AIF Registration

What are the criteria for an alternative investment fund Registration?

What are the criteria for an alternative investment fund Registration

An alternative investment fund, or AIF, is a privately pooled investment vehicle that invests in many types of start-ups and businesses as investment objectives. Before launching an Alternative Investment Fund (AIF), the applicant or candidate must register with SEBI or the Securities and Exchange Board of India. 

SEBI (Alternative Investment Fund) laws, 2012 are a collection of laws launched by the Securities and Exchange Board of India in 2012 to regulate joint investment funds in India, such as private equity, real estate, and hedge funds.

Such regulations were put in place to bring unregistered monies under the jurisdiction of the law. Alternative Investment Funds are defined in this law as funds constituted in the form of an entity, trust, LLP (Limited Liability Partnership), or body corporate. The following entities would be subject to the requirements governing Alternative Investment Fund Registration.

  1. A privately joint investment vehicle collects funds from sophisticated investors by the established investment policy for the advantage of the investor, whether foreign or Indian. 
  2. It is not governed by the SEBI (Mutual Funds) Regulations, 1996 or any other SEBI regulations governing all aspects of fund management. 

Different Categories of Alternative Investment Funds 

The following are the various types of Alternative Investment Funds:

Category I

These conventional investment funds invest in start-ups and are subsidised by the Securities and Exchange Board of India, the government, or other governing bodies. This comprises social venture funds, small and SME funds, and infrastructure funds.

Category II

Funds such as private equity funds, debt funds, and funds of funds are permitted to be invested in any business and investment options anywhere, but they are not permitted to be borrowed for any reason other than everyday operations. This includes various funds such as debt.

Category III

This category also includes funds that make short-term investments and then sell them as hedge funds.

Requirements under the Regulations

Below are some of the requirement that has to be followed in AIF registration: 

SEBI certificate of registration   

Existing funds that meet the definition of Alternative Investment Fund but are not registered with the Board may continue to operate for 6 months after the Regulations go into effect.  

Existing schemes will be allowed to complete their agreed-upon duration. However, such funds will not be able to raise any new funds other than promises previously made until registration is granted.  

Criteria for Eligibility:

The eligibility criteria to register for an alternative investment fund are:

  1. A provision in the memorandum of association of a company, the Trust Deed of a trust, or the Partnership Deed of a limited liability partnership to carry on the alternative investment funds operation.
  2. Prohibition against inviting the public to subscribe to its securities. 
  3. The Charter instruments must be registered in accordance with the applicable Acts. 
  4. The candidate, Sponsor, and Manager are all qualified individuals. Managers and sponsors must have sufficient infrastructure and people. 
  5. The fund or scheme’s investment purpose, targeted investors, intended corpus, investing style or strategy, and projected duration must all be declared upfront.

Entities that are not eligible for registration and to Raise Funds:

According to SEBI criteria, the following entities are not allowed to be registered as AIFs:

  1. Employee benefits are the main goals of a Trustor Gratuity registered.
  2. Any family trust is established with the primary objective of delivering advantages to family members.
  3. The Securities and Exchange Board of India has received registration for the ESOP trust (SEBI).

Procedure for Registration: 

The procedure to register the alternative investment funds is as follows:

  1. Submit an application to SEBI in Form A, along with all required documentation. 
  2. SEBI will respond within 21 working days of receiving the application. 
  3. To aid in speeding up the registration procedure, an applicant should be aware of the eligibility criteria and other requirements outlined in the SEBI (Alternative Investment Fund) Regulations, 2012.
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In the covering letter, the applicant should state whether or not:  

  • Is it registered with SEBI as a Venture Capital Fund, and if so, he has to mention the details 
  • If he carried out any AIF-related activities prior to the application, then he has to mention the details.
    • Applicant must send Form A, duly signed and stamped, together with a bank draft for Rs. 1,00,000/- payable to “The Securities and Exchange Board of India” in Mumbai. 
    • The applicant needs to submit an online application to the instructions issued by SEBI from time to time.

