National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Relief granted from requirements contained in paragraphs 2.5(2)(a), (b) and (c) of National Instrument NI 81-102 Investment Funds to permit mutual funds to invest up to 10% of each net asset value in securities of EU qualified mutual funds governed by the laws of Ireland that are managed by an affiliated manager -- Each underlying mutual fund invests substantially all of its assets in a mutual fund formed in Mauritius -- Relief subject to certain conditions -- Top funds are required to divest holdings of underlying funds if laws applicable to underlying funds cease to be materially consistent with NI 81-102.
Applicable Legislative Provisions
National Instrument 81-102 Investment Funds, ss. 2.5(2)(a), (b) and (c), 19.1.
September 10, 2015
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF SUN LIFE GLOBAL INVESTMENTS (CANADA) INC. (the Filer) AND IN THE MATTER OF SUN LIFE MANAGED CONSERVATIVE PORTFOLIO, SUN LIFE MANAGED MODERATE PORTFOLIO, SUN LIFE MANAGED BALANCED PORTFOLIO, SUN LIFE MANAGED BALANCED GROWTH PORTFOLIO, SUN LIFE MANAGED GROWTH PORTFOLIO, SUN LIFE MANAGED INCOME PORTFOLIO AND SUN LIFE MANAGED ENHANCED INCOME PORTFOLIO (the Funds)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Funds and such other funds managed by the Filer that have investment objectives and strategies that contemplate exposure to Indian securities (each, a Top Fund and collectively, the Top Funds) for a decision under the securities legislation of the Jurisdiction (the Legislation) exempting the Top Funds from paragraphs 2.5(2)(a), 2.5(2)(b) and 2.5(2)(c) of National Instrument 81-102 Investment Funds (NI 81-102) to permit each Top Fund to invest up to 10 percent of its net assets, taken at market value at the time of the investment, in aggregate, in securities of a sub-fund of ABSL Umbrella UCITS Fund PLC (the ABSL UCITS) that has adopted an investment policy of obtaining exposure to the Indian market (each, an Underlying Fund and collectively, the Underlying Funds) (the Exemption Sought).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in each of the other provinces and territories of Canada (together with Ontario, the Jurisdictions).
Terms defined in MI 11-102 and National Instrument 14-101 Definitions have the same meaning if used in this decision, unless otherwise defined.
Birla Sun Life means Birla Sun Life Asset Management Company Limited.
Central Bank means the Central Bank of Ireland or any successor regulator thereto.
EU means the European Union, whose member states currently include Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.
EU Directives means EU Council Directive 2009/65/EC of 13 July 2009 on the Coordination of Laws, Regulations and Administrative Provisions relating to UCITS, as amended, as implemented into Irish legislation by the Regulations.
FPI means foreign portfolio investor.
Investment Manager means Aditya Birla Sun Life Asset Management Pte. Ltd.
KIIDs means key investor information documents.
Mauritius Subsidiaries means India Frontline Equity and India Quality Advantage, each of which is a Mauritius private company and any other such company through which an Underlying Fund obtains exposure to the Indian market.
Regulations means the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended, and every regulation or other provision of law modifying or extending them.
SEBI means the Securities and Exchange Board of India.
Top Funds means Sun Life Managed Conservative Portfolio, Sun Life Managed Moderate Portfolio, Sun Life Managed Balanced Portfolio, Sun Life Managed Balanced Growth Portfolio, Sun Life Managed Growth Portfolio, Sun Life Managed Income Portfolio and Sun Life Managed Enhanced Income Portfolio, and other mutual funds managed by the Filer from time to time.
UCITS means an undertaking for collective investment in transferable securities, as more fully defined in the Regulations, and refers to an investment fund authorized by the Central Bank pursuant to the Regulations and which is suitable for distribution throughout the EU.
UCITS Notices means the series of UCITS notices, memorandums, guidelines and letters issued by the Central Bank.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of Canada with its head office in Toronto, Ontario.
2. The Filer is registered as: (i) an investment fund manager in Ontario, Quebec and Newfoundland and Labrador; (ii) a portfolio manager in Ontario; (iii) a mutual fund dealer in each of the Jurisdictions; and (iv) a commodity trading manager in Ontario.
3. The Filer acts or will act as the manager and portfolio manager of the Top Funds.
4. Neither the Filer nor the Funds are in default of securities legislation in any of the Jurisdictions.
5. Each of the Top Funds is or will be an open-end mutual fund trust established under the laws of the province of Ontario or a province or territory of Canada or a class of a corporation established under the laws of Canada or a province or territory of Canada.
6. Each of the Top Funds is or will be a reporting issuer in one or more of the Jurisdictions and subject to NI 81-102, subject to any relief therefrom granted by applicable securities regulatory authorities.
7. The securities of the Top Funds are qualified for distribution pursuant to a simplified prospectus, annual information form and Fund Facts that were prepared and filed in accordance with National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101).
