AIF Registration

Eligibility Criteria for AIF Registration in India

AIF Registration in India

AIF or Alternative Investment Funds regulations were brought into force under SEBI to regulate and govern the eligibility criteria for AIF registration in India and various other funds facilities operating without any regulations issued under SEBI or the Securities and Exchange Board of India. This AIF operates with the predetermined investment policy based on the privately pooled investment vehicle operations. With this view, such AIF regulations were launched to regulate the eligibility criteria for AIF registration and its operations. However, these AIF regulations have made it mandatory for a company to comply with the eligibility criteria for AIF registration and to operate its AIF business within the ambit of these statutes.

According to the SEBI (Alternative Investment Funds) Regulations, 2012, AIFs are divided into three categories, i.e. Category I, Category II, and Category III, and each category has different eligibility criteria for AIF registration in India along with different compliance requirements. All SEBI-registered AIFs must meet the eligibility criteria for AIF registration to file a compliance report and submit applications within a stipulated time according to the provisions of AIF policies and regulations and various other circulars updated on the SEBI official websites.

Eligibility criteria for AIF registration in India are important aspects of operating alternative investment funds in order to protect the interest of investors and maintain transparency in AIF business operations. There are various elements connected with AIF compliance, such as registration and regulatory filings, investment restrictions, operational and governance compliance, investor disclosure and protection, KYC and Aml compliance, and custodian and trustee compliance. Complying with the eligibility criteria for AIF and its compliances can establish a regulatory framework that promotes confidence among investors, combat potential risks, and align with the industry’s best practices. AIF must inform SEBI of any major change and discrepancies detection in the pooled investment funds with the guidance of the manager of the alternative investment.

What do you mean by an Alternative Investment Fund?

The simple meaning of an alternative investment fund is an investment that is an alternative to stocks, bonds, and cash. Alternative Investment Fund is an investment instrument, unlike traditional investment instruments. AIF is a privately pooled investment vehicle that collects funds and is regulated under the SEBI (Alternative Investment Funds) Regulations, 2012. However, AIFs can be formed as a company, limited liability partnership (LLP), trust, etc. Further alternative investments may include private equity, venture capital, hedge funds, commodities, derivatives contracts, real estate, etc.

Often, AIFs are held by institutional investors or accredited, high-net-worth individuals. This is because AIF is complex in nature, lacks regulation policies, and has a very high degree of risk, unlike conventional investment. Most alternative investment funds are fairly illiquid and have high minimum investments and fee structures, especially when compared to mutual funds and ETFs (exchange-traded funds).

What are the Different Categories of Alternative Investment Funds

Applicants can apply for an AIF registration in one of the following categories given below:

Category I AIF

Category I Alternative Investment fund registration are those AIFs who are eligible to invest in the early phase ventures, start-ups, social ventures, Small and Medium Enterprises, infrastructures, and various other sectors or areas that are considered by the government or regulators as socially and economically desirable. However, in this category, it is anticipated that such AIF registration will help the nation’s economy to grow. The government of India, SEBI, and other regulatory bodies may provide incentives or concessions under this category of AIF.

Category II AIF

Category II AIFs (Alternative Investment Funds) are those AIFs that are unlike Category I and III, not eligible to undertake borrowing or leverage other than to provide daily operational requirements of a company as permitted by the SEBI (Alternative Investment Funds) Regulations, 2012.

Some of the examples under this category are debt funds and private equity funds, this AIF receives no concession or specific incentives from the Government of India or various other regulatory bodies. However, funds like real estate, private equity, distressed assets funds etc are registered under category II of AIF.

 Category III AIF

Category III AIFs are commonly known as hedge funds that engage in diverse and complex trading strategies by investing in derivatives that are either listed or unlisted. This category of AIF is also eligible to employ leverage strategies such as borrowing to invest. These funds trade for making short-term returns or other open-ended funds for which no concessions or specific incentives are received from the government of India or various other regulatory bodies, unlike category I AIF.

