SECURITIES AND EXCHANGE BOARD OF INDIA (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012

Definitions- 

1. “Alternative Investment Fund” means any fund established or incorporated in India in  the  form  of  a  trust  or  a  company  or  a  limited  liability  partnership  or  a  body corporate which,-

(i) is   a  privately   pooled   investment   vehicle   which   collects   funds   from investors, whether  Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and

(ii) is not covered under the  Securities and Exchange Board of  India (Mutual Funds)   Regulations,   1996,   Securities   and   Exchange   Board   of   India (Collective   Investment   Schemes)   Regulations,   1999   or   any   other regulations of the Board to regulate fund management activities:

Registration of Venture Capital Funds Under SEBI

Provided that the following shall not be considered as Alternative Investment Fund for the purpose of these regulations, –

(i) family  trusts  set  up  for  the  benefit  of  ‘relatives’  as  defined  under [ Companies Act,2013] ;

(ii) ESOP  Trusts  set  up  under  the  Securities  and  Exchange  Board  of  India (Share Based Employee Benefits) Regulations, 2014 or as permitted under Companies Act, 2013 ;]

(iii) employee  welfare  trusts  or  gratuity  trusts  set  up  for  the  benefit  of employees;

(iv)’holding  companies’  as  defined  under  sub-section  46  of section  2  of Companies Act, 2013;

v) other special purpose vehicles not established by fund managers, including securitization trusts, regulated under a specific regulatory framework;

(vi) funds managed by securitization company or reconstruction company which is  registered  with  the  Reserve  Bank  of  India  under  Section  3  of  the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and

(vii) any such pool of funds which is directly regulated by any other regulator in India;

2. “venture  capital  fund”  means  an  Alternative  Investment  Fund  which  invests primarily in unlisted securities of start-ups, emerging or early – stage venture capital

undertakings  mainly  involved  in  new  products, new  services,  technology  or intellectual  property  right  based  activities  or  a  new  business  model [and  shall

include an angel fund as defined under Chapter III -A]

3. “venture capital undertaking” means a domestic company which is not listed on a recognised stock exchange at the time of making investments;

COMPULSORY REGISTRATION OF AIF WITH SEBI UNDER REGULATION 3 

As per Reg 3 No entity or person shall act as an Alternative  Investment Fund unless it has obtained a certificate of registration from the Board in any one of the categories  mentioned thereunder  and  in  case  of  Category  I  Alternative  Investment  Fund,  in  one  of  the  sub-categories mentioned thereof;

(a) “Category I Alternative  Investment Fund” – 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;

Explanation.─ For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spillover effects on economy and for which the  Board  or  Government  of  India  or  other  regulators  in  India  might  consider providing  incentives  or  concessions  shall  be  included and  such  funds  which  are formed as trusts or companies shall be construed as “venture capital company” or “venture capital fund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961.

So, VCF falls under category 1 AIF. Hence registration has to be obtained under this category. 

ELIGIBILITY CRITERIA 

1. Whether Applicant’s MOA/Trust Deed/ Partnership Deed

1. permits it to carry on the activity of an Alternative Investment Fund;

2. Prohibits it from making an invitation to the public to subscribe to its securities

2.  If applicant is a-

1. Trust- the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908;

2. LLP-  the partnership is duly incorporated and the partnership deed has been duly filed with the Registrar under the provisions of the Limited Liability Partnership Act, 2008;

3. body corporate- it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an Alternative Investment Fund;

3. Applicant, Sponsors and Manager are Fit and proper persons as per Schedule II  of SEBI (Intermediaries) Regulations, 2008.

4. The key investment team of the Manager of Alternative Investment Fund has –

(i) adequate experience, with at least one key personnel having not less than five years of 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

(ii) at least one key personnel with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board:

Provided that  both the requirements of experience and professional qualification as specified may also be fulfilled by the same key personnel.

5. the Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities;

6. 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;

7. whether the applicant or any entity established by the Sponsor or Manager has earlier been refused registration by the Board.

INVESTMENT CONDITIONS AND RESTRICTIONS 

Investment in Alternative Investment Fund. 

