Subject: Note on Alternative Investment Fund
Only a few years ago, the only way to create financial assets in India was to put your money in conventional investment categories such as stocks, bonds and real estate. With the increasing tribe of high net-worth individuals in the country, there is a steady rise in the demand for non-conventional investment avenues such as Alternative Investment Funds (AIFs).
A) What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund comprises pooled investment funds which invest in venture capital, private equity, hedge funds, managed futures, etc. In simpler terms, an AIF refers to an investment which differs from conventional investment avenues such as stocks, debt securities, etc.
Alternative Investment Fund is described under Regulation 2(1)(b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI). AIF can be established in the form of a company or a corporate body or a trust or a Limited Liability Partnership (LLP).
Generally, high net worth individuals and institutions invest in Alternative Investment Funds as it requires a high investment amount, unlike Mutual Funds.
B) Registration of AIF:
Any entity or person after obtaining a certificate of registration from the SEBI shall act as an Alternative Investment Fund.
Alternative Investment Funds shall seek registration in one of the categories mentioned hereunder:
(a) “Category I Alternative Investment Fund” which invests 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.
- Venture Capital Fund
- Infrastructure Fund
- Angel Fund
- Social Venture Fund
(b) “Category II Alternative Investment Fund”: Funds investing in various equity securities and debt securities come under this category. All those funds that are not described under category I and III by SEBI, fall under category II. No incentive or concession is given by the government on investment in these funds.
- Private Equity (PE) Fund
- Debt Fund
(c) “Category III Alternative Investment Fund”: Funds which aim at short term returns fall under this category. They employ various complex and diverse trading strategies to achieve their goal of short term capital appreciation. There is no specific incentive or concession given by the government on investment on these funds as well.
- Hedge Fund
- Private Investment in Public Equity Fund (PIPE)
C) Eligibility to invest in AIF:
Any sophisticated investor whether Indian, foreign or non-resident Indian is allowed to invest in an AIF, provided s/he has the required funds for investment, and is willing to bet on the unlisted and illiquid securities.
D) Investment in Alternative Investment Fund
1.The Alternative Investment Fund may raise funds from any investor whether Indian,Foreign or non-resident Indians by way of issue of units;
2. Each scheme of the Alternative Investment Fund shall have corpus of atleast twenty crore rupees;
(* Meaning of Corpus – means the total amount of funds committed by investors to the AIF by way of a written contract or any such document as on a particular date)
3. The Alternative Investment Fund shall not accept from an investor, an investment of value less than one crore rupees:
Provided that in case of investors who are employees or directors of the Alternative Investment Fund or employees or directors of the Manager, the minimum value of investment shall be twenty five lakh rupees-
4)no scheme of the Alternative Investment Fund shall have more than one thousand investors.
Provided that the provisions of the Companies Act, 2013 shall apply to the Alternative Investment Fund, if it is formed as a company.
F) Overseas Investment by Alternative Investment Funds:
Under Regulation 15(1)(a) of AIF Regulations, “Alternative Investment Fund may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and SEBI from time to time .
As per SEBI circular in consultation with RBI, USD 750 million has allowed as overseas investment by AIFs.
For monitoring the utilization of the overseas investment limits, AIFs has to disclose the following:
a)AIF shall report the utilization of the overseas limits within 5 working days of such utilization on SEBI intermediary portal.
b)AIFs shall also report the followingthrough SEBI intermediary portal:
- In case an AIF has not utilized the overseas limitgranted to themwithin aperiod of 6 monthsfrom the date of SEBI approval (hereinafter referred to as ‘validity period’), the same shall be reported within 2 working days after expiry ofthevalidity period;
- In case an AIF has not utilizeda part ofthe overseas limitwithin the validity period, the same shall be reported within 2 working days afterexpiry of the validity period;
- In case an AIF wishes to surrender the overseas limit at any point of time within the validity period, the same shall be reported within 2 working days from the date of decision to surrender the limit.