8. The investment objectives of the Top Funds include or will include, to various degrees, seeking capital appreciation and income through investments in equity and fixed income securities (or in mutual funds and/or ETFs that invest in such equity or fixed income securities) across various asset classes, industry sectors, investment styles and geography. The Indian market includes many quality issuers that the Filer, as portfolio manager of the Top Funds, has identified as investments that provide such diversification and exposure opportunities.
9. Some or all of the Top Funds use or will use a "fund on fund" structure in allocating their assets among underlying funds in order to diversify by asset class, industry sector, investment style, and geography with the objective of matching certain investment goals and risk tolerance levels. The investment strategies of the Top Funds contemplate or will contemplate that each may invest a portion of its assets in foreign securities, which the Top Funds do or will do by investing in underlying funds that include in their mandate the ability to seek foreign market exposures.
10. To achieve the Top Funds' investment objectives, the Filer has determined that it would be in the best interests of each Top Fund if it had the ability to invest up to 10% of its net asset value in securities of the Underlying Funds, in order to gain exposure to the Indian market, instead of investing directly in Indian securities.
The ABSL UCITS and the Underlying Funds
11. The ABSL UCITS is an open-ended investment company governed by the laws of Ireland and is regulated by the Central Bank. The ABSL UCITS complies with the EU Directives.
12. Securities of the ABSL UCITS, including securities of the Underlying Funds, are distributed in certain European countries pursuant to the EU Directives. The ABSL UCITS has issued a prospectus which contains disclosure pertaining to it and the Underlying Funds.
13. The promoter of the ABSL UCITS is Birla Sun Life, a joint venture between Aditya Birla Group and Sun Life (India) AMC Investments Inc. Aditya Birla Group owns 51%, and Sun Life (India) AMC Investments Inc. owns 49%, of Birla Sun Life, respectively. Birla Sun Life is an associate of the Filer and Sun Life (India) AMC Investments Inc. is an affiliate of the Filer. Each of them is part of the Sun Life Financial group of companies.
14. The Investment Manager is a Singapore limited company and a wholly owned subsidiary of Birla Sun Life. The Investment Manager acts as investment manager of the Underlying Funds and directs the investments of the Mauritius Subsidiaries. The Investment Manager is a member of the Sun Life Financial group of companies and is an associate of the Filer. The Investment Manager is regulated by the Monetary Authority of Singapore and holds a Capital Markets Services license for fund management.
15. The investment objective of the ABSL UCITS is to invest in accordance with the investment objectives and policies of the various sub-funds, including the Underlying Funds, that are operated under the "umbrella" of the ABSL UCITS. Each sub-fund, including the Underlying Funds, will invest in accordance with the investment objectives and policies set out in separate supplements to the ABSL UCITS' prospectus.
16. Currently, the only sub-funds of the ABSL UCITS are the Underlying Funds, being India Frontline Equity Fund and India Quality Advantage Fund.
17. The investment objective of India Frontline Equity Fund is to generate long-term growth of capital. The investment strategies of this Underlying Fund disclose that it seeks to invest its assets in India through investments in its respective Mauritius Subsidiary, whose policy is in turn to invest in equities and equity-related instruments issued by companies that are incorporated in India, are owned by Indian promoters or which have significant operations in India.
18. The investment objective of India Quality Advantage Fund is to generate superior risk-adjusted returns. The investment strategies of this Underlying Fund disclose that it seeks to invest its assets in India through investment in its respective Mauritius Subsidiary, whose policy is in turn to invest in equities and equity-related instruments that exhibit consistent high-quality growth and which are issued by companies that are incorporated in India or are owned by Indian promoters or which have significant operations in India.
19. Each Underlying Fund and its respective Mauritius Subsidiary will have substantially similar names.
20. The ABSL UCITS and its sub-funds, including the Underlying Funds, are subject to investment restrictions and practices under the laws of the European Union that are applicable to mutual funds that are sold to the general public and that are consistent with similar restrictions and practices applicable to mutual funds under NI 81-102. The Underlying Funds are not generally considered to be hedge funds.
21. The Mauritius Subsidiaries are, or will be, incorporated under the laws of, and are resident in, Mauritius. India Frontline Equity (registration number 121982 C1/GBL) and India Quality Advantage (registration number 121981 C1/GBL) were both incorporated on April 1, 2014.
22. The Director General of the Mauritius Revenue Authority issued a certificate of Mauritian tax residence under the Mauritius -- India Double Taxation Agreement to India Frontline Equity on April 23, 2015 and to India Quality Advantage on April 22, 2015.
23. The assets of the Mauritius Subsidiaries are or will be invested in American Depositary Receipts, Global Depositary Receipts and in listed and unlisted Indian securities, including non-publicly offered debt securities. Listed Indian securities may be listed on any of the recognized Indian stock exchanges, including the National Stock Exchange.
