Alternative Investment Fund (AIF) Registration in India

AIF Registration – An Overview

Investors seeking alternative investment options other than conventional investments, such as cash, stocks and bonds, can explore Alternative Investment Funds (AIF). AIFs offer opportunities for attractive investment options with a balanced risk-return ratio to investors. The AIFs do not cater to regular investors but rather attract high-net-worth individuals with the required financial resources to commit to the AIFs. High-net-worth individuals from within India and worldwide can invest in AIFs in India.

AIFs are categorized into three categories. They offer investment scope across a broad range of non-traditional assets through start-ups, private equity, pre-IPO & post-IPO investments, venture capital, hedge funds, real estate, commodities and rare collectables.

AIFs in India are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

Legal Structure for AIF Registration in India

Applicants wanting to register an Alternative Investment Fund (AIF) in India can choose from the three legally recognized structures. Every structure requires a separate legal and regulatory requirement; therefore, selecting the one suited to individual needs is necessary. Even though Trust is the most commonly used, the following are the different types of legal structures for AIF Registration in India:

1. Trust – Trust is a legal arrangement registered under the Trust Act of 1882.
2. Company – A private or public company is a legal entity registered under the Companies Act, 1956 or the Companies Act, 2013.
3. Limited Liability Partnership (LLP) – An LLP is a limited liability partnership registered under the LLP Act, 2008.

Types of AIFs in India

AIFs in India have been categorized into three different types. Let us explore each category in detail below:

1. Category I AIF— Category I AIF invests in early-stage ventures, start-ups, social ventures, SMEs, infrastructure, or sectors considered socially and economically suitable. This category comprises Venture Capital Funds, Angel Funds, social venture funds, infrastructure funds and SME funds. Category I AIF is known for its investments in start-ups. It must be noted that shares of Angel funds cannot be traded or listed for public buying and selling on any recognized stock exchange.

Minimum Corpus Requirement - The minimum corpus requirement for Category I AIF is INR 10 crore, of which 2.5% or INR 50 lakhs must be mandatorily invested by the fund manager and sponsors, whichever is less.

2. Category II AIF—Category II AIF funds are those that don’t align with Category I or III. These include debt funds, private equity funds, or Funds of funds. These funds don’t use the money to increase their investment capital except to manage their daily operations.

Minimum Corpus Requirement—The minimum corpus requirement for Category II AIF is INR 10 crore. The sponsor must invest 2.5% of this amount or INR 5 crore, whichever is less.

3. Category III AIF—Category III AIF funds are investment funds that use diverse trading strategies, such as hedge funds, for short-term returns. They also use complex trading strategies, such as leverage, arbitrage, and derivates.

Minimum Corpus Requirement—The minimum corpus requirement for Category III AIF is INR 20 crore, and the sponsor contribution must be at least 5% of the corpus amount or INR 10 crore, whichever is less.

Foreign Direct Investment (FDI) in Alternative Investment Fund

Foreign Direct Investment (FDI) in AIF in India is an investment made by foreign entities in Alternative Investment Funds. As per the Securities Exchange Board of India (SEBI), AIFs in India can seek 100% FDI in all three categories. According to RBI compliance and FEMA guidelines, AIFs can also invest in foreign entities and stock exchanges.

Taxation Impact of AIF

Taxation on the AIFs in India depends on the category of the AIF. Taxed as pass-through entities, their income is taxed at the investor level. Let us look at the taxation methods of different category AIFs:

Category I and II—Long-term capital gains older than one year are taxed at long-term capital gain rates. However, unlisted shares and other assets are subject to 20% tax. Listed shares are taxed at 20%, while short-term capital gains are taxed at a 15% rate (commonly).

Category III – Capital gains, income and business are subject to fund-level taxation in this category. Tax rates applicable to the AIFs in this category include:

Type of Income	Tax Rate
Long-Term Capital Gain	10%
Short-Term Capital Gain	15%
Income from Dividend	30%
Income from Interest	30%
Income from Business	30%

Benefits of AIF

Alternative Investment Funds offer various benefits to the investors. Let us look at some of the benefits listed below:

Protection from Market Fluctuations

AIFs offer greater protection to investors for their investments in these funds. They safeguard investments against market instability and help steady an investor's portfolio. Since AIFs function independently from broader market trends, they are not impacted by market fluctuations.

Portfolio Diversification

AIFs allocate their funds to a broad range of assets, more than any other investment vehicle. This, in turn, offers a gateway to portfolio expansion to protect investments from market volatility or financial emergencies.

