What is an Alternative Investment Fund?
Alternative investments collectively represent the many asset classes that fall outside the traditional investment instruments of direct investment in stocks and bonds. This category includes hedge funds, private equity, real estate, commodities, infrastructure, and other alternative investment funds.
Alternative Investment funds represent a form of a pooled investment vehicle where collective investments are made into different nontraditional investment options. Any person who wants to invest in an alternative investment fund in India can do it via SEBI-registered AIF entities.
Here, a group of qualified individuals form a fund and collect money from eligible investors to invest them in lucrative investment opportunities.
These investors can be domestic or foreigners. The SEBI registered AIF can exist in the Form of Trust, LLP, or body corporate. The nature and risk of investments made via AIF are different from traditional investment options. The registration of an AIF shall be valid till the lifetime of the AIF.
Alternative Investment Fund Registration
Types of AIFs registration in India
- Category- I AIF:
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:
These funds are not allowed to borrow for any purpose other than to carry day-to-day transactions. These funds invest in any form of combination and include private equity funds, real estate private equity funds, debt funds, etc.
- Category-III AIF:
Under these funds, there are short-term investments made, and later they are sold as hedge funds to make short-term benefits. Various hedge funds, PIPE funds, etc., form this category of AIFs.
Eligibility for Alternative Investment Fund Registration
Following conditions are necessary to be fulfilled for getting registered as AIFs:
- An entity shall be restricted through its MOA & AOA to invite the public to subscribe 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.
- The minimum corpus for any AIF must be a minimum of 20 crores.
Prohibited entities for AIF registration
As per SEBI guidelines, the following entities are not permitted to be registered as AIFs:
- Trustor Gratuity registered whose principal objectives are of employee's benefits.
- Any family trust registered with the primary objective of providing benefits to the relatives.
- ESOP trust registered under SEBI.
What is the Fund size for AIFs?
Can an AIF raise any amount of funds from any investor? An AIF may raise funds from any sophisticated investor, whether Indian, foreign or non-resident Indians, who inter alia undertake the risk of investing in primarily unlisted or illiquid securities.
The minimum fund size should be INR 20 crores. However, AIF (other than angel fund) shall not accept from an investor an investment of value less than one crore rupees. In the case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be twenty-five lakh rupees.
Documents required for AIF registration
- Details of registered addresses such as name, address, etc.
- Registration certificate of the company, in case of body corporate
- Name and Contact details of applicant such as contact number, E-mail Id, residential address
- Partnership deed, in case the applicant is registered LLP
- Trust deed, in case an applicant is a trust
- Business strategies and investment plans
- A draft copy of the placement memorandum
- Self-declaration by the directors/partner/members
- Financial statements of the previous years
- Sponsor or Directors are registered with the Board or not.
- Previously registered AIF by the sponsors.
- Past Work profile of the sponsors.
Business Plan for AIF registration
Details of Business Plan and Investment Strategy constitutes:
- Objective of the fund
- 2 Investment style/ strategy of the fund.
- Tenure of the Fund or scheme
- The target industries/ Sectors, if any
- Proposed Corpus
- The target Investors
- Proposed Fee structure to compensate the Sponsor and Manager
- Any regulatory proceeding against the sponsors or director.
Registration Process of AIF
Following are the step by a step registration process of Alternative Investment Fund:
- Apply To SEBI:
An applicant shall apply in Form A of SEBI (Alternative Investment Funds) Regulations, 2012, along with necessary documents and business plan.
- Authorization Letter:
Furnish an authorization letter in case an applicant or entity has authorized any director/promoter/or any such officer to act as an authorized signatory.
- SEBI Compliances:
To know whether an applicant is eligible or ineligible to be registered as AIF shall study the SEBI guidelines thoroughly.
- Cover Letter:
In case the applicant is registered with SEBI as a venture capital fund, it shall provide the details regarding the same in the cover letter as well as it needs to report in a covering letter whether it has been undertaking any activity as AIF or is applying registration for the new fund.
- Final Submission of Application:
Online application is filed as per the guidelines of SEBI on this behalf. Properly filled, numbered, duly signed, and stamped Form A accompanied by necessary documents and application fee of INR 100000 by way of a draft drawn in favor of The Securities and Exchange Board of India, payable at Mumbai shall be submitted for the grant of certificate of registration.
- Scrutinizing of Application:
SEBI, within 21 days of receipt of an application, shall verify and reply to the applicant. Application is evaluated for its correctness by SEBI, and SEBI, on being satisfied with the same, shall approve the application.
- Grant of Registration Certificate:
Once satisfied with the application, SEBI will grant the registration certificate against the charge of registration fees.