Issuance of Certificate of Registration  

According to the regulation, the SEBI issues the certificate of registration in the following manner: 

  1. When evaluating the award of registration, SEBI shall take into account the requirements provided in the Regulations. If SEBI is satisfied that the applicant meets the standards outlined in the Regulations, it will approve the application and notify the applicant.  
  2. Upon obtaining approval from SEBI, the applicant must pay a registration fee of Rs. 5,00,000 (if the applicant is not registered with SEBI as a Venture Capital Fund) or re-registration fees of Rs. 1,00,000 (if the applicant is registered with SEBI as a Venture Capital Fund) by bank draft made payable to “The Securities and Exchange Board of India”. 
  3. SEBI will provide the applicant with a certificate of registration as an Alternative Investment Fund upon receipt of registration and re-registration fees. 

Criteria for Alternate Investment Fund Registration 

The following are the important criteria for registering an alternative investment fund: 

Trust Deed

The original trust deed must be included in the application for alternative investment fund registration if the Alternative Investment Fund was founded as a society or trust. 

Any Entity

Any organisation that intends to register as an alternative investment fund must ensure that neither the Memorandum of Association nor the Article of Association prohibits the public from making investment offers in the organisation.

Partnership Agreement

To complete the Alternative Investment Fund Registration process, the Alternative Investment Fund must submit all original documentation about the deed if it is registered under the LLP (Limited Liability Partnership) Act, 2008.

Investors Must Have a Minimum Amount

For the registration of an Alternative Investment Fund, there have to be the least amount of investors. However, an alternative investment fund shouldn’t have more than 1000 investors.

Residential Status

Anybody can invest in any alternative investment fund, regardless of their nationality—foreigners, NRIs, or Indians.

Important Points in AIF Registration 

The following are important points to consider while registering alternative investment funds:

  1. An AIF may launch funds or schemes after filing a Private Placement Memorandum (PPM) with SEBI.
  2. The PPM is a document that provides all the details a potential investor needs to make an informed decision on the AIF scheme.
  3. Sponsor must maintain a 2.5% corpus stake (or Rs. 5 crores, whichever is smaller) in AIF (Category I & II). Category III – Rs. 10 crores or 5% of the corpus, whichever is lower).
  4. While Category III AIFs can be either open-ended or closed-ended, Category I and II AIFs can only be closed.
  5. The minimum term for Category I and II AIFs is three years, with a maximum of five years for Angel Funds.
  6. Funds are raised from angel investors by the Angel Fund, a subcategory of Venture Capital Fund under Category I AIF. Angel funds are subject to various relaxations in the AIF regulatory standards, such as a smaller corpus, investor commitment, etc., and are required to invest by the guidelines.
  7. Under the Automatic method, 100% FDI is allowed in all AIF categories.
  8. AIF may make foreign investments, provided that it complies with the following SEBI and RBI requirements.
  9. All AIFs shall have Qualified Institutional Buyer status as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.
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How can Financial Advisory Help You in an Alternative Investment Fund?

The financial advisory will help you in the following ways in alternative investment fund:

  1. Guiding the best arrangement for an alternative investment fund between companies, trusts, or limited liability partnerships.
  2. Advising on issues about the organisation that will be utilised for investment management, sponsorship, SEBI registration, investment team, etc.
  3. Support in submitting a registration application to SEBI.
  4. Aid in the creation of fund documentation, such as the Investment Management Agreement, Contribution Agreement, and Private Placement Memorandum.
  5. Guiding the education and work history needed to obtain the licences.
  6. Application to SEBI both online and offline, which entails completing Form A.
  7. Obtaining a Certificate of Registration and answering SEBI’s questions
  8. Coordination with several professional agencies viz. Trustee, Registrar, Custodian.
  9. Support for establishing operations.
  10. Designing policies, procedures and operating processes.
  11. Assistance in collaboration with Benchmarking Agencies and Auditors.
  12. Outsourcing of non-essential tasks like filing regulations and accounting, etc.

Compliance with AIF Regulation 

Following the applicant’s receipt of the AIF Registration Certificate, the following compliances must be made: 

  • Following registration, an Alternative Investment Fund is required to abide by the reporting requirements periodically specified by SEBI.
  • An alternative investment fund should routinely monitor the SEBI website for any notifications, updates, or instructions on AIF activities released by the Securities and Exchange Board of India.
  • The Alternative Investment Fund investment in listed or unlisted shall notify SEBI of any changes to the information it has already given it promptly.

