Date: 14th January, 2020
SUBJECT: NOTE FOR REGISTRATION OF ALTERNATIVE INVESTMENT FUNDS (AIF’s)
A) INTRODUCTION TO ALTERNATIVE INVESTMENT FUNDS:
Alternative Investment Funds AIF differ from regular conventional investments (asset classes) like stocks, debt securities etc. Alternative Investment Fund is a privately pooled investment vehicle that collects money from sophisticated private investors.
AIFs include private equity, venture capital, hedge fund, and angel fund etc. Also, AIFs don’t come under the purview of Securities and Exchange Board of India SEBI mutual fund regulations. Investors who wish to diversify can choose Alternative Investment Funds to invest. All Indians, including NRIs, PIOs, and OCIs, are eligible to invest in AIFs. However, they will have to meet the eligibility criteria.
B) WHAT ARE ALTERNATIVE INVESTMENT FUNDS?
Alternative Investment Funds AIF pool money from sophisticated private investors. Funds collected are invested according to the investment policy of the AIF. Securities and Exchange Board of India‘s mutual fund regulations doesn’t govern AIFs. However, AIF in India has its regulation, Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. An AIF in India can be established as a company, Limited Liability Partnership (LLP), corporate body, or trust.
AIFs invest in investments that are not traditional (for example, equities or fixed income).
Securities and Exchange Board of India classifies AIFs under three broad categories. Namely, Category I AIF, Category II AIF and Category III AIF. Each of the categories has different investments as per the broad definition of the category. Some of them are private equity, venture capital, hedge fund, and angel fund etc.
C) WHAT ARE THE TYPES OF ALTERNATIVE INVESTMENT FUNDS IN INDIA?
Securities and Exchange Board of India (SEBI) categories Alternative Investment Funds into three broad categories. Investors can choose to register in any of the following three categories and subcategories thereof.
- Category I AIF:
- Venture Capital Funds
- Angel Funds
- SME Funds
- Social Venture Capital Funds
- Infrastructure funds
- Category II AIF
- Private Equity (PE) Funds
- Real estate Funds
- Funds for distressed assets
- Debt Funds
- Funds of Funds
- Category III AIF
- Hedge Funds
- Private Investment in Public Equity Funds (PIPE)
D) ELIGIBILITY FOR ALTERNATIVE INVESTMENT FUND REGISTRATION:
- An entity shall be restricted through its MOA & AOA to invite the public for subscribing to its shares.
- A maximum number of investors shall not at any time exceed 1000.
- Trust deed duly registered under Registration Act 1908, shall also be furnished in case of an applicant for AIF registration is registered trust.
- A partnership deed is compulsorily furnished in case the applicant is LLP, and such deed shall be duly registered under the LLP Act 2008.
- Investors of AIF shall be either Indian or Non-Resident Indian.
E) WHAT ARE THE TAXATION RULES FOR AIFS?
Alternative Investment Funds are privately pooled investment vehicles. They collect money from sophisticated private investors.
Following are the taxation rules of AIFs for each category.
Category I and Category II are pass-through vehicles. The fund doesn’t have to pay any tax on its earnings. However, the investors have to pay the tax at their respective tax slabs. If the fund has any capital gains on stocks, then the investors have to pay 15% or 10% depending on the holding period.
Category III AIFs are taxable at the highest income tax slab level (42.7%) at the fund level. The returns given to investors are after deducting the tax.
F) WHO IS THE SPONSOR OF THE AIF?
Sponsor(s) is a person(s) who has established the AIF. In the case of a company, a promoter is the sponsor. And in case of a Limited Liability Partnership, a designated partner is the sponsor. To ensure the good interest of the sponsor or manager is aligned with that of the investors, few regulations have been set up.
The sponsor/manager will have a certain continuing interest in the AIF. This will not be in the form of a fee waiver.
For Category I and II, the sponsor/manager will contribute an amount not less than 2.5% of the corpus or INR 5 Cr, whichever is lesser.
For Category III, the contribution will be 5% of the corpus or INR 10 Cr, whichever is lower. Also, for angel investors, this amount will not be less than 2.5% of the corpus or INR 50 lakhs, whichever is lesser.
G) TIMELINE:
Approx. 3 To 4 Months.
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