Onshorisation as the Gateway to APAC's Fastest-Growing Market

The global asset management landscape is witnessing a notable "onshorisation" trend, and this shift is particularly pronounced for Asia-Pacific (APAC) funds looking to deepen their engagement with the high-growth Indian market. India's steady economic expansion and burgeoning middle class have made it a critical destination for foreign capital. Still, the shift from traditional offshore fund domiciles (such as the Cayman Islands) to setting up investment and management operations directly in India is being driven primarily by the country's evolving tax and regulatory environment.

The Push–Pull Dynamics of Onshorisation

The accelerating shift toward onshorisation reflects a combination of global regulatory pressures and India’s evolving tax and regulatory framework. On the worldwide front, substance requirements, led by the OECD’s Base Erosion and Profit Shifting (BEPS) initiative, have made traditional offshore fund structures more complex and costly to maintain. Jurisdictions once considered tax-neutral now demand demonstrable economic substance, increasing compliance burdens and heightening scrutiny from tax authorities worldwide. As a result, fund managers are increasingly wary of litigation risks and the potential for adverse tax outcomes if offshore vehicles are perceived as lacking a genuine operational presence. This evolving landscape has also shaped investor expectations, as sovereign wealth funds, pension funds, and other institutional investors increasingly prefer structures that exhibit transparency, regulatory robustness, and clarity of tax compliance.

Complementing these global pressures, India’s regulatory and tax reforms have created a strong domestic pull toward onshorisation. At the centre of this shift is Section 9A of the Income-tax Act, 1961, which provides a safe-harbour framework enabling eligible investment funds to undertake fund management activities from India without triggering Indian tax residency or Permanent Establishment exposure, provided the prescribed conditions are met. This regime has materially de-risked onshore operations and given foreign investors greater certainty. Further, the rationalisation of remuneration norms by the Central Board of Direct Taxes (CBDT) has introduced clear minimum thresholds for eligible fund managers, reducing potential transfer pricing disputes and making India a more predictable and cost-efficient jurisdiction for fund management activities.

Adaptations in APAC Fund Structures

In response to the evolving regulatory environment, APAC fund managers are recalibrating their structures to better align with Indian compliance frameworks while maintaining operational flexibility. A prominent trend is the establishment of Category I and Category II Alternative Investment Funds (AIFs) in India, enabling managers to move beyond sole reliance on offshore vehicles. These structures offer significant tax efficiency, as most income streams flow through on a pass-through basis and are taxed directly in investors' hands, thereby reducing the risk of multilayered taxation. Moreover, the credibility of SEBI-regulated AIFs provides institutional investors with greater confidence in governance, oversight, and regulatory alignment.

For managers who prefer to retain an offshore domicile while overseeing Indian asset exposure from India, strategic optimisation of Section 9A compliance has become critical. This includes strict adherence to conditions relating to investment strategy and diversification—ensuring the fund does not predominantly invest in Indian assets—along with meeting corpus thresholds and maintaining a sufficiently broad non-resident investor base. Equally important is the accurate determination and documentation of fund manager remuneration, whether based on prescribed minima or arm’s length principles, to meet transfer pricing standards and uphold the integrity of the safe harbour regime.

The onshoring of APAC fund structures into India is an undeniable trend, driven by global demand for substance and by specific, pragmatic incentives provided by the Indian government. The primary mechanism of adaptation involves leveraging the Section 9A safe harbour for management and establishing local AIFs for investment, thereby balancing global compliance needs with access to the massive opportunities within the Indian economy.