastructure commensurate with the regulatory obligations imposed in each jurisdiction. Fund managers should not underestimate the ongoing cost of maintaining dual compliance environments.

Conclusion

Offshore fund structures for India-focused capital have never been a simple compliance exercise, and the regulatory environment in 2026 is more layered than at any point in the past decade. SEBI's consolidation of the AIF framework, the 2026 amendments to FEMA, and India's heightened FATF standing collectively create a compliance landscape that rewards careful structuring at the outset. Managers who engage legal, tax, and regulatory counsel early in the fund design process will be materially better placed to execute a compliant and commercially efficient fundraise.

Endnotes

¹ SEBI (Alternative Investment Funds) Regulations 2012, reg 2(1)(b).

² Foreign Exchange Management (Non-Debt Instruments) Rules 2019 (Ministry of Finance, Government of India, SO 3732(E), 17 October 2019).

³ Department for Promotion of Industry and Internal Trade, Press Note 3 of 2020 (Ministry of Commerce and Industry, Government of India, 2020).

⁴ SEBI (Alternative Investment Funds) Regulations 2012, reg 10.

⁵ Neeraj Vyas, 'India's 2026 FDI Regulatory Overhaul: A Critical Legal Analysis of FEMA (NDI) Amendments, and the SOP Framework' (Mondaq, 18 May 2026).

⁶ Financial Action Task Force, Mutual Evaluation Report: India (FATF, 2024).

⁷ Protocol Amending the Convention Between the Government of the Republic of India and the Government of Mauritius for the Avoidance of Double Taxation (signed 10 May 2016, entered into force 19 July 2016).

Silverlake Insights

Offshore Fund structures for India