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Overview of Investment Company

An investment company generally is an entity that pools investors' funds to provide them with the advantages of professional investment management and diversification of ownership in the securities markets. An investment company sells its capital shares to third-parties and invests the net proceeds in a broad range of stocks, bonds, government obligations or other securities, intended to meet the fund's stated investment objectives which include investing for current income, capital appreciation, or both. Its main fundamental characteristic is return or benefits from investment There is an act to regulate Investment Company in USA called 'Investment Company act 1940', but in India, there is no such kind of separate act for investment company. It's mostly govern by company act 2013 and some others banking regulation act in India.

Investment companies must be a separate legal entity and may be in the (legal) form of regular corporations, partnerships, limited liability companies, Incorporated Cell Companies ("ICCs") and may include hedge fund vehicles, special purpose entities ('SPEs') and structured investment vehicles ('SIVs').

An investment company is a separate legal entity whose business purpose and activity comprise all of the following;

  1. Investing in multiple substantive investments,
  2. Investing for current income, capital appreciation, or both
  3. Investing with investment plans that include exit strategies.

Accordingly, investment companies do not either:

a. Acquire or hold investments for strategic operating purposes or 

b. Obtain benefits (other than current income, capital appreciation, or both) from investees that are unavailable to non-investor entities that are not related parties to the investee.

Typical Characteristics

More than one investment: An Investment company hold multiple investment at same time to diversify risk and maximize its return by creating a strong portfolio consist of security of other entity but also may include commodity, derivative instrument, real estate property, and other form of investment . An investment company may hold investments directly or indirectly through another investment company.

More than one investor: An investment company typically pools funds from multiple investors and provides them with investment management services, including access to investment opportunities unobtainable by individual investors.

Having a single investor does not necessarily preclude an entity from being an investment company. There may be times when an investment company has a single investor, such as in any of the following examples:

  1. It is in its initial offering period, which has not expired, and it is actively identifying suitable investors.
  2. It is actively identifying investors but has not yet identified suitable investors to replace those that have redeemed their ownership interests.
  3. It is in the process of liquidation.

An investment company may be formed by, or for, a single investor that represents or supports the interests of a wider group of investors (for example, a pension fund, government investment fund, or endowment fund). An investment company with a single investor also may be formed (for legal, regulatory, tax, or other business reasons) investing along-side another investment company that has multiple investors. Investment companies formed in conjunction with each other are not required to be formed at the same time. Having a single investor for those reasons does not preclude an entity from being an investment company.

Ownership interests: Ownership in the investment company is represented by units of ownership, such as shares of stock or partnership interests, to which proportionate shares of net assets can be attributed. As a result, that unit of ownership is usually expressed as net asset value of the unit.

Fair value management: Determining whether an entity manages its investments on fair value basis does not depend on the nature of its investments but, rather, includes an evaluation of whether fair value is a key component of:

  • Evaluating the performance of the entity's investments and making investment decisions
  • Transactions (i.e. subscriptions and redemptions) with its investors
  • The calculation of asset-based fees

Financial accounting and reporting at investment company entity level

Generally Investment companies should report their investment assets at fair value in their financial statements in accordance with the recognition and measurement principles under IFRS except in case of special requirement of some other GAAP.

An investment company is prohibited from using the equity method of accounting for non-controlling ownership interests in other investment companies and instead require those interests to be measure at fair value under USGAAP.

Investments in foreign securities should be reported at fair value by converting their foreign currency denominated value into functional currency using current exchange rates.

Generally investment companies are not required to consolidate investees. The investees are considered inventory for achieving the investment objective of the entity, which is to invest in appreciable assets and distribute those returns to investors. This applies irrespective of whether the investee is an investment company, a variable interest entity or a voting interest entity.


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