Registration Fees for AIF
On receipt of approval of SEBI, an applicant shall submit the following registration fee for the issuance of Certificate of Registration:
- INR 500000: If the applicant for AIF registration is of category-I
- INR 100000: If the applicant for AIF registration is of category-II
- INR 1500000: If the applicant for AIF registration is of Category-III
Such a certificate is valid throughout the life of AIF until it is wound up.
Restrictions of AIFs
Restrictions on the fundraising of AIFs and investments
There are certain following restrictions on the fundraising of AIFs and investments made by such AIFs:
- AIFs are allowed to raise funds through Private Placement.
- AIFs cannot accept an investment of value less than INR 1 Crore from the investor.
- Not more than 1000 investors are allowed under this fund, with the corpus limit of each scheme shall be INR 20 Crore.
- Promoter, sponsors, or manager shall have the continuing interest at least of the following:
- 2.5% Of The Initial Corpus
Invest minimum 5 crore. For Category AIF category III , the continuing interest shall be not less than 5% of the corpus or Rs. 10 crores, whichever is lower.
- AIFs registered under Category-I and Category-II are not allowed to invest 25% or more of their investment fund in a single investee company. In contrast, the same limit is 10% for Category-III AIFs.
- Close-ended AIFs are allowed to be listed on the stock exchange up to a minimum of INR 1 Crore of a trading lot after the closure of the scheme or fund.
Restriction on number of Investors/Members of AIFs
Following are the limits imposed on the number of investors or members under AIF regulations:
- AIF (other than Angel Funds) cannot have more than 1000 investors at any time.
- In the case of Angel Funds, no scheme can have more than 49 investors at any time.
- AIF is permitted to raise funds through Private Placement and cannot invite the public for the subscription of its shares.
Complaint Redressal Mechanism
Investors who have any grievances or complaints against AIFs shall redress the same. SEBI, for this purpose, has established a web-based centralized grievance redressal system known as SCORES (SEBI Complaint Redressal System).
AIF shall resolve the dispute through its manager/sponsor/promoter in the Form of arbitration or such other mechanism as decided on mutual terms between investors and AIF.
Post- Registration compliance
AIF needs to comply with the reporting norms of SEBI:
- Quarterly: by Category-I, II & III(not employing leverage)
- Monthly: by Category-III (employing leverage)
- In addition to these, Category-III AIFs shall comply with the norms of risk management, compliance, redemption, etc., as mentioned in the circular.
- Leverage for Category-III shall not exceed two times the gross exposure after hedging offset.
Other Compliance Requirements
- The AIF must be compliant with the reporting requirement of SEBI.
- AIF shall report to the SEBI in case of any material changes made in detail already furnished to SEBI at the time of application.
- AIF must keep the regular follow up with the SEBI website for any updates on the latest circulars, amendments, or new guidelines issued
- AIF must appoint a custodian for funds protection in case the corpus surpasses
- the 500 crore mark.
- The books of accounts of AIF must be annually audited by a qualified auditor.
- The sponsors or managers must disclose their conflict of interests.
Frequently Asked Questions
These funds use a combination of complicated trading strategies and are not limited to arbitrage, derivative trading, margin trading, etc. These funds are authorized under SEBI (Alternative Investment Fund) Regulations to invest in unlisted as well as listed derivatives.
"Angel Fund" is a sub-category of Venture Capital Fund under Category Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations.
A debt fund is an Alternative Investment Fund (AIF) that invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the fund. [Ref. Regulation 2(1)(i)]. These funds are registered under Category II. In this regard, it is clarified that, since Alternative Investment Fund is a privately pooled investment vehicle, the amount contributed by the investors shall not be utilized for the purpose of giving loans.
‘’Sponsor’’ is any person(s) who set up the AIF and includes promoter in case of a company and designated partner in case of a limited liability partnership.
As per the SEBI, AIFs can be registered, established, or incorporated in the Form of trust, company, LLP, partnership firm, body corporate. In general practice, the majority of AIFs are registered as a trust.
It is defined as the total amount of money committed in a written agreement or any similar documents by investors on a particular date to the AIFs.
No, it cannot go public. It cannot get listed or issue its shares and securities to the public.
Yes, it can get as per the current FDI policies under the FEMA act.
The objective of AIF is different from mutual funds. AIF is a highly risky investment.MF is considered less risky than AIF and available to retail investors.
Yes, it is mandatory for Cat-III and for others having a fund size of more than INR 500 Crores
No, it is not. However, primarily its investment should be unlisted; hence 51% or more can be unlisted.
Yes, but only by AIF Cat -III
AIFs can't directly in projects. They can only invest in securities of such projects. For Cat I and II, only 25% of the fund can be invested in one project.
Yes, but approval of 75% of investors is mandatory.
Yes, it can. There is no limit on the number of schemes in AIF.