Alternative Investment Funds in India

30 May, 2019

SEBI Provisions Relating To Alternative Investment Funds in India

Before the introduction of the SEBI (Alternative Investment Funds) Regulations, 2012 there were various funds which were operating unregulated. Such funds were not covered under any of the regulations specified by Securities and Exchange Board of India like SEBI (Mutual Funds) Regulations, 1996; SEBI (Custodian of Securities) Regulations, 1996 etc. It was only after the introduction of SEBI (Alternative Investment Funds) Regulations, 2012 that such unregulated funds were covered under the ambit of law. These regulations are also termed as AIF Regulations.

Purpose of Introduction of AIF Regulations

Alternative Investment Fund Regulations were introduced with a view to regularizing pooled funds not covered under any of the previous regulations in India. These regulations require such funds to be registered an operated as per these provisions. This was to cover such pooled investment funds under a legal umbrella. These funds can receive capital from Indian as well as foreign investors

What Funds are considered as Alternative Investment Funds?

As we have discussed above AIF are the funds include the pooled investment funds established in India which collect funds from sophisticated investors and invest them as per their Investment policy.

For further clarification let’s understand the legal definition of Alternative Investment Funds. Regulation 2 (b) of SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012 specifies exactly what is covered under Alternative Investment Funds. As per this definition, an AIF has the following features:

Such funds are established or incorporated within India
They have established either in the form of a trust, company (private or public), LLP or a body corporate
They are a privately pooled investment vehicle
Such funds are not covered under:
Securities and Exchange Board of India (Mutual Funds) Regulations, 1996
Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999
Any other regulations Introduced by SEBI to regulate fund management activities.

READ Extension of Tenure for Large Value Close-Ended AIFs

Functions of Alternative Investment Fund

As we have discussed they are privately pooled investment vehicles. Their main activity involves:

Collection of funds from investors. Such investors can be Indian as well as foreign.
Investment of such collected funds as per their defined investment policies

They are required to work for the benefit of their investors.

Exemptions to Alternative Investment Funds

AIF regulations clearly specify the following list of entities which are not considered as Alternative Investment Fund:

Any family trust established under the Companies Act, 2013 for the benefit of relatives.
Any ESOP Trusts trust established under SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 or as permitted under Companies Act, 2013
Any employee welfare trusts or gratuity trusts established for the benefit of employees.
Holding companies as defined under Section 2(46) of the Companies Act, 2013
Any special purpose vehicles which are not established by fund managers and regulated by any specific regulatory framework. Such funds include securitization trusts.
Any fund managed by Securitization Company or Reconstruction Company registered under Section 3 of SARFAESI Act, 2002.
Any other fund which is regulated by any other official regulators in India.

What is the Eligibility Criteria to register an Alternative Investment Fund?

Regulation 4 of SEBI (AIF) Regulations have provided the eligibility criteria for Alternative Investment Fund Registration. Such conditions are listed below:

The incorporation document of the applicant organization permits the activities of Alternative Investment Fund. Such an incorporation document will be MOA in case of company and partnership or trust deed in case of LLP and Trust respectively.
The above mention incorporation document restricts the applicant from making an invitation to the public to subscribe to its securities. AIFs are privately pooled investment vehicles thus they are prohibited from inviting the general public to subscribe to its securities.
If the applicant is a Trust, then its Trust Deed must be registered as per the provisions of the Registration Act, 1908.
If the applicant is an LLP, then after its successful incorporation its partnership deed must have been registered with the Registrar by the filing of Form 3
If the applicant is a body corporate, then it must have been established as per the relevant Central or State laws. And is allowed to do the activities of Alternative Investment Fund.
The applicant, its Sponsor, and Manager must fulfill the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008
The key investment team of the applicant must be experienced enough. At least one person must have a minimum experience of 5 years in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has a relevant professional qualification.
The applicant’s Manager or Sponsor must have required manpower and infrastructure for the proper discharge of its activities.
At the time of making the registration application following information is to be shared by the applicant:

The main objective of investment
Who are the targeted investors
Proposed corpus of AIF. Corpus refers to the total amount of funds committed by investors.
Investment Strategy
Proposed tenure of funds