Alternative Investment Fund
Alternative Investment Fund
Alternative Investment Funds (AIFs) deeply influence the global financial system and economy with investment decision affecting the capital markets, companies and individuals. According to Securities and Exchange Board of India’s (SEBI) Regulation 2(1) (b), AIFs can be referred as any privately pooled investment fund (whether from Indian or foreign sources), in the form of a trust or company or a body corporate or a Limited Liability Partnership (LLP). However, AIF does not come under the purview of SEBI’s mutual fund regulations.
AIFs has evolved as an important part of the financial system and global economy and influenced regulatory changes, economic cycles and technological developments.
AIFs act as an alternative investment option and privately pooled investment vehicle. They collect national or foreign funds from worldly investors for investing in assets and strategies with defined investment policies for the benefit of its investors.
AIF explore alternative investment opportunities and does not invest in the traditional ways of investing such as stocks, bonds or commodities.
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Role of AIF
AIFs generate new investment opportunities and serve to increase the source of the capital. It also helps to reform the macroeconomic drivers, post-crisis financial industry regulation and two critical industry trends.
Objectives of AIF
- To provide flexible options to take long and short positions for investment returns
- To provide specific, measurable, achievable, relevant and time-bound opportunities for investors
- To provide new business models for alternative investment firms and individuals
- To provide a platform for global alternative asset managers through developing in-house operating teams
- To develop strategies for safe and steady growth in income
- To provide a less volatile investment environment and
To provide the benefits of diversification
AIFs Contribution to the Economy
AIFs contribute through Capital Markets and Real Economy by the following mechanisms:
Capital Market
|
S. No. |
Title |
Description |
Returns/Benefits |
|
1 |
Liquidity | Provides options for investors to buy or sell assets at their convenient time | Mild/High |
|
2 |
Financial Innovation | Develops new and innovative products | High/with risks |
|
3 |
Long Term Capital
|
Provides the capital to invest in long term projects | High |
|
4 |
High-Risk Capital
|
Provides capital to normal investors’ risky projects | High |
|
5 |
Transaction Costs | Provides support for consumers and businesses to reduce the cost of deals/trades | High |
Real Economy
|
S. No |
Title | Description |
Returns/Benefits |
|
1 |
Economic Impact
|
Increases GDP and increases competition in the global market | High |
|
2 |
Innovation
|
Provides support for future technologies | High/Moderate |
|
3 |
Employment
|
Creates more employment opportunities | High/Mild |
|
4 |
Corporate governance
|
Strengthens the structure of governance and reduces principal-agent issues | High/Moderate |
|
5 |
Firm productivity
|
Increases the productivity in quality and quantity and supports for new research areas | High |
Funds not covered by the AIFs
- Family Trusts
- ESOP Trusts
- Employee Welfare Trusts or Gratuity Trusts
- Holding Companies defined under section 2(46) of the Companies Act 2013
Funds regulated and managed by Securitization Company or Reconstruction Companies registered with RBI under section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
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Categories of AIFs
As per SEBI (AIFs) Regulations, 2012 classifications of AIFs have three categories. They are Category I, Category II and Category III.
According to SEBI, Category I contribute 27%, Category II contributes 58%, and Category III contributes 14% of capital commitments by AIFs. The majority of AIFs are in the form of infrastructure and Venture Capital funds.
Category I
Criteria
Investors investing in the following sectors are eligible in this category:
- Start-up, social ventures, early stages of ventures
- Infrastructure, social, non-banked credit for SME
- Special incentives provided by the government
Type of funds
- Venture Capital Funds
- SME Funds
- Social Venture Funds
- Infrastructure Funds and
- Other Alternative Investment Funds
Benefits
- Close-ended tenure
- Specific investment restrictions for each subtype
- Not allowed to leverage
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Category II
Criteria
Investors investing in a Residual category of funds are eligible in this category. This category does not get incentives or concessions from the government.
Type of funds
- Private Equity Funds
- Debt Funds
- Fund of Funds
Other alternative funds (such as Real Estate funds)
Benefits
- Closed-ended tenure
- Not allowed to leverage
No restrictions on asset allocation
Category III
This category is more flexible and provides short-term gains. This category does not get incentives or concessions from the government.
Criteria
- Liquid or listed equity funds
- Funds invested in derivatives
- Funds that employ leverage for investments
Type of funds
- Long Only Equity Funds
- Long Short Equity Funds
Benefits
- Open or close-ended tenure
- Leverage is allowed
- No restrictions on asset allocation
- Flexible asset allocation
Key Regulations for AIF
Private Placement:
AIFs units can be placed only through the private offering and not through a public offering.
