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4. Results: Answers
Alternative Investment Funds
6.
Investment process
6.1
Do any investment or borrowing restrictions apply to the portfolios of alternative investment funds?
India

Answer ... Yes, the AIF Regulations impose restrictions on both investment and borrowing of AIFs, according to their category of registration.

In terms of investment restrictions, a general diversification restriction is imposed whereby Category I and Category II AIFs can invest only the maximum of 25% of their ‘investible funds’ in a single portfolio company; and Category III AIFs are further restricted investing a maximum of 10% of their investible funds in a single portfolio investment.

Further investment restrictions in terms of the constitution of the portfolio are detailed in the response to question 6.2.

In terms of borrowing restrictions, Category I and Category II AIFs are not permitted to borrow funds directly or indirectly, or to engage in any leverage except for meeting temporary funding requirements for not more than 30 days, on not more than four occasions per year and of not more than 10% of their investible funds.

For more information about this answer please contact: Shagoofa Rashid Khan from Cyril Amarchand Mangaldas
6.2
Are there any specific legal or regulatory requirements regarding investments in particular assets?
India

Answer ... Each category and sub-category of AIF under the AIF Regulations must maintain a particular composition of portfolio investments, as follows:

Category I AIFs:

  • Venture capital funds:
    • At least two-thirds of their investible funds must be invested in unlisted equity shares or equity-linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a small and medium-sized enterprise (SME) exchange; and
    • Not more than one-third of their investible funds must be invested in:
      • the initial public offering of a venture capital undertaking proposed to be listed;
      • debt instruments of a venture capital undertaking;
      • preferential allotment of equity or equity linked instruments of a listed company;
      • equity or equity-linked instruments of a financially weak company – that is, a company whose accumulated losses had eroded more than 50% of its net worth as at the beginning of the previous financial year; or
      • special purpose vehicles which are created by the fund for the purpose of facilitating investment in accordance with the AIF Regulations.
  • SME funds: At least 75% of their investible funds must be invested in unlisted securities or partnership interests of venture capital undertakings or investee companies which are SMEs, or in companies listed on an SME exchange.
  • Social venture funds: At least 75% of their investible funds must be invested in unlisted securities or partnership interests of social ventures.
  • Infrastructure funds: At least 75% of their investible funds must be invested in unlisted securities or partnership interests of venture capital undertakings, or investee companies or special purpose vehicles which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects.

Category II AIFs: At least 50% of their investible funds must be invested in unlisted investee companies.

Category III AIFs: No portfolio allocation restrictions apply, apart from the general diversification requirement captured above. This category of AIF is permitted to invest in listed or unlisted investee companies or derivatives or complex or structured products; and to deal in goods received in delivery against physical settlement of commodity derivatives.

Funds of funds: An AIF which invests in the units of other AIFs may be created under the AIF Regulations and categorised as a Category I, Category II or Category III AIF. Category I funds of funds are permitted to invest only in the units of Category I AIFs. Category II funds of funds are permitted to invest in the units of Category I and Category II AIFs. Category III funds of funds are permitted to invest in the units of Category I and Category II AIFs. No fund of funds AIFs are permitted to invest in other fund of funds AIFs.

For more information about this answer please contact: Shagoofa Rashid Khan from Cyril Amarchand Mangaldas
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Alternative Investment Funds