24. Each of the Mauritius Subsidiaries (a) has or will have a primary purpose to invest money provided by its securityholders; and (b) has or will have securities that entitle its securityholders to receive on demand, or within a specified period after demand, an amount computed by reference to the value of a proportionate interest in net assets of the respective Mauritius Subsidiary. Accordingly, each of the Mauritius Subsidiaries is or will be a mutual fund within the meaning of Canadian securities legislation and therefore considered to be an investment fund in Canada.
25. At the time of this decision, each Underlying Fund holds substantially all of its net assets in securities of its relevant Mauritius Subsidiary. In the future, each Underlying Fund may invest directly in the Indian market, instead of investing in securities of its relevant Mauritius Subsidiary to obtain exposure to the Indian market.
26. Section 2.5(2) of NI 81-102 would permit the Top Funds to invest in the Underlying Funds but for the fact that the Underlying Funds (i) are not subject to NI 81-102, (ii) do not distribute their securities in Canada under a simplified prospectus in accordance with NI 81-101, (iii) do not invest more than 10% of their net asset value in securities of other investment funds and (iv) are not reporting issuers in any province or territory of Canada.
27. The Filer believes that it is in the best interests of the Top Funds to be permitted to invest up to 10% of their net assets in the Underlying Funds as such investment will allow the Top Funds to gain exposure to the Indian market in an economically viable way. Investing in the Underlying Funds would enable the Top Funds to better capitalize on global economic trends and respond to market conditions.
28. In particular, the Underlying Funds provide the Top Funds with exposure to Indian securities. Investments into India by an entity located outside of India are generally restricted to foreign institutional investors who are licensed under the foreign portfolio investment regime, which is regulated by SEBI and the Reserve Bank of India. FPI status (formerly, Foreign Institutional Investor status) is only obtained through a lengthy administrative review process. The Mauritius Subsidiaries are each registered and certified as Category III FPIs. Category III FPIs include endowments, charitable societies, charitable trusts, foundations, corporate bodies, trusts, individuals and family offices.
29. There are significant tax and investment restrictions imposed by Indian regulatory authorities applicable to foreign investors like a Canadian mutual fund. For FPIs intending to trade in Indian securities, Mauritius provides a minimal cost alternative when compared to other jurisdictions. Investing in Indian securities through Mauritius is favourable as compared to directly investing in India from jurisdictions such as Canada, since a Mauritius domiciled fund or company can avail itself of the benefits of the Double Taxation Avoidance Agreement between India and Mauritius. According to article 13 of the India-Mauritius Tax Treaty, capital gains earned by a Mauritian resident on the transfer of Indian securities are taxable only in Mauritius. Further, Mauritius does not tax capital gains under its domestic tax laws. Hence, capital gains earned by a Mauritius resident (such as the Mauritius Subsidiaries) on the sale of shares of an Indian company would not be liable to tax either in India or in Mauritius.
30. Due to these considerable cost savings, and in order to achieve their respective investment objectives, the Top Funds seek to obtain exposure to Indian securities through investing in the Underlying Funds, each of which in turn invests in its relevant Mauritius Subsidiary. The Mauritius Subsidiaries qualify as FPIs.
31. The investment strategies of each Top Fund, which contemplate or will contemplate investment in securities of underlying funds that invest in American Depositary Receipts, Global Depositary Receipts and foreign securities, permit or will permit the allocation of assets to Indian securities. As economic conditions change, the Top Funds may reallocate assets, including on the basis of industrial sector or geographic region. Each Top Fund has or will have investment objectives consistent with permitting such Top Fund to gain exposure to the Indian market.
32. Each Mauritius Subsidiary was or will be created to facilitate its respective Underlying Fund's investments in Indian securities. Such passive fund structures are efficient and commonly used structures for facilitating investments into India. For this reason, the passive two-tiered investment structure of each Underlying Fund should be treated collectively as a single mutual fund for purposes of the Top Funds' proposed investment in the Underlying Funds as described herein.
33. The Mauritius Subsidiaries were or will be created to serve solely as investment conduits for the Underlying Funds for the purposes of obtaining exposure to India's capital market on a more tax efficient basis. By investing in the Mauritius Subsidiaries, withholding tax on short-term capital gains and long-term capital gains are effectively lowered to nil for the Underlying Funds. Capital gains tax rates in India vary from 15% to 30% depending upon the nature of the securities and period of holding.
34. The Top Funds will otherwise comply fully with section 2.5 of NI 81-102 in their investment in the Underlying Funds and will provide all disclosure mandated for mutual funds investing in other mutual funds. In particular, additional disclosure will be made in the simplified prospectus of each Top Fund that the Underlying Funds are not subject to Canadian securities regulation.