Attractive Earnings

AIF investment offers attractive earnings thanks to the availability of various investment alternatives. Investors looking for good passive investment should consider investing in AIFs rather than traditional investments. The returns are also stable since AIFs are unaffected by stock market fluctuations.

More Flexibility & Scope

AIFs are more flexible than traditional investments and offer greater scope since they're not bound by similar investment restrictions like mutual funds. This gives AIFs the opportunity to invest in a wide range of assets. To get profitable returns, AIFs use innovative strategies for investment across different risk capacities.

Risk-Return Balance

With great risks come greater returns. However, in the case of AIFs, great returns come with great investment, as many investors find the risk-return ratio lucrative. The returns are also higher since AIFs offer a chance to invest in non-traditional and less-liquid assets.  

Investment Opportunities

AIFs offer investment opportunities in high-yielding funds, including unlisted companies. These opportunities are unavailable to regular investors and open floodgates to attractive investments like early-stage startups and real estate projects.

Risk Mitigation

AIFs provide structured products that balance out the risk and return ratio using advanced strategies and financial instruments to mitigate the risk factor. That is why high-net-worth individuals find AIFs attractive investments offering risk mitigation.

Eligibility Criteria for AIF Registration

Applicants who wish to start an Alternative Investment Fund (AIF) in India, need to first get a certificate of AIF registration from SEBI. They must fulfil the below-mentioned eligibility criteria to be able to fill out the application form:

Permitted Business Activities

Company– The Memorandum of Association (MOA) should have a clause allowing AIF investments in different categories.

Trust– The trust deed should have a clause allowing AIF investments in different categories.

The trust should be registered under the Registration Act, 1908.

Limited Liability Partnership (LLP)—The partnership deed should include a clause allowing AIF investments in different categories. It must be registered with the Registrar under the LLP Act, 2008.

Private Subscription

The applicant's incorporation documents, such as the Memorandum of Association, Articles of Association, Trust Deed, or Partnership Deed, should include a clause prohibiting public invitations to subscribe to its securities.

Incorporation Requirement

Trusts– Should be registered under the Registration Act, 1908.

LLPs – Should be incorporated with a legal partnership deed filed under the LLP Act, 2008.

Company – Private or public company should be registered under the Companies Act, 1956/2013.

Fit Criteria

The applicants, sponsors, and managers must be declared fit as per Schedule II of the SEBI (Intermediaries) Regulations, 2008.

Management Qualification

The management needs at least 5-10 years of experience in relevant fields. One key person should also have 5 years of experience in finance and professional qualifications like CA or CFA.  At least one member of the key investment team must have NISM Series-XIX-C: Alternative Investment Fund Managers Certification.

Resource and Workforce Capacity

Managers and sponsors should fulfil all infrastructure and workforce requirements to achieve the activities set by AIF. Infrastructure comprises a data storage server, file lock room, and 500-square-foot office space during the application.

Investment Strategy

It is important for the applicants to have a transparent investment strategy outlining their investment objectives, investors, intended corpus, investment strategy, fund tenure, or scheme.

Process to Register for an Alternative Investment Fund (AIF)

The step-by-step guide to the registration process for AIF is given below:

Application Submission

Applicants across all registration categories need to submit an application to SEBI. The application should be in Form A as per SEBI (Alternative Investment Funds) Regulations 2012. It should submit the following details:

• Contact Details
• Incorporation Documents
• Ownership Details
• Business Strategies
• Important People with their Experience
• Private Placement Memorandum (PPM)
• Authorization

Application Fees – INR 1,00,000

Review & Processing by SEBI

• Application review by SEBI
• Document verification by SEBI
• Additional Information or Clarifications (if any by SEBI)
• In-person Meetings with AIF Officials (if required)
• Inspection of Office Space for Infrastructure Check by SEBI
• Principal Registration grant by SEBI within 120 Working Days (if the AIF meets all regulatory requirements)

Payment for Final Fee for Grant of Registration

Category I – INR 5,00,000

Category II – INR 10,00,000

Category III – INR 15,00,000

Validity of Certificate

Registration certificate is valid throughout the lifetime of the AIF.