Investment in all categories of Alternative Investment Funds shall be subject to the following conditions:-

(a) the Alternative Investment Fund may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units;

(b) each scheme of the Alternative Investment Fund shall have corpus of atleast twenty crore rupees; 

(c) the Alternative Investment Fund shall not accept from an investor, an investment of value less than one crore rupees (MINIMUM INVESTMENT PER INVESTOR- 1 CR) 

Provided that in case of investors who are employees or directors of the Alternative Investment Fund or employees or directors of the Manager, the minimum value of investment shall be twenty five lakh rupees. ( IN CASE OF EMPLOYEES/DIRECTORS OF AIF OR MANAGER MIN INVESTMENT 25 LAKHS) 

Provided further that this clause shall not apply to an accredited investor[1]; 

d) the Manager or Sponsor shall have a continuing interest in the Alternative Investment Fund of not less than two and half percent of the corpus or five crore rupees, whichever is lower, in the form of investment in the Alternative Investment Fund and such interest shall not be through the waiver of management fees:

(e) the Manager or Sponsor shall disclose their investment in the Alternative Investment Fund to the investors of the Alternative Investment Fund;

(f) no scheme of the Alternative Investment Fund shall have more than one thousand investors.

[Provided that the provisions of the[Companies Act, 2013] shall apply to the Alternative Investment Fund, if it is formed as a company.]

(g) the fund shall not solicit or collect funds except by way of private placement 

SCHEMES 

The Alternative Investment Fund may launch schemes subject to filing of placement memorandum with the Board through a merchant banker at least thirty days prior to launch of scheme along with the fees as specified in the Second Schedule:

Provided that payment of scheme fees shall not apply in case of launch of the first scheme by the Alternative Investment Fund.

LISTING 

(1) Units of close ended Alternative Investment Fund may be listed on stock exchange subject to a minimum tradable lot of one crore rupees.

(2) Listing of Alternative Investment Fund units shall be permitted only after final close of the fund or scheme. 

TENURE

(1) Category I Alternative Investment Fund  shall be close ended and the tenure of fund or scheme shall be determined at the time of application subject to sub-regulation (2) of this regulation.

(2) Category I Alternative Investment Fund or schemes launched by such funds shall have a minimum tenure of three years.

General Investment Conditions.

  • Category I and II of Alternative Investment Funds shall invest not more than twenty five per cent of the investable funds in an Investee Company directly or through investment in the units of other Alternative Investment Funds.

Provided that large value funds for accredited investors of Category I and II may invest up to fifty percent of the investable funds in an investee company directly or through investment in the units of other Alternative Investment Funds;]

 Conditions for Category I Alternative Investment Funds.

(a) Category I Alternative Investment Fund shall invest in investee companies, venture capital undertakings, special purpose vehicles, limited liability partnerships in units of other Category I Alternative Investment Funds of the same subcategory or in units of Category II Alternative Investment Funds as specified in this regulation

(b) Category I Alternative Investment Funds shall not borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than thirty days, on not more than four occasions in a year and not more than ten percent of the [investable funds].

(2) The following investment conditions shall apply to venture capital funds in addition to conditions laid down in sub-regulation (1):-

(a) at least seventy-five percent of the investable funds shall 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 SME exchange or SME segment of an exchange:

Provided that the investment conditions specified in clause (a) shall be achieved by the fund by the end of its life cycle.

 b) such funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making under [Chapter IX of 2018 and the provisions of clause (a) of sub- the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, regulation (2)] shall not apply in case of acquisition or sale of securities pursuant to such subscription or market making.

(c) such funds shall be exempt from sub-regulations (1) and (2) of regulation 3 and sub-regulation (1) of regulation 4 of the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 in respect of investment in companies listed on the SME exchange or SME segment of an exchange pursuant to due diligence of such companies subject to the following conditions:

(i) the fund shall disclose any trading in securities pursuant to such due-diligence, within two trading days of such trading, to the stock exchanges where the investee company is listed;

(ii) such investment shall be locked in for a period of one year from the date of investment.

 ANGEL FUNDS

(1) “angel fund” means a subcategory of Venture Capital Fund under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of this Chapter.