Number of Investors:
The maximum number for any AIF scheme cannot exceed more than 1000 investors (provisioned under the Companies Act, 1956).
The maximum number of Angel Investors cannot exceed more than 49 investors.
Taxation:
- Category I and II is tax pass-through vehicles. TDS will not be deducted.
- 10% withholding is done while making distributions
- The rate of withholding for offshore investors will be determined based on DTAA
Foreign Investments:
SEBI and AIF have permitted AIFs for foreign investments
Manager/Sponsor Continuing Interest:
Continuing Interest could be above 2.5% of fund size or Rs.5 crores (whichever is less).
Tenure and Listing of AIFs
|
S. No. |
Category |
Tenure |
Listing |
|
1 |
Category I |
|
Units of close-ended AIFs will be listed on Stock exchange with a minimum trading amount of Rs.1 crore |
|
2 |
Category II | Same as Category I | |
|
3 |
Category III | Open or Close-ended |
Process for Listing and Trading AIF on BSE
Step 1: AIF approach BSE to seek In-principle Approval for Listing and Trading of units
Step 2: AIF receives the approval receipt and approaches SEBI for approval
Step 3: AIF receives the approval receipt and approaches BSE for listing and trading
Documents required for Seeking In-Principle Approval
- Draft Information or Placement memorandum.
- Investment Management Agreement.
- Certification of registration of AI Fund issued by SEBI.
- Custodian Agreement.
- R & T Agreement.
- Trust Deed
- Memorandum & Articles of Association of the issuer
- The resolution passed by trustees or from the Board of Directors in case of AIF is established as trust or Company respectively
- An undertaking from the CEO or compliance officer that AIF is in compliance with SEBI (AIF) Regulations, 2012 as amended and all the other applicable laws.
Note: A non-refundable processing fee of Rs.50,000 is applicable for Per Placement memorandum/ Information memorandum (excluding GST).
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Documents required for Listing of Units
- Letter of Application
- Details of the applicant and details of Issue.
- A certified true copy of the Final Placement Memorandum/Scheme Information Document (SID)
- Certified True Copy of observations/comments received from SEBI on the Memorandum/Scheme Information Document (SID)
- Unit holding pattern of Unitholders of the Scheme (As per format)
- Confirmation from the CEO or Compliance officer regarding allotment of units and the actual no. of units allotted.
- Statement of Collection details.
- Listing Agreement as per SEBI LODR Regulations.
- Confirmation from CEO/Compliance officer regarding compliance with the provisions of SEBI (AIF) Regulations, 2012.
- Confirmation from NSDL and CDSL (ISIN activation)
- Confirmation from RTA on the final number of units to be allotted with NSDL, to be allotted with CDSL and to be issued under the physical form.
- Undertaking from the RTA on the units considered under switches that they have debited the units from the respective schemes and credited the applicable units in this scheme.
- Confirmation received from NSDL/CDSL for credit.
- Confirmation from RTA regarding the dispatch of Certificates/Account statement/refund order.
- Annual listing fees.
Non-Refundable Fees for AIFs Annual Listing
|
S. No. |
Particulars |
Fees Amount |
|
1 |
Initial Listing Fees | Nil |
|
2 |
Annual listing fees for the tenure of the scheme | Payable per annum |
|
3 |
Up to Rs.250 crores | Rs.2,50,000 |
|
4 |
Between Rs.250 crores and 500 crores | Rs.3,75,000 |
| 5 | Between Rs.500 crores and 750 crores | Rs.5,00,000 |
|
6 |
Between Rs.750 crores and 1000 crores | Rs.7,50,000 |
|
7 |
Above Rs.1000 crores | Rs.10,00,000 |
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AIFs for NRIs, PIOs and OCI
SEBI and AIF approve funds for AIFs from all Indians including NRIs, PIOs, OCIs (restrictions in some geographical areas as per AMC compliance policy).
Eligibility
- The minimum investment fund is Rs.20 crore
- The minimum investment through Angel Investors is Rs.10 crore
- The maximum investors cannot exceed 1000 investors
- The manager or the sponsor should have a continued interest for Rs.5 crores or less than 2.5% of the initial corpus
To be registered as AIF, the consent should obtain a certificate of registration from SEBI by filing Form A in sub-regulation (4).
The following details should be furnished:
- General details such as Trade name, date of registration and registration number
- Type of the company
- Details of the sponsor/manager
- Details of the business plan and investment strategy
- Details of the regulatory actions, if any
Application and Registration Fee
|
S. No. |
Title |
Fees |
|
1 |
Application Fee | Rs.1,00,000 |
|
2 |
Registration Fee (not registered with SEBI) | Rs.5,00,000 |
|
3 |
Registration Fee (registered with SEBI) | Rs.1,00,000 |
