Note on Alternate Investment Funds
What is AIF –
Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.
AIF has certain benefits regarding the flexibility in structuring and operation which are not afforded to the other investment vehicles.
Meaning of terminology –
AIF is defined under regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 as follow
AIF as a fund established or incorporated in India in the form of a Limited Liability Partnership (LLP) or Company or Trust or Body Corporate which-
- It is a privately pooled investment vehicle that gathers funds from investors, including Indian investors and foreign investors, to invest it as per a defined investment policy to benefit its investors.
- It does not include funds covered under the SEBI (Collective Investment Schemes) Regulations, 1999, SEBI (Mutual Funds) Regulations, 1996 or any other regulations of SEBI regulating fund management activities.
While the LLP or a Company are incorporated under the respective statutes, a Trust needs to be established under the Indian Trusts Act, 1882 and the trust deed is required to be registered under the Registration Act, 1908.
Followings are not considered as AIF
- Mutual funds
- Collective investment schemes
- Employee Stock Options Trusts
- Employee welfare trusts or gratuity trusts
- Family benefit trust
- Holding companies
Categories of AIF –
There are different categories of AIFs based on their objectives as well as the forms. SEBI has divided them into 3 categories for the purpose of granting registration:
Category I – which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified by SEBI time to time.
Category II – which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-today operational requirements. This category includes the private equity funds (which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund) as well as the debt funds (which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund).
A minimum tenure of the funds or schemes is 3 years.
Category III – which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
Once registered in a particular category, the fund may be identified on its theme.
Eligibility criteria of AIF –
1. The applicant, manager and sponsor are fit and proper persons as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
2. Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification.
3. Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities.
Sponser – means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of a limited liability partnership.
1. Memorandum of Association/ trust deed/ other constitutional document clearly states the objectives and prohibits to accept subscription of securities from public.
2. The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme.
3. Whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by the SEBI.
Furnishing information and personal presentation
- The SEBI may require the applicant to furnish any such further information or clarification regarding the Sponsor or Manager or nature of the fund or fund management activities or any such matter connected thereto to consider the application for grant of a certificate or after registration thereon.
- If required by the SEBI, the applicant or Sponsor or Manager shall appear before the SEBI for personal representation.
Registration process –
- Application shall be made with category in Form A of first schedule along with necessary documents.
- The registration application should be accompanied by a non-refundable application fee as stated in Part A and paid in the manner stated in Part B of the Second Schedule of the Regulations. The fees for a Category II fund are INR 10,00,000.
- The applicant must state in the covering letter of the application whether it is registered with the SEBI as a Venture Capital Fund. If the answer is yes, the details must be provided.
- The applicant has been undertaking the activities of AIF before filing the application for registration. If the answer is yes, the details must be provided.
- The applicant is applying for registration of a new fund.
- SEBI will analyze application and may ask for further information.
- The SEBI may grant in-principle approval for taking commitments from the investors. However, money can be accepted only after the final registration is granted.
- After the receipt of the registration fee from the applicant, the SEBI will grant the Certificate of Registration of Alternative Investment Fund to the applicant in Form B. This Registration Certificate will be valid till the Alternate Investment Fund is wound up.
Conditions of Certificate
The following shall be conditions with certificate
(a) The Alternative Investment Fund shall abide by the provisions of the Act and these regulations;
(b) The Alternative Investment Fund shall not carry on any other activity other than permitted activities;
(c) the Alternative Investment Fund shall forthwith inform the Board in writing, if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any material change in the information already submitted.
An Alternative Investment Fund which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of the Board
Operational stakeholders and relevant documents
For an AIF, there are different stakeholders in the form of manager, investor, sponsor, trustees, Valuer, and the like.Manager (or an Investment Committee) is responsible for taking the investment decisions.
In case of investors, while both the Indian and foreign residents and non-residents can invest, their minimum investment size is INR 1 crores. Each scheme is required to have a minimum corpus of INR 20 Crores.
The funds can be raised only by way of private placement and from a maximum of 1000 investors per scheme.
There are different documents which delineate the inter se relations between the same and require careful drafting. A few are enumerated below:
1. The constitutional document
2. Business plan
3. The investment strategy, investment purpose and its investment methodology (which is required to be stated in the placement memorandum) – which shall be compliant with the SEBI (AIF) Regulations, 2012
4. Detailed policies and procedures to ensure compliance with the SEBI (AIF) Regulations, 2012 and anti-money laundering laws
5. Code of Conduct for Managers. Key Managerial Personnel, Investment Committee, Trustees
6. Conflict of interest mitigation policy for manager and sponsor.
Author Bio
