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
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
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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