(2) “angel investor” means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely,

(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:

(i) has early stage investment experience, or

(ii) has experience as a serial entrepreneur, or

(iii) is a senior management professional with at least ten years of experience;

Explanation: For the purpose of this clause,  ‘early stage investment experience‘ shall mean prior experience in investing in start-up or emerging or early-stage ventures and  ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.

(b) a body corporate with a net worth of at least ten crore rupees; or

(c) an Alternative Investment Fund registered under these regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Investment in angel funds.

(1) Angel funds shall only raise funds by way of issue of units to angel investors.

(2) An angel fund shall have a corpus of at least [five] crore rupees.

(3) Angel funds shall accept, up to a maximum period of [five] years, an investment of not less than twenty five lakh rupees from an angel investor.

(4) Angel fund shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called.

[Provided that the provisions of the Companies Act, 2013 shall apply to the Angel Fund, if it is formed as a company.]

Schemes.

(1) The angel fund may launch schemes subject to filing of a term sheet with the Board, containing material information regarding the scheme, in the format and time period as may be specified by the Board.]

2) No scheme of the angel fund shall have more than two hundred angel investors.

Provided that the provisions of the Companies Act, 2013 shall apply to the Angel Fund, if it is formed as a company.]

Investment by Angel Funds.

(1) Angel funds shall invest  in startups which:

(a) are not promoted or sponsored by or related to an industrial group whose group turnover exceeds three hundred crore rupees; and

Explanation I: For the purpose of this clause, “industrial group” shall include a group of body corporates with the same promoter(s)/promoter group, a parent company and its subsidiaries, a group of body corporates in which the same person/ group of persons exercise control, and a group of body corporates comprised of associates/ subsidiaries/ holding companies.

Explanation II: For the purpose of this clause, “group turnover” shall mean combined total revenue of the industrial group.

(b) are not companies with family connection with any of the angel investors who are investing in the company.

(2) Investment by an angel fund in any venture capital undertaking shall not be less than twenty five lakh rupees and shall not exceed  ten crores rupees.

(3) Investment by an angel fund in the venture capital undertaking shall be locked-in for a period of  one year.

(4) Angel funds shall not invest in associates.

(5) Angel funds shall not invest more than twenty-five per cent of the total investments under all its schemes in one venture capital undertaking:

Provided that the compliance to this sub-regulation shall be ensured by the Angel Fund at the end of its tenure.

(6) An angel fund may also invest in the securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the Reserve Bank of India and the Board from time to time.

Obligations of Sponsors and Managers of Angel Fund.

(1) The manager or sponsor shall have a continuing interest in the angel fund of not less than two and half percent of the corpus or fifty lakh rupees, whichever is lesser, and such interest shall not be through the waiver of management fees.

(2) The manager of the angel fund shall obtain an undertaking from every angel investor proposing to make investment in a venture capital undertaking, confirming his approval for such an investment, prior to making such an investment.

Prohibition of Listing. 

Units of angel funds shall not be listed on any recognised stock exchange. 

PROCEDURE OF MAKING APPLICATION FOR REGISTRATION AS VCF WITH SEBI

  • Make an Application to SEBI in Form A under Category I Alternative Investment Fund-Venture Capital Fund and shall be accompanied by a non-refundable application fee as specified in the table below along with the following documents-
  • General Documents
    • Copy of the draft placement memorandum
  • Applicant’s Attachments-
    • Identity and  Address  proof  of   Trustees/   Directors  of  the  Trustee Company (In case of Trust)
    • In case of company-
      • Identity proof  and address proof of the directors.
      • Copy of Memorandum of Association.
    • In case of LLP-
      • Identity proof and address proof of the partners
      • Copy of the Partnership Deed
    • In case of Body Corporate
      • Copy of  relevant Statute/Act
      • Identity  proof  and address proof of the directors.
  • Sponsors Documents-
    • Identity proof and address proof of the Sponsor (if sponsor is an individual)/ directors of Sponsor(is sponsor is a company)/ partners of the Sponsor (if sponsor is an limited liability partnership)
    • Copies of the financial statements for the previous financial year
  • Manager Documents-
    • Identity proof and address proof of the Manager (if manager is an individual)/ directors of Manager (if manager is a company)/ partners of the Manager(if manager is an limited liability partnership)
    • Copies of the financial statements for the previous financial year
  • Declaration as to Regulatory action taken in the past.
  • copies of commitment letters from the sponsor(s)/manager(s) for Amount  contributed/  proposed  to be  contributed  by  the  Sponsor(s)/Manager(s)  as  per clause  (d)  of  regulation  10
  • Fit and Proper Person Declaration for applicant, Sponsor  and  Manager
  • Declaration that  the  applicant  shall  comply  with  the  provisions  of regulation 10  with respect to investment in the Alternative Investment Fund.
  • Declaration that the applicant shall comply with the provisions of regulation 15 and 16 with respect to general investment conditions and conditions for the applicable category.