35. The ABSL UCITS qualifies as a UCITS and its securities are distributed in accordance with the Regulations, which subject the Underlying Funds to the following investment restrictions and practices that are substantially similar to NI 81-102:
(a) The ABSL UCITS is subject to a robust risk management framework through the prescribed UCITS Notices on governance, risk, regulation of service providers and the safekeeping of assets.
(b) Each Underlying Fund is subject to investment restrictions designed to limit its holdings of illiquid securities to 10% or less of its net asset value.
(c) Each Underlying Fund does not intend to use derivatives but if it commenced the use of derivatives, any such use:
(1) would be subject to the oversight of, and require prior approval from, the Central Bank;
(2) would be subject to restrictions concerning the use of derivatives as set out in the UCITS Notices and the Regulations, including the types of derivatives in which it may transact, limits on counterparty risk and limits on increases to overall market risk resulting from the use of derivatives; and
(3) would need to design, implement and document a comprehensive risk management process in order to meet the key requirement of investor protection, as set out in the UCITS Notices and the Regulations. The risk management process would enable it to accurately manage, monitor and measure the risks attached to derivative positions.
(d) The ABSL UCITS is required to prepare a prospectus that discloses material facts about the Underlying Funds and that is similar to the disclosure required to be included in a simplified prospectus of a Top Fund pursuant to NI 81-101.
(e) The ABSL UCITS prepares KIIDs for the Underlying Funds which provide disclosure that is substantially similar to that required to be included in a fund facts document prepared under NI 81-101. The ABSL UCITS is obligated to update its KIIDs at least annually.
(f) The ABSL UCITS is subject to continuous disclosure obligations which are similar to the disclosure obligations under NI 81-106.
(g) The ABSL UCITS is required to update the prospectus and the supplements to the prospectus to reflect any information changes therein. All updates must be submitted to the Central Bank in advance for review and prior approval.
(h) Any change in the investment objective or material change to the investment policy of an Underlying Fund will only be effected following the written approval of all shareholders of the Underlying Fund or a resolution of a majority of the voting shareholders of that Underlying Fund at a general meeting.
(i) The Investment Manager is subject to an Investment Management Agreement which sets out a duty of care and a standard of care requiring the Investment Manager to act in the best interest of shareholders and in the best interest of the assets it manages.
(j) All activities of the Investment Manager must be conducted at all times in accordance with the Regulations, the UCITS Notices and the investment policy of the Underlying Funds and are at all times subject to the supervision of the board of directors of the ABSL UCITS.
(k) The Investment Manager is required to prepare quarterly investment management reports on behalf of the ABSL UCITS and the Underlying Funds.
(l) The Investment Manager is (a) registered with SEBI as a Foreign Institutional Investor under SEBI (Foreign Institutional Investors) Regulations, 1995, bearing registration number INSGFD262611 dated June 7, 2011 under the category of an investment manager, and (b) also registered with the Monetary Authority of Singapore pursuant to the Securities and Futures Act as a capital markets services licence holder licensed to conduct the regulated activity of fund management. The Investment Manager has also been approved by the Central Bank to act as an investment manager to Irish authorized collective investment schemes.
(m) Ernst & Young LLP, as auditors of the ABSL UCITS, are required to prepare an audited set of accounts for the ABSL UCITS at least annually.
36. The Filer believes that, without the Exemption Sought, the Top Funds would not have the ability to access the Indian market in a cost effective manner.
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that the Exemption Sought is granted, provided that:
(a) The ABSL UCITS qualifies as a UCITS and the securities of the Underlying Funds are distributed in accordance with the EU Directives, which subject the Underlying Funds to investment restrictions and practices that are substantially similar to those that govern the Top Funds;
(b) The investment of the Top Funds in the Underlying Funds otherwise complies with section 2.5 of NI 81-102 and the Top Funds will provide the disclosure required for fund-of-fund investments in NI 81-101. Specifically, the investment by the Top Funds in the Underlying Funds will be disclosed in the simplified prospectus of the Top Funds;
(c) A Top Fund will not purchase securities of an Underlying Fund if, immediately after the purchase, more than 10 per cent of its net asset value would consist of investments in the Underlying Funds;
(d) During any period of time when an Underlying Fund obtains exposure to the Indian market through investing in a Mauritius Subsidiary, that Underlying Fund invests all or substantially all of its assets in securities of its respective Mauritius Subsidiary; and
(e) The Top Funds dispose of the securities of an Underlying Fund, in an orderly and prudent manner, if that Underlying Fund is no longer subject to investment restrictions and practices that are substantially similar to the investment restrictions and practices contained in Part 2 of NI 81-102.
(f) The Top Funds dispose of the securities of an Underlying Fund, in an orderly and prudent manner, if the investments of the Mauritius Subsidiary in which the Underlying Fund invests would be prohibited investments for the Underlying Fund to make directly.