AIF Registration

Who regulates alternative investment funds (AIF)?

Who regulates alternative investment funds (AIF)

The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) and the guidelines and circulars issued by the Securities and Exchange Board of India (“SEBI”) govern the creation and operation of Alternative Investment Funds (“AIFs”) in India. Funds are also subject to some extra regulations of the board from other legislation, such as the Prevention of Money Laundering Act, 2002, and the SEBI (Intermediaries) Regulations, 2008. However, the SEBI (Collective Investment Schemes) Regulations, 1999, the Mutual Funds Regulations, 1996, and any other fund management laws do not apply to AIF funds.

The International Financial Services Centres Authority (“IFSCA”) (Fund Management) Regulations (“FM Regulations”) and the guidelines and circulars issued by IFSCA govern funds and fund manager entities (“FMEs”) at the International Financial Services Centre (“IFSC”) in GIFT City, India.

Alternative investment funds may be established as corporations, limited liability partnerships (“LLPs”), trusts, or other legal entities. Other laws, such as the Limited Liability Partnership Act of 2008, the Companies Act of 2013, and the Indian Trusts Act of 1882, may also apply, depending on the type of vehicle.

Types of Alternative Investment Funds

Alternative investment funds are classified into three categories by the Securities and Exchange Board of India. Three types of funds are discussed below: 

Category I AIFs

These investments include funds made in start-ups and SME funds & enterprises that are either newly established or have the potential to expand financially. The government promotes investment in these endeavours since they boost the economy by creating jobs and generating high output.

Here are some examples in this category:

  • Infrastructure Funds
  • Angel Funds
  • Venture Capital Funds
  • Social Venture Funds

Category II AIFs

Funds invested in debt securities and equity securities fall under this category. Included are the funds that do not fall under Category 1 or 3, respectively. The government does not offer any discounts for investments made for Category 2 AIFS.

READ  AIF Audit Checklist

Here are some examples in this category:

  • Funds of funds
  • Debt funds
  • Private Equity Funds

Category III AIFs 

Alternative investment funds are funds that yield returns in a brief amount of time. These funds employ a variety of intricate trading techniques to meet their objectives. There isn’t a documented government subsidy or incentive allocated to these funds directly.

Here are some examples in this category:

  • Hedge Funds or Funds
  • Private Investment in Public Equity Funds

Eligibility Criteria For Registration of Alternative Investment Fund 

The eligibility criteria to apply for registration as an alternative investment fund are discussed below:

  • The applicant, manager, and sponsor must meet the requirements listed in Schedule II of the SEBI (Intermediaries) Regulations, 2008, in order to be eligible to apply for registration as an Alternate Investment Fund.
  • In addition to having at least one key employee with five years of experience managing capital pools or providing advice, the manager of the alternative investment funds key investment team also has sufficient experience managing funds, wealth, and asset portfolios, as well as the business of buying, selling, and trading securities and other financial assets. 
  • A minimum of one important employee must hold a professional degree in accounting, finance, business management, commerce, capital markets, economics, or banking from a school or organisation approved by the federal government or any state government. 
  • The intended investors, investment purpose, investing style, projected corpus, strategy, and proposed term of the fund or scheme have all been expressly declared by the applicant at the time of registration.
  • The Memorandum of Association (MoA) of a company or the Trust Deed of a Trust or the Partnership deed of an LLP gives a licence to carry on the activity of an alternative investment fund.
  • The applicant’s Memorandum of Agreement (MoA), Articles of Association (AoA), Partnership Deed, or Trust Deed should forbid it from inviting the public to subscribe to its securities. 
  • The Trust Deed is properly registered under the Registration Act of 1908 if the applicant is a trust.
  • If the applicant is an LLP, it is lawfully incorporated, and the partnership deed is submitted to the Registrar of Firms as per the terms of the Limited Liability Partnership Act, 2008. 
  • If the applicant is a corporate body, it must have been created or organised in accordance with Central or State Legislature legislation and be authorised to engage in AIF operations.

SEBI Alternative Investment Fund application fee structure

The requisite application fees, as provided by the FAQs, are as enumerated below: 

S. NoCategory of the ApplicantRegistration Fee
1.Application Fee1,00,000
2.Registration fee for Category I Alternative Investment Funds other than Angel Funds5,00,000
3.Registration fee for Category II Alternative Investment Funds other than Angel Funds10,00,000
4.Registration fee for Category III Alternative Investment Funds other than Angel Funds15,00,00
5. Scheme Fee for Alternative Investment Funds Other than Angel Funds1,00,000
6.Re-registration Fee1,00,000
7.Registration Fee for Angel Funds or Funds from Angel Investors2,00,000

Taxation Rules for AIF in India 

READ  Alternative Investment Funds Registration

Each alternative investment fund type has a different set of tax regulations. The tax pass-through status is enjoyed by Category I and II AIFs, meaning that any gain or loss other than business income is subject to both investor and fund taxes. Therefore, alternative investment fund investments in these two AIF categories are subject to capital gain taxes, which have a 20% tax rate and an indexation advantage. Additionally, tax rates, surcharges, and cessation costs apply to short-term capital gains. Furthermore, except for the case of company income, all other income is subject to Dividend Distribution Tax, and the investment fund is required to deduct 10% TDS from it.

However, Category III does not benefit from the pass-through status and is taxable at the fund level. The following categories of income are subject to taxation by Category III AIF:

  • Long-term Capital Gains
  • Short-term Capital Gains
  • Dividend Income 
  • Revenue from Business
NBFC

Empowering Financial Access with Digital Lending

In today’s fast-paced world, digital lending provides financial convenience, speed, and accessibility to borrowers.

Download PDF

What makes compliance with the Alternative Investment Fund crucial?

All alternative investment funds registered with SEBI must submit their compliance reports and applications for any requests under the alternative investment fund Regulations and related circulars via the SEBI Intermediary Portal.

Lately, the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (referred to as the “AIF Regulations”), specifically Regulation 24(b) read with Regulation 28 of the same, highlighted a violation involving the incorrect reporting of an “investable fund”. AIFs that are registered are required by Regulation 28 of the AIF Regulations to provide reports as requested by SEBI to continue their investment objectives. According to the July 2013 circular, all Category I, II, and III AIFs (which do not engage in leverage) must report to SEBI every quarter using a specific format. Additionally, as of July 2017, SEBI mandates that all AIFs that have registered must use the SEBI Intermediary Portal/SI Portal to file their compliance reports and make other requests.

However, despite the requirement, a few acknowledged registered alternative investment funds neglected to provide the necessary reports, and SEBI repeatedly sent letters and emails to the Notices informing them of their non-compliance. However, as these messages were not returned, SEBI opted to use Section 15EA of the Securities and Exchange Board of India Act, 1992 (often known as the “SEBI Act”) to take enforcement action against the Notices. Therefore, market players must understand the value of strong reporting and disclosure frameworks and make sure they are fully compliant with these regulations.

What benefits come with making investments in alternative investment funds?

Alternative investment funds have many advantages that may make them appealing investments.

  • Access to hard-to-get asset classes like real estate, hedge funds, venture capital, and private equity is made possible by alternative investment funds. It is frequently simpler to discover appealing returns with these kinds of investments.
  • Second, by allowing investors to spread their investments over a variety of asset classes, AIFs can help create a portfolio that is more stable and well-balanced.
  • Thirdly, alternative investment funds are overseen by seasoned individuals with the know-how and experience required to maximise the funds’ long-term success. Fund managers provide investors with valuable insights and recommendations to optimise their potential profitability.
  • Additionally, compared to other investment vehicles, some alternative investment funds provide tax advantages that can help investors who could be exposed to high rates of taxation on particular types of income or gains from their assets.
  • Last but not least, investing in alternative investment funds gives investors access to specialised asset classes and knowledge, which may result in returns that are possibly higher than those of standard investments. There may also be potential tax savings and benefits from diversification.
READ  All you need to know about Alternative Investment Funds

Compliance Calendar for Alternative Investment Funds 

The following is the compliance calendar for each alternative investment fund category:

AIFs in Categories I and II:

  • Financial statements must be filed quarterly, no later than one month after the end of each quarter.
  • Submitting a compliance certificate every quarter no later than one month from the end of the previous quarter.
  • Financial statements and an auditor’s report must be filed annually and within six months of the fiscal year’s conclusion.

AIFs in Category III: 

·         Financial statements are filed each month within ten working days of the end of the month.

  • Submission of a compliance certificate every month, no later than ten working days from the end of the month.
  • Financial statements and an auditor’s report must be filed annually and within six months of the fiscal year’s conclusion.

Conclusion 

For alternative investment funds to raise funds and to preserve the confidence of their investors and the stability of the market, adhering to SEBI’s regulations is crucial according to their investment style. To maintain accountability and transparency in their business practices, AIFs have to abide by SEBI rules and reporting specifications. Each alternative investment fund category’s compliance calendar offers a road plan for AIFs to meet their compliance obligations and steer clear of any fines or registration cancellations. Alternative investment funds that violate SEBI’s laws and regulations risk severe repercussions, such as fines, penalties, and even registration cancellation. AIFs may have serious repercussions from the loss of registration since they will be unable to obtain additional funding from investors or make new investments.

FAQs:-

  1. What is an Alternative Investment Fund?

    Privately pooled investment vehicles that collect funds from sophisticated investors and invest them according to the defined investment policy are known as alternative investment funds. They raise money from affluent domestic and foreign investors.

  2. Who oversees alternative investment funds in India?

    The Securities and Exchange Board of India (SEBI) oversees the alternative investment funds in India under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

  3. What are the main legal frameworks that Alternative Investment Funds employ?

    Alternative investment funds can be set up as trusts, LLPs, corporations or corporate bodies. Trusts are frequently used to establish funds because they have greater operational flexibility, require fewer statutory disclosures, and are simpler to incorporate and wind up.

  4. What are the main legal frameworks that advisers and managers of alternative investment funds use?

    According to the AIF Regulations, an individual or organisation in India designated by the alternative investment fund to oversee its investments may be referred to as a manager. Managers are usually organised as LLPs or businesses.

  5. How long is an AIF's certificate of registration valid?

    A certificate of registration for an alternative investment fund is valid until the AIF is wound up by sub-regulation 7 of regulation 3.

  6. What process is involved in opening an Alternative Investment Fund?

    The Securities and Exchange Board of India (SEBI) must receive an application for registration along with the required documents and fees.

  7. Does the eligibility to invest in alternative investment funds have any restrictions?

    Yes, accredited or institutional investors who satisfy specific income and net worth requirements are typically the target audience for AIFs.

  8. What are an alternative investment fund's ongoing reporting obligations?

    SEBI requires alternative investment funds to submit reports regularly that include information about their investments, financials, and any significant changes to the fund.

Trending Posted