Additional Information About the Alternative Investment Fund Registration

Below are some of the additional pieces of information in the registration of alternative investment funds:

Sponsor of AIF

The sponsor, who created the Alternative Investment Fund, is made up of a proposed partner in the event of an LLP and a promoter in the case of a business.

The AIF Registration Certificate is good for the duration of the AIF. On the other hand, the Alternative Investment Fund Registration certificate would be valid indefinitely.

Corpus

It is the total sum of money that investors contribute to the Alternative Investment Fund on a certain day through a written agreement or other similar document. The investment restrictions stated for the number of investors under the rules of the AIF.

Other than angel funds, no alternative investment fund scheme may have less than 1000 investors. No scheme involving an angel fund may have more than 49 angel investors. However, an alternative investment fund is limited to using private placement to obtain capital from sophisticated investors; it is not permitted to extend an invitation to the general public to pledge its units.

Redressal of Grievances

Through the “SEBI Compliant Redress System,” a web-based centralised complaint redress system run by the Securities and Exchange Board of India, investors can lodge complaints against alternative investment funds. The AIF, sponsor, or manager must establish the process for settling disagreements between the investors, manager, AIF, or sponsor through arbitration or another method that the investors and AIF jointly choose. 

How to start Investing in Alternate Investment Fund?

An investor needs to meet the following requirements to begin investing in AIF:

  1. Needs to have a minimum corpus of Rs. 10 Cr. for an angel fund or Rs. 20 Cr. for any given plan.
  2. AIF employees, managers, and directors are required to contribute a minimum of Rs. 25 lakhs, while individuals must invest a minimum of Rs. 1 crore.
  3. There can be no more than 1000 investors in any one scheme. When it comes to Angel Funds, the number is restricted to 49.
  4. Category III AIF can be both open-ended and closed-ended, but Category I & II AIF can only be closed-ended.
  5. 2.5% of the initial corpus must remain in the vested interest of the fund management or AIF sponsor.
  6. Individual investors must provide proof of identity, a PAN card, and proof of income.
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The main reason AIFs are becoming more and more popular is that they yield larger returns than mutual funds or portfolio management services. Even if there are more market and liquidity risks associated with these investments, the investors are accustomed to these kinds of situations.  

Conclusion

For individuals who are well aware of the risks and benefits and are investing in instruments other than debt and stock options, alternative investment funds may be a good choice. An organisation must meet specific criteria to register as an alternative investment fund. It is crucial to remember that alternative investment funds are regarded as high-risk investments, and prospective buyers need to be ready to assume such risks. 

FAQs: –

  1. Who oversees alternative investment funds in India?

    The Securities and Exchange Board of India (SEBI) oversees the alternative investment funds in India. The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 define AIFs.

  2. What is the registered AIFs' regulation or legal structure?

    AIFs may be formed, registered, or incorporated as LLPs, companies, trusts, partnership firms, or body corporates, according to the SEBI. In general, most AIFs are registered as trusts.

  3. Is it possible for the AIF to raise funds from the public?

    No, AIFs are not eligible for an IPO. It indicates that the securities and shares are not available for public purchase. As a result, it is unable to list or issue securities and shares to the general public.

  4. How much does it cost to invest as little as possible in an AIF?

    AIF employees, fund managers, and directors are required to contribute a minimum of Rs. 25 lakhs, while individuals must invest a minimum of Rs. 1 crore.

  5. How can one invest in an AIF in India?

    You need to show identification, a PAN card, and proof of income to invest in an AIF. For AIFs, the minimum investment is INR 1 crore, and for angel funds, it is INR 25 lakhs.

  6. Is there a choice for an AIF to be open-ended or closed-ended? 

    No. Close-ended AIFs with a minimum term of three years are mandatory for both Category I and II AIFs. On the other hand, Category III AIFs could be closed-ended or open-ended.

  7. Who is the AIF's Sponsor?

    Anybody who creates the AIF and names a designated partner in the event of a limited liability partnership or a promoter in the case of a company is considered a sponsor.

  8. What is the maximum number of investors allowed under the AIF regulations? 

    All AIF schemes (except from angel funds) should not have less than 1000 investors. There can be no more than 49 angel investors in a scheme, including an angel fund. An AIF cannot invite the general public to subscribe to its units; instead, it can only raise capital from knowledgeable investors through private placement.

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