Alternative Investment funds and its Disclosure Standards

Rajdeep Saini

19 Nov, 2020

The Alternative Investment Fund (AIF) varies from the regular traditional investments such as securities and stocks. It is a type of privately pooled investment vehicle that is incorporated in India.  An AIF further collects money from superior private investors and invests in hedge funds, private equity, venture capital, and other forms of Angel Funds. It is believed that individuals or businesses with high net worth, invest in Alternative Investment Fund as it provides higher benefits.

Types of Alternate Investment Funds (AIF)

According to the Securities Exchange Board of India (SEBI), the Alternative Investment Fund (AIF) can be categorized into three types.

The investors have an opportunity to register in these following categories and their subcategories:

Category I

Generally, this category of individuals invests in early-stage ventures, small and medium enterprises (SME), startups, angel funds, infrastructure, and other sectors. These sectors are most economical as it has high growth potential.

Category I contains the following funds:

Venture Capital Fund

The primary purpose of the Venture Capital Fund is to invest in Start-ups. They have huge potential but face issues to obtain the initial investments of the growth for their business.  Since the entrepreneurs and new business face problems to raise funds through the capital market, the venture capital funds work as a perfect medium to cope up with the initial financial needs.

Angle Fund

It is similar to the Venture Capital fund, where managers together combine money from several angel investors and further invest them in the development of budding startups. Moreover, when the startups become profitable, an angle investor receives dividends or return on initial investments.

Social Venture Fund

These companies aim to bring change in society to invest in companies which have strong social ethics. This led to the surfacing of the Social Venture Fund. This is often termed as a philanthropic investment. However, the investment in this fund provides a rate of return in the form of development of goodwill and reputation amongst stakeholders. Companies that have the Social Venture Fund will be generally engaged in carrying out Corporate Social Responsibility Obligations (CSR).

Category II         

In this category, some investors specifically invest in debt securities and equity securities. No concessions are provided by the government to invest in these funds.

This category comprises of the following funds:

Private equity fund

This fund generally invests in unlisted private companies and obtains a share in their ownership. Since private equity cannot obtain capital through the issuance of equity, they are dependent on the Private Equity fund^[1].

Debt Fund         

This fund principally invests in the debt instrument of the listed companies and also in unlisted companies.

Fund of Funds

This fund is a combination of diverse alternative funds. The prime strategy of this fund is to invest in other Alternative Investment Fund and doesn’t rely on investing in a specific sector.

Category III

The major focus of this fund is to obtain short term returns. They use strategies such as margin trading, derivatives strategies, arbitrage derivatives etc. to fulfil the purpose of gaining short term capital goals.

Some examples of category funds are as follows:

Hedge Fund

This fund primarily invests in international as well as domestic markets by pooling capital from the institutional investors as well as accredited investors.

Private Investment in Public Equity fund (PIPE)

PIPE is the pool of funds that are privately sourced and managed.  The main purpose of this fund is to purchase publicly traded stocks at a discounted price.

Disclosure Standards for Alternative Investment Funds

On  5^th February 2020, in the effort to smoothen the process of disclosure standards, a landmark step has been taken by the Securities and Exchange Board of India (SEBI) by issuing the disclosure standards of the Alternative Investment Fund. The original circular issued by SEBI on 4^th December 2019, where SEBI has provided with the “Introduction of Performance Benchmarking” and “Standardization of Private Placement Memorandum (PPM) for Alternative Investment Fund”.

In this circular, the  SEBI has introduced the following:

Introduction of templates for Private Placement Memorandum

Annual auditing to validate compliance with the terms of the Private Placement Memorandum.

The Private Placement Memorandum used is the process of marketing an Alternate Investment Fund to the investors who are willing to invest. Such an Alternative Investment Fund is required to undergo an annual audit to verify that it complies with the requirement of the Private Placement Memorandum. Either an external or internal auditor or a legal professional will carry out the audit. The prior circular has also put compulsion on certain reporting requirements which mandate finding of the audit and also the corrective measures are to be reported to the designated partners, trustees and the board of directors of the Alternative Investment Fund.

Performance benchmarking of Alternative Investment Fund (AIF)

Security exchange board of India has introduced an industry benchmark to develop for the purpose to compare the global investment opportunity with the Alternative Investment Fund industry. “As the industry needs the flexibility to showcase its performance based on different criteria and benchmarking of performance of Alternative Investment Fund’s will help investors in assessing the performance of the Alternative Investment Fund industry,” noted SEBI. The confidential aspect is also maintained when the data is reported to the benchmarking agencies. The manner and the modes of data reporting are covered by the benchmarking agencies and Alternative Investment Funds.

Conclusion

Read our article:Categories of Alternative Investment Funds