SEBI amends rules of Alternative Investment Fund

Rajdeep Saini

29 Oct, 2020

The Securities and Exchange Board of India (SEBI) has amended standards pertaining to alternative investment funds (AIF), such as crucial relevant professional credentials. Under the new rules, experience and qualification criteria by the investment team may be satisfied collectively or individually by employees of the key investment team of the manager.

The move comes into the picture after the Securities and Exchange Board of India approved these amendments in this regard. In this latest notification on October 19th, the regulator said that the key investment team comprising of the manager of Alternative Investment Fund is required to have sufficient experience, with at least one key personnel having a minimum of five years of experience in managing pools of capital or advising or wealth or assets or in the business of dealing of securities buying and selling. To understand this amendment better, let’s first understand what is Alternative Investment Fund?

What is an Alternative Investment Fund?

An alternative investment is a type of financial asset that does not fall into one of the predictable investment categories. These categories include bonds, stocks and cash. Most alternative investment assets are held by the institutional accredited or investors, high net-worth persons because of their compound nature, degree of risk, and lack of regulation.

An alternative investment fund consists of private equity or venture capital, derivatives contracts, managed futures, commodities, art and antiques, and hedge funds. Real estate is also regularly classified as an alternative investment.

Types of Alternate Investment Funds

According to the Securities and Exchange Board of India, an Alternative Investment Fund (AIF) can be categorized into 3 wide categories.

The investors can register into the following types of AIF:

Category I

Generally, this category of investors invests in early-stage ventures, SMEs, startups, angel funds, infrastructure and other sectors. This division is most cheap to run and have high growth potential. For example, Venture Capital Fund, Angle Fund, Social Venture Fund etc.

Category II

In this category, there are funds that particularly invest in debt securities and equity securities. No concessions are provided by the government to invest in these funds. For example, Private equity fund, Debt Fund and Fund of Funds etc.

Category III

Category III fund is to obtain short term returns. They use methods such as margin trading, derivatives strategies, arbitrage derivatives, etc. to fulfill the purpose of gaining short term capital goals. For example, Hedge Fund, Private Investment in Public Equity fund^[1] (PIPE), etc.

New Amendments in Alternative Investment Fund rules

Under this new amendment by the Securities and Exchange Board of India, the qualification and experience standard of the investment team may be satisfied collectively or individually by personnel of key investment lineup of the manager. The move comes after the board of Security exchanged board approved amendments in this regard.

In this notification on October 19th, the regulator stated that the main investment team of the manager of Alternative Investment Fund required to have sufficient experience, with a minimum of one major personnel having minimum five years of experience in managing pools of capital or advising or wealth or assets or in the business of dealing of securities buying and selling. In addition, such main investment teams need to have at least one key personnel with professional qualifications in accountancy, finance, commerce, business management, economics, banking from a recognized institution and capital market.

The Securities and Exchange Board further said the manager will be accountable for decisions of investment in the AIF, provided that such manager comprises of committee of investment to approve the investment decisions. This is subject to the members of the investment committee being uniformly responsible as the manager for investment decisions of the AIF.

The members and managers of the committee will jointly and severally ensure that the investments of the Alternative Investment Fund are in conformity with the provisions of these regulations.

The reason behind this amendment in the Alternative Investment Fund

The Securities and Exchange Board through this amendment require managers to be responsible for the investment pronouncement of all the Alternative Investment Fund, provided that the manager will comprise of a board of an investment to approve such decisions of Investment. This is with respect to the members of the investment committee being uniformly responsible as the manager for investment decisions of the alternative investment fund.

The members and managers of the committee will severally and jointly ensure that the investments of the alternative investment fund are in compliance with the provisions of these set of laws.

The securities exchange board also said external members whose names are not unveiled in the placement memo of the agreement made with the investor at the time of on-boarding will be selected to the committee of investments only with the approval of at least seventy five per cent of the investors by worth of their investment in the alternative investment fund.

Conclusion

Read our article:Alternative Investment Funds India – A Fund of new opportunities