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Who can Invest in an AIF?

Investors who are willing to diversify their business portfolio can invest in AIFs if they meet the eligibility criteria for AIF registration in India. The eligibility criteria for AIF registration in India are given below. Who can invest:

1. All the residents, along with NRIs and foreign nationals, are eligible to make an investment in AIF funds in India.

2. The minimum investment limit for AIF funds in India is Rs.1 crore for investors, whereas the minimum amount of investment for directors, employees and fund managers is Rs.25 lakh.

3. The lock-in period of AIFs is for three years.

4. The number of investors in every single AIF is restricted to 100, except for angel funds, where the number of investors goes up to 49.

 Eligibility Alternative Investment fund Registration application?

Given below is the list of eligibility criteria for the AIF registration application:

1. According to Schedule II of the SEBI (intermediaries) Regulations, 2022 the proposed AIF applicant, manager, and sponsor have to be fit and proper to meet the eligibility criteria for AIF registration.

2. The manager of the AIF applicant must have adequate experience with at least one person having an experience of five years in managing pools of capital or advising in fund, wealth, asset, and portfolio management or in the business of selling, buying, and dealing with various financial assets and securities.

3. At least one of the manager key personnel must have a professional qualification in accountancy, finance, commerce, business management, capital market, economics, or banking from a university or an institution from a recognized central and state government.

4. One of the major eligibility criteria for AIF registration is that the said AIF applicant must specifically state the list of targeted investors, the objective behind the investment, the investment structure, the proposed corpus, and the tenure of the AIF fund or scheme.

5. The applicant’s company must have a MoA (Memorandum of Association) trust deed of a trust or a Partnership deed of an LLP to meet the eligibility criteria for AIF registration in India to run the AIF-based investment company.

6. If the AIF applicant is a Trust, such Trust deed has to be duly registered according to the Registration Act, 1908.

7. If the applicant for AIF registration is LLP, the same has to be registered under the Limited Liability Partnership Act, 2008.

8. In case the AIF applicant for registration is a corporate body, it has to be established and set under the laws and regulations of both state and central legislatures.

Registration Certificate Process of AIF

Given below is the procedure for registering as an AIF investment instrument after meeting the eligibility criteria for AIF registration in India:

1. The applicant for an AIF registration certificate should be made before the SEBI or Securities Exchange Board of India for categories I, II, and III in form A as mentioned in the regulation’s first schedule attached with necessary documents.

2. According to the regulations part A and B of the second schedule, the said AIF application shall be attached with the application fee i.e. non-refundable.

3. It is the responsibility of SEBI to verify the requirements according to the regulations before granting an AIF registration of an applicant.

4. SEBI, after receiving the AIF registration application from the applicant, will send a reply within 21 working days. However, the time required to grant the registration depends upon the time taken by the applicant to comply with the mandatory requirements for filling the eligibility criteria for AIF registration in India.

5. The applicant for AIF must state in his cover letter of an application if it is registered with SEBI as a venture capital fund.

6. Whether the applicant has undertaken the AIF activities before initiating the registration application must also be mentioned in the covering letter of the AIF application.

7. Whether the applicant is applying for a new fund registration.

8. According to the SEBI regulations, the applicant for an AIF shall also file an online application from time to time according to the SEBI guidelines.

Required documents for eligibility criteria for AIF registration

The documents required for the eligibility criteria for AIF registration in India are given below. These documents are to be accompanied along with the application for an AIF registration:

1. Certificate of Incorporation or a registration certificate of an applicant entity seeking an AIF registration.

2. If AIF applicant registration is by a partnership registration under the Limited Liability Partnership Act, 2008 a partnership deed must be submitted along with the AIF application.

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3. In case the AIF registration is through a society or trust registered according to the Trusts Act, of 1882 an original Trust Deed has to be attached to the application by an applicant.

4. Directors’ and shareholders’ information also needed to be attached to the AIF applications.

5. A copy of the applicant entity placement memorandum.

6. Applicant entity contact information and various other information.

7. Address proof and particulars of the applicant entity registered office.

8. Applicant entity MoA (Memorandum of Association and AoA (Articles of Association).

9. A business information of an applicant entity relating to expansion plans of the company or LLP.

What are the Fundraising Restrictions of AIFs in India?

In India, Alternative Investment Funds cannot accept an investment whose value is less than Rs.1 crore. The maximum number of investors allowed under AIF is 1000, with the corpus limit of each scheme being Rs.20 crore. However, AIF instrument promoters, sponsors, and managers shall have the continuing interest of a minimum of 2.5% of the initial corpus.

For a category III of AIF, the minimum continuing interest is 5 % of the corpus or 10 crores, whichever is lower. On the other hand, category I and Category II of AIF are not eligible to invest 25% or more of their investment fund in a single investee company. Unlike under category III AIFs, the same limit is 10 %. Further, close-ended AIFs are eligible to be listed on the stock exchange up to a minimum amount of Rs 1 crore of a trading lot after the closure of the scheme or the fund.

Cancellation of AIF registration

SEBI is the regulatory authority that decides the eligibility criteria for AIF registration and cancels or denies AIF registration. This cancellation indeed seriously impacts the ability of the intermediary to operate or function in India’s securities market. Such actions taken by the SEBI impact the reputations of the intermediary and future prospects in the given below:

1. This cancellation of the registration certificate results in a complete bar on the ability of an intermediary to practice and engage in activities connected to the securities market. Further, this means intermediaries may, to a certain extent, be prohibited from serving their specific AIF services or engaging in a transaction in the securities market.

2. Such cancellation of AIF registration also negatively reflects the reputation of the intermediary. Denial of the applicant eligibility criteria for AIF registration raises concerns among the participants in the market, clients, and investors regarding the integrity of the intermediaries, compliance records, and overall trustworthiness.

3. It also puts a restriction on the intermediary’s access to the business opportunities within the securities market. However various other players in the market will find it difficult to engage in business transactions or partnerships with such intermediary whose AIF registration has been cancelled.

4. Applicants whose eligibility criteria for AIF have been denied or cancelled may result in losing the confidence of potential clients. This customer will be hesitant to continue their business engagement with such an intermediary.

5. In some situations, AIF re-registration is possible, but prior disqualification may result in stricter regulatory scrutiny, imposing stringent monitoring, reporting, and compliance requirements due to their previous noncompliance with the AIF regulatory framework.

6. The intermediary who has complied with the eligibility criteria for AIF registration in India may face several challenges in fulfilling the compliance requirements for AIF in the future. The regulatory body may closely monitor their business activities and thus if any violations and illegal activities are detected, further legal liabilities and penalties will have to be faced by such intermediaries.

After meeting the eligibility for AIF registration in India, the respective applicant must meet the crucial aspect of alternative investment Fund compliance requirements and maintain transparency in the business operations. Various other elements under the AIF compliances are registrations, regulatory filings, investment restrictions, operational and governance compliances, AML and KYC compliance.

Registration Fee Structure Alternative Investment Fund in India

The registration fee structure alternative investment fund in India, according to the concerned authority, are:

1. The application fee for AIF is Rs.1,00,000/- (One Lakh).

2. The registration fee for AIF category I, except for angel funds, is Rs.5,00,000/- (Five lakhs)

3. The registration fee for AIF category II AIF except Angel Funds is Rs. 10,00,00/-(Ten Lakhs)

4. The registration fee for category III AIF, except for angel funds, is Rs.15,00,000/-(Fifteen lakhs).

5. Scheme for AIF besides Angel funds is Rs.1,00,000/- (One Lakh).

6. The fee for re-registration of AIF is Rs.1,00,000/- (One Lakh).

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7. The fee for registration of angel funds is Rs.2,00,000/- (Two lakhs).

AIF registration in India Pros and Cons

Registration of alternative investment fund unlike traditional investment options are regulated under the SEBI or Securities Exchange Board of India and funds are privately pooled investment.

1. Alternative investment funds may offer diverse benefits to investors, but they are associated with higher fees and transaction costs.

2. Unlike traditional investment AIF has a potential for higher returns along high investment amount. On the other hand, AIF has a higher risk than a traditional investment.

3. AIF may protect the inflation rate. However, it also lacks transparency and may have a reduced regulation policy.

4. Investment in the AIF are less liquid and not easily accessible to sell in emergencies, unlike traditional investments.

Conclusion

Thus, an applicant who meets the eligibility criteria for AIF registration in India can operate their business in Alternative Investment funds complying with the SEBI regulatory framework for maintaining transparency and promoting confidence among the investors. With the AIF compliance meeting, they can mitigate and align with the industry’s best practices. However, every AIF in India needs to stay updated with the latest regulatory guidelines and various other relevant authority directions in order to stay relevant in the market. Any company seeking AIF service must receive a grant of an AIF registration certificate from the concerned authority.

Consulting legal and compliance professionals is essential for any company willing to seek AIF registration to gain a seamless understanding of the procedure for eligibility criteria for AIF registration in India. A robust compliance framework and stringent eligibility criteria for AIF registration not only demonstrate the commitment of an AIF to the regulatory framework but also promote an efficient and trustworthy investment environment in the market.

FAQ’s

  1. What is an Alternative Investment Fund (AIF)?

    An AIF or an Alternative Investment Fund is an investment vehicle that is privately pooled and collects funds from individuals who are highly net worth and various other institutional investors to invest in the AIF funds according to the defined policies of the investment.

  2. Who is eligible to register as an AIF?

    Any Indian citizen, or foreign entity who proposes to pool in capital from an investor and to invest according to the regulations and framework is eligible to register as an AIF.

  3. What are the types of AIF?

    There are three types of AIF category I deals with investment in start-ups, early ventures, social ventures, SMEs, and infrastructure. Category II does not undertake leverage or borrowing other than to meet daily operational requirements. Lastly, in Category III, AIF is the one who trades to make a short-term return, provides leverage, or both.

  4. What is the Registration process for AIF?

    For AIF registration, an applicant must submit an application before the SEBI, which is attached with all the necessary documents and fees. SEBI, or Securities and Exchange Board of India, is the concerned regulatory body that shall be examining the said application of the AIF applicant and, thus, accordingly, grant registration if the eligibility criteria for AIF registration in India are satisfied.

  5. What is the list of documents required for AIF registration?

    Some of the list of documents required for AIF registration are Memorandum and Articles of Association, Certificate of Incorporation, Certificate of Registration with the Registrar of Companies, etc.

  6. What are the ongoing obligations for AIFs?

    Some of the major ongoing obligations for AIFs are the filing of periodic reports to SEBI, financial statements disclosure to investors, and appointment of a custodian, compliance with AML and KYC guidelines.

  7. What are the benefits of AIF registration?

    Some of the common benefits of AIF registration are access to a larger pool of investors, the capability to raise capital from a foreign investor, better regulatory framework and transparency etc.

  8. What are the post-formation compliance requirements for AIFs?

    The post-formation compliance requirements of AIFs report filling with SEBI and other regulatory authorities, custodian appointment, compliance with AML and KYC guidelines, disclosure of financial statements to investors regularly, maintaining of proper books of account and record, a regular internal audit, etc.

  9. What reports need to be filed with SEBI by AIFs?

    Reports that need to be filed with SEBI by AIFs are financial statements quarterly, half-yearly compliance certificates, and annual audit reports. 

  10. Can AIFs borrow funds?

    Yes, AIFs can borrow funds subject to specific conditions and limits according to the SEBI regulations.

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