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Alternative Investment Funds India – A Fund of new opportunities

Neelansh Gupta

| Updated: Jan 09, 2019 | Category: AIF Registration

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In India Alternative Investment Funds (AIFs) are a relatively new concept and they have been described in detail in Regulation 2 (1) (b) SEBI (Alternative Investment Funds) Regulation, 2012.  The concept is new but has got a lot of benefits with it.

In the below article we will discuss about Alternative Investment Funds and its benefits in detail. But before moving ahead, let us first discuss about what Alternative Investment Funds are.

What is Alternative Investment Fund (AIF)?

As mentioned above, Alternative Investment Funds are defined in Regulation 2 (1) (b) of SEBI (Alternative Investment Funds) Regulation, 2012. In simple language, it refers to any privately pooled investment fund which can be from Indian or foreign sources in the form of a Limited Liability Partnership (LLP), corporate body, company or trust.

In India, AIFs are private funds. So they do not come under the jurisdiction of any regulatory agency in India.

Note: SEBI currently recognize AIFs as private funds or private placement funds which are not at all covered by any jurisdiction or any kind of regulatory body in India.

AIFs are not available through IPOs or through any other form of public issue

What are not considered as Alternative Investment Funds?

  1. Family Trusts
  2. Employee Stock Option Scheme
  3. Employee welfare trusts or Gratuity Trusts
  4. Holding Companies
  5. Securitization Trusts
  6. Funds managed by the Securitization Company or Reconstruction Company

How can you seek registration as an AIF?

AIFs can seek registration in any one of the below categories as per the SEBI (Alternative Investment Funds) Regulation, 2012.

The above categories are the types of alternative investment funds which are available in India.

Let us try to discuss them in detail:

Category 1 Alternative Investment Funds

They are specially targeted to make investment in startups or early stage ventures or SMEs and infrastructure projects or other sectors or areas which the government thinks as socially or economically desirable. This category of alternative investments funds may include:

  • Venture Capital Funds
  • SME Funds
  • Social Venture Funds
  • Infrastructure Bonds

Category 2 Alternative Investments Funds

According to SEBI (Alternative Investment Funds) Regulation, 2012, any AIFs that are not covered under Category I and Category III of alternative investment funds are classified as Category II AIFs. They are close ended in nature as compared to Category 3 AIFs and not allowed to utilize and undertake leverage. However Category II AIF is allowed to meet day to day operational requirements. Such category may include Private equity funds or debt funds for which no special incentive or concession is given by the Government.

Category 3 Alternative Investments Funds

This category is quite unique and employs some complicated trading strategies to generate returns. Such strategies can be Arbitrage, Margin Trading, Futures and Derivatives Trading etc. Example of this alternative investment fund category can be:

  • Private Investment in Public Equity Funds (PIPE) Funds
  • Hedge Funds

For detailed process of registration, click here

Important: Category I and II AIFs are required to be close ended and must have a minimum tenure of three years. On the other hand, Category III AIFs may be open ended or close ended.

Also, Category 1 is one of the widest categories of AIFs; it further includes a Venture capital fund which is known as Angel Fund. Now let us discuss about it in detail:

What is Angel Fund?

Before we try to understand what angel funds, let us first discuss about angel investors.

Angel investor” means any kind of affluent person or wealthy individuals who want to invest in an angel fund. They provide capital for a business start up in exchange for convertible debts or ownership equity.

They need to satisfy one of the following conditions if they want to invest in an angel fund. The conditions are as follows,

(a) He must be an individual investor who has net tangible assets of at least two crore rupees excluding value of his residence which is used principally, and who

(i) has early stage investment experience, or

(ii) has experience as a serial entrepreneur, or

(iii) is a senior management professional with at least ten years of experience;

(b) a body corporate with a net worth of at least ten crore rupees; or

(c) an AIF who might be registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than Rs. 25 lakh from an angel investor.

“Angel fund” is a kind of Venture Capital Fund under the Category I Alternative Investment Fund that raises funds from the angel investors and invests it according to the rules and regulations.

Angel fund must be raised only by way of issue of units to angel investors

Reporting Requirements to SEBI for those AIFs which are registered with SEBI

  • Category I and II AIFs and the Category III AIFs which do not undertake leverage- They need to submit report to SEBI on a “quarterly basis”
  • Category III AIFs which undertake leverage- They are required to submit the reports on a monthly basis.

Positive things you must know about Alternative Investment Funds

  • In 2018, At least 24 public market-focused alternative investment funds (AIFs) have been registered.
  • India has been ranked on the top position in 2017 as the ‘most preferred destination’ by global investors, as per the Global Limited Partner Survey, 2017 of Emerging Markets Private Equity Association. This ranking has improved from ninth position in 2013.
  • The number of Alternative Investment Funds (AIFs) registered with SEBI have increased by 50% from June 30, 2016, to September 30, 2017, reaching 374 Funds.
  • Growth in alternative investments reflects the growth of an economy. AIFs make sure that necessary funds are made available to the young entrepreneurs at different stages of their ventures and also to different “economically-desirable” industries such as Infrastructure, SME, and Social Ventures.
  • For the investors AIFs provide diversification benefits for portfolios of High Net-worth Individuals (HNIs) and Institutional Investors.

Can AIF make an invitation to the public to subscribe to its securities?

Since AIFs are privately pooled investment vehicles. So they are not permitted to make an invitation to the public to subscribe to its securities.

The applicant is prohibited by its memorandum and articles of association/trust deed/partnership deed to make any such invitation.

Note: AIFs shall raise funds through private placement only by issue of information memorandum or placement memorandum, by whatever name called.

More details can be found at https://www.sebi.gov.in/

What would be the size of the fund or scheme launched by the AIF?

Generally, each scheme of the Alternative Investment Fund shall have corpus of at least twenty core rupees.

In case of angel fund, it must be at least ten crore rupees.

If an investor wants to complaint against AIFs, then SEBI has a web based centralized grievance redress system called SEBI Complaint Redress System (SCORES) at http://scores.gov.in where investors can lodge their complaints against AIFs.

Conclusion

The Alternative Investment Funds India market is growing at a very fast pace and all the participants in this market are hopeful that regulatory reforms will continue to support the growth of this industry in India. For more information and query related to Alternate Investment Funds, you can get in touch with Enterslice.

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Neelansh Gupta

Mr. Neelansh Gupta is a Legal Counsel having extensive in-depth knowledge of various laws. He has completed his graduation in law and has experience in IPR, Taxation and Corporate laws.

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