Placement Memorandum.

(1) Alternative Investment Fund shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called.

(2) Such information or placement memorandum as specified in sub-regulation (1) shall contain-

  • all material information about the Alternative Investment Fund and the Manager,
  • background of key investment team of the Manager,
  • targeted investors,
  • fees and all other expenses proposed to be charged,
  • tenure of the Alternative Investment Fund or scheme,
  • conditions or limits on redemption,
  • investment strategy,
  • risk management tools and parameters employed,
  • key service providers,
  • terms of reference of the committee constituted for approving the decisions of the Alternative Investment Fund,
  • conflict of interest and procedures to identify and address them,
  • disciplinary history, the terms and conditions on which the Manager offers investment services,
  • its affiliations with other intermediaries,
  • manner of winding up of the Alternative Investment Fund or the scheme
  • and such other information as may be necessary for the investor to take an informed decision on whether to invest in the Alternative Investment Fund.

FEES 

PART A

AMOUNT TO BE PAID AS FEES 

Application fee

1,00,000

Registration fee for Category I Alternative Investment Funds other than Angel Funds  5,00,000
Registration fee for Category II Alternative Investment Funds other than Angel Funds  10,00,000
Registration fee for Category III Alternative Investment Funds other than Angel Funds 15,00,000
Scheme Fee for Alternative Investment

Funds other than Angel Funds

1,00,000
Re-registration Fee 1,00,000
Registration Fee for Angel Funds 2,00,000

The fees specified above shall be payable by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by bank draft in favour of “The Securities and Exchange Board of India” at Mumbai. 

DECLARATION STATEMENT

(TO BE GIVEN AS BELOW) 

We  hereby  agree  and  declare  that  the  information  supplied  in  the  application,  including  the attachment sheets, is complete and true.

AND  we  further  agree  that,  we  shall  notify  the  Securities  and  Exchange  Board  of  India immediately any change in the information provided in the application.

We further agree that we shall comply with, and be bound by the Securities and Exchange Board of India Act, 1992, and the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, an d Government of India guidelines/instructions as may be announced by the Securities and Exchange Board of India from time to time.

We  further  agree  that  as  a  condition  of  registration,  we  shall  abide  by  such  operational instructions/directives as may be issued by the Securities and Exchange Board of India from time to time.

For and on behalf of________________________

(Name of the applicant) 

Authorized signatory

(Signature) 

[1] “accredited investor” means any person who is granted a certificate of accreditation by an accreditation agency who,

(i) in case of an individual, Hindu Undivided Family, family trust or sole proprietorship has:

(A) annual income of at least two crore rupees; or

(B) net worth of at least seven crore fifty lakh rupees, out of which not less than three crores seventy-five lakh rupees is in the form of financial assets; or

(C) annual income of at least one crore rupees and minimum net worth of five crore rupees, out of which not less than two crore fifty lakh rupees is in the form of financial assets.

(ii) in case of a body corporate, has net worth of at least fifty crore rupees;

(iii) in case of a trust other than family trust, has net worth of at least fifty crore rupees;

(iv) in case of a partnership firm set up under the Indian Partnership Act, 1932, each partner independently meets the eligibility criteria for accreditation:

