6 Dec 2019

Alternative Investment Funds (AIFs)

Sources: SEBI & Arthapedia

SEBI is toying with the idea of introducing direct plans for alternative investment funds and portfolio management schemes.

Definition of AIFs

  • In India, alternative investment funds (AIFs) are defined in Regulation 2(1)(b) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. 
  • It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership(LLP) which are not presently covered by any Regulation of SEBI governing fund management (like, Regulations governing Mutual Fund or Collective Investment Scheme)nor coming under the direct regulation of any other sectoral regulators in India-IRDA, PFRDA, RBI.
  • Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Types of AIFs

  • Category I: AIFs which invest in start-up or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified
  • Category II AIF:  AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIF
  • Category III AIF: AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs

Fundraising and investment restrictions for AIFs

  • AIFs raise funds through private placement and they cannot accept from an investor an investment of value less than Rs. 1 Cr. 
  • The fund or any scheme of the fund cannot have more than 1000 investors and each Scheme should have a corpus of Rs. 20 Crore.
  • The manager or sponsor/ promoter of the AIF should have a continuing interest in the AIF of not less than 2.5% of the initial corpus or Rs.5 crore whichever is lower.
  • AIFs of Category I and II are not permitted to invest more than 25% of the investible funds in one Investee Company while it is 10% for Category III AIFs.