Fee for Additional Schemes – INR 1,00,000

Investment Limit

• Category II & III AIF – Each investor is required to invest at least INR 1 crore
• Angel Fund – INR 25 lakhs is prescribed as the minimum investment
• AIF Employees, Directors or Managers – Can invest a minimum of INR 25 lakhs

AIF Registration– Requirements & Conditions

The following requirements and conditions must be fulfilled by the AIFs:

Applicant Details

For Trusts

1. Write up on the activities of the applicants
2. Trust Deed registration under the Registration Act, 1908
3. Trust Deed should have a clause for AIF activities
4. Trustees/Trustee Company details, including registration and activities

For Companies

1. Write up on the activities of the applicant
2. Shareholding pattern
3. Director profiles - including identity & address proof
4. A Memorandum of Association (MOA) should have a clause for AIF activities
5. Memorandum & Articles of Association – should prohibit public invitations to subscribe to securities

For Limited Liability Partnerships (LLPs)

1. Write up on the activities of the applicant
2. Beneficial ownership pattern
3. Partner profiles - including identity & address proof
4. Partnership Deed – duly filed under the LLP Act, 2008
5. Partnership Deed should have a clause for AIF activities
6. Partnership Deed – should prohibit public invitations to subscribe to securities

For Body Corporates

1. Write up on the activities of the applicant
2. Shareholding pattern
3. Director profiles - including identity & address proof
4. Should be established under Central or State legislature laws
5. Relevant statutes/Acts – should have a clause for AIF activities
6. Memorandum & Articles of Association – should prohibit public invitations to subscribe to securities

Details of Sponsor(s)

1. Name, address, contact details & legal status
2. Brief profile - including professional qualifications
3. Registration with SEBI or other regulatory authorities
4. Experience in managing or advising capital pools
5. Copies of financial statements for the previous financial year
6. Details of any previously floated AIFs or Venture Capital Funds

Details of Manager

1. Name, address, contact details & legal status
2. Write-up on past experience in managing capital pools
3. Identity & address proof of key personnel
4. Shareholding pattern & profiles of directors/partners
5. Profile of key investment team
6. Copies of financial statements from the previous financial year
7. Details of any previously managed AIFs or Venture Capital Funds

Business Plan & Investment Strategy

1. Investment objectives & strategy
2. Target investors & industries/sectors
3. Proposed corpus & fees
4. Tenure of the fund or scheme
5. Use of leverage for Category III AIFs

Regulatory Actions

1. Details of any past litigation or regulatory actions
2. Declaration of no involvement in adverse litigation
3. Confirmation of no previous SEBI certificate refusal or suspension

 

Other Information/Declarations

1. Contribution details from sponsor(s)/manager(s)
2. Declaration of compliance with SEBI regulations for investment and general conditions

 

Tenure of AIFs

Open-ended (infinite) for Category III AIFs and close-ended Category I and II AIFs have a minimum tenure of 36 months.

 

For Category I &II

In a close-ended fund, the applicant decides the tenure at the time of application submission to the board. The minimum tenure prescribed is 3 years. However, the AIF shall fix the maximum tenure.

For Category III

It may be open-ended or close-ended. However, most of AIF Category III is open-ended in India.

Extension of Tenure for Close-Ended AIFs

The tenure of a close-ended AIF can be extended by up to two years. However, that requires approval from two-thirds of the unit holders based on the value of their investments.

Investment Conditions for Alternative Investment Funds (AIFs)

Conditions for all AIF categories are given below:

Foreign Investments

AIFs can invest in foreign companies' securities if they comply with RBI and SEBI guidelines.

Co-Investment Terms

Co-investments by a manager or sponsor should match the terms offered to the AIF.

Investment Limits

Category I & II AIFs – Up to 25% of investible funds in one investee company

Category III AIFs – Up to 10% of investible funds in one investee company

Investments in Associates

Requires 75% investor approval by value

Uninvested Funds

It can be invested in liquid mutual funds, bank deposits, or other high-quality liquid assets.

Nominated Investor Role

AIFs can act as nominated investors under IPO.

Category II AIFs Specific Conditions

Investment Focus

• The primary focus on unlisted companies or units of other AIFs.
• Can invest in Category I or II AIF units. Cannot invest in other Fund of Funds.

Borrowing & Leverage

• No borrowing or leverage except for temporary needs (up to 30 days, 4 times a year, 10% of investible funds).
• May engage in hedging in accordance with SEBI guidelines.

Market Making

Funds are entitled to enter into agreements with merchant bankers for the purpose of market making.

Insider Trader Regulations

Exempt from investments in SME-listed companies, subject to the condition of disclosure and lock-in requirement of 12 months.

Category III AIFs Specific Conditions

Investment Scope

• Investment scope in listed/unlisted securities, derivatives or complex products.
• Investment scope in Category I or II AIFs units but not in any other Fund of Funds.

Leverage & Borrowing

• Permitted with investor consent and within SEBI limits.
• It is mandatory to disclose leverage details to investors and SEBI

Regulatory Compliance

It is mandatory to follow SEBI's rules on operations, business conduct, prudential requirements, redemption restrictions, and conflict of interest management.

AIF Registration – Angel Fund Investment Conditions

Registration of Angel Funds

Application Process

• File registration application by Chapter II of SEBI Regulations.
• For existing AIFs, conversion to an Angel fund without investments is possible.

Investment in Angel Funds

Fundraising

• Fundraising is only done by issuing units to angel investors.
• Minimum corpus requirement of INR 5 crores.
• A minimum investment of INR 25 lakhs per angel investor is required for up to five years.
• Fundraising through private placements via information or placement memorandums.

Schemes

Launching Schemes

• Fulfilling a scheme memorandum with SEBI must be filed 10 days before the launch.
• There are no scheme fees for angel funds.
• The scheme memorandum shall include all material investment information.
• SEBI may provide comments to be incorporated before launch.
• Maximum 200 angel investors per scheme allowed.

Investments by Angel Funds

Investment Criteria

• Invest in venture capital undertakings/start-ups as per Department of Industrial Policy and Promotion guidelines.
• Companies with turnover of less than INR 25 crores.
• Companies should not be a part of any industrial group with turnover exceeding INR 300 crores.
• Investment in companies with family connections to angel investors is not permitted.
• Investment range – INR 25 lakhs to INR 5 crores per venture.
• Locking period for Investments – 1 year.
• No investment in associates.
• Maximum 25% of total investments allowed in one venture.

Foreign Investments

In compliance with RBI & SEBI guidelines, Angel funds may invest in companies outside India.

Which entities do not fall under AIF?

According to SEBI Regulations, 2012, entities that do not fall under AIFs as per the sub-clause (b) of Regulation-2 include the following:

• Family trusts
• Holding companies
• Employee welfare trusts
• Gratuity trusts for employees
• Pool of funds, which another regulator in India directly regulates
• ESOPs under SEBI (Share Based Employee Benefits) Regulations, 2014 or the Companies Act, 2013
• Funds managed by a securitization or reconstruction company registered under SARFAESI Act, 2012
• Special Purpose Vehicles include securitization trusts not established by fund managers and are regulated under a specific regulatory framework.

Compliance & Regulatory Requirements for AIF

Yearly Audit

Annual audits of financial statements by a qualified auditor are a must for AIFs.

Quarterly Reporting

Quarterly reports are submitted to SEBI outlining the details of their activities, such as performance and portfolio valuation, fund expenses, and any other changes in investment strategy.

Valuation Reports

• Category I and II AIFs – Must get their investments valued by an independent valuer once every six months, which can be extended to one year with the approval of 75% of investors by value.
• Category III AIFs – Must disclose their Net Asset Value (NAV) quarterly for close-ended funds.

Investor Reporting

It is important to share performance updates with investors regularly. Updates include

detailed statements, valuations, and any other significant development by the AIF.

Conflicts of Interests Disclosure

It is important for AIFs to disclose any conflicts of interest (if any) with SEBI and their investors. This helps maintain transparency and ethics.

Changes in Key People

If any key management people or investment team are changed, AIFs must report these changes to the SEBI.

Investment Limit Compliance

AIFs must comply with SEBI's investment limits and restrictions, including sector-specific limits and restrictions on borrowing and leverage.

Appointment of Custodian

AIFs must appoint SEBI-registered custodians with a corpus of over INR 500 crores to keep the securities safe. Regardless of their corpus size, Category III AIFs are mandated to appoint a custodian.

Record Keeping

All AIFs need to maintain financial records, transactions, and communication with investors for a specified period. This ensures the easy accessibility of these records during regulatory inspections.

Regulatory Filing

All AIFs must comply with regulatory filing requirements. These include annual returns and other documents required by SEBI to:

• Maintain transparency
• Safeguard investor interests
• Ensure the integrity of the financial markets

Registration Fees for AIF

Registration fee for Alternative Investment Fund (AIF) includes the following:

Category I – INR 5,00,000

Category II – INR 10,00,000

Category III – INR 15,00,000

Additional Schemes – INR 1,00,000

 

Why Choose Corpbiz for Alternative Investment Fund Registration?

Choosing Corpbiz for Alternative Investment Fund registration in India ensures a focused approach to simplifying your AIF Registration process.

• Expertise in SEBI Regulations for AIFs
• Extensive and Precise Documentation Assistance
• Efficient Application Process
• Customized Structuring of AIFs
• Post-registration Support