India: Alternative Investment Fund

Last Updated: 23 November 2012
Article by Nusrat Hassan

The Securities and Exchange Board of India ("SEBI") notified Alternative Investment Funds Regulations ("AIF Regulations") on 21st May 2012, thereby repealing the SEBI (Venture Capital Funds) Regulations, 1999, with a view to monitor unregulated funds, encourage formation of new capital and consumer protection thus increasing the market efficiency. AIF Regulations are the outcome of the Concept Paper issued in August 2011 which was drafted to shift SEBI's regulatory strategy from the existing facilitative regime to a mandatory regime.

A significant requirement of the regulation is that AIFs are barred from raising capital from investors unless they obtain registration with the SEBI.  The following types of private pools of capital will be brought within SEBI's mandatory registration regime: (i) Venture Capital Funds; (ii) Private Investment in Public Equity Funds; (iii) Private Equity Funds; (iv) Debt Funds; (v) Infrastructure Equity Funds; (vi) Real Estate Funds; (vii) Small and Medium Enterprises Funds; (viii) Social Venture Funds; (ix) Strategy Funds; and (x) Residual category (including hedge funds).

Applicability: AIF Regulations are applicable to any fund established or incorporated in India in the form of a trust or a company or a LLP or a body corporate, which collects funds from investors, whether Indian or foreigner for investing in accordance with a defined investment policy. Mutual funds under the SEBI (Mutual Funds) Regulation, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999, Family trust, ESOP trusts, employee welfare trusts, collective investment schemes, holding companies etc. are expressly excluded.

Existing VCFs shall continue to be regulated by the VCF Regulations till the existing fund or scheme managed by the fund is wound up and such funds are not permitted to launch any new scheme or raise any capital commitments beyond the original targeted corpus unless they seek registration.

Prerequisites before raising fund:  Before raising any funds,AIFS will be required to state its investment strategy, investment purpose and business model in an information memorandum which is to be filed with SEBI at least 30 days prior to the launch of the scheme giving material detail about the AIF. The procedure of filing an information memorandum before raising funds is somewhat similar to that prescribed for companies coming out with public offers.

Categories of funds:  Based on the objectives sought to be achieved, the AIFs have been classified into three categories. Category I include those AIFs for which certain incentives or concessions might be considered by SEBI or Government of India or other regulators in India and which shall include Venture Capital Funds, SME Funds, Social Venture Funds, and Infrastructure Funds. Category II includes those which do not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and cannot engage in derivatives investments. Category III has those AIFs including hedge funds which trade with a view to make short term returns and may employ leverage including through investment in listed or unlisted derivatives.

Key conditions: Under the AIF Regulations:

  • The Alternative Investment Fund shall not accept from an investor an investment of value less than 10 million.
  • AIF shall have a minimum corpus of 200 million.
  • The manager or sponsor for a Category I and II AIF shall have a continuing interest in the AIF of not less than 2.5% of the initial corpus or 50 million whichever is lower. For Category III Alternative Investment Fund, the continuing interest shall be not less that 5% of the corpus or 100 million, whichever is lower.
  • Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable fees.
  • Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years. However, Category III AIF may either be close-ended or open-ended.
  • AIFs shall have maximum 1000 investors.

Conclusion:  The implementation of AIF Regulations is a step in a progressive direction and should go a long way in steering the growth of the industry, while at the same-time balancing the need for managing risks to the investors and ensuring the stability of the financial system. However, keeping the market exigencies in the mind, it is yet to be seen as to how these regulations mould themselves to promote the activities of the players in the market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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