Categories of Alternative Investment Funds

What are the Categories of Alternative Investment Funds?

Categories of Alternative Investment Funds are registered and regulated as per the SEBI (Alternative Investment Funds) Regulations, 2012. They are privately pooled investment vehicle who are in the business to collect funds from sophisticated investors either Indian or otherwise and utilize them for making the investment as per their policies.

Categories of AIF

We know a gist of the fact as to what exactly is a Categories of  Alternative Investment Funds. But here we will discuss in detail the types of AIF. The AIF Regulations have clearly specified 3 different categories of AIF than can be registered in Regulation 3(4) of Chapter II.

As per alternative investment fund regulation, registration can be done with SEBI under any of the three below mentioned Category:

Category I

In this category, those Funds are included which are considered to have a positive effect on the Indian Economy. For example, the AIF which basically invest in early-stage ventures like start-ups, small and medium-sized enterprises, infrastructure or social sectors. These sectors are considered as socially or economically desirable and as a result Government, as well as other Regulators, provides concessions and incentives to them.

This Category I AIFs include:

  • Venture capital funds,
  • SME Funds,
  • Social venture funds,
  • Infrastructure funds etc.

Category II

In general, the AIF which are not covered under Category I and Category III fall under this category. They only undertake leverage and borrowings to meet operational requirements and such other activities permitted by the AIF regulations. Unlike Category, I, for funds covered under this category no incentives or concessions are proposed by the authorities.

These Category II AIFs include:

  • Private equity funds
  • Debt funds etc.

Category III

The Categories of Alternative Investment Funds Included under this category are the types which include very diverse and complex trading strategies, unlike the other two categories. They can even make an investment in listed as well as unlisted derivatives. And same as Category II AIF, they do not receive any incentives or concessions from the authorities

These Category II AIFs include:

  • Hedge funds or
  • Funds which trade with an objective to make short-term returns or
  • Funds which are open-ended etc.

Can an AIF be close-ended or open-ended?

The fact that whether an Alternate Investment Fund can be close-ended or open-ended depends upon the category they belong to.

Regulation 13 of the SEBI (Alternative Investment Fund) Regulations states the specifications relating to the tenure of different category AIFs.

The only Category of Alternative Investment Funds has the option to issue open-ended as well as close-ended funds and schemes.

As per this regulation Category, I and II AIFs cannot be open-ended. And the schemes or funds launched by them must have a minimum tenure of 3 years. Their actual tenure is to be determined and mentioned at the time of the submission of the application for registration.

Can the tenure of close-ended AIF extend?

Yes, the tenure of close-ended AIF can be extended up to two years. But it is conditional in nature.

In order to extend the tenure approval from 2/3rd unitholders by the value of their investment in that particular AIF is required.

If they fail to obtain the required majority they no extension can be granted. And it is required that the Alternative Investment Fund is fully liquidated within one year from the date of expiration of the tenure.

Can Category of an AIF Change Post Registration?

According to the Circular No. CIR/IMD/DF/12/2013 issued on 07th August 2013 the category of an AIF can be changed, but it is conditional in nature. It is required that AIF

Has not made any investments under the category it is currently registered in.

However, if the AIF has received commitments or raised funds from the investors then prior to submitting an application for such change in the category the AIF is required to send letters/emails to such investors providing them the option to withdraw their commitments/ funds without any penalties/charges. All the funds collected must be returned

Application for such change: For changing the category of the AIF it is required to submit an application in Form A along with necessary supporting documents.

Fees: Even for changing the category the applicant is required to pay the application fees of Rs. 1, 00,000. However, they are only required to pay the application fee, no registration fees are required to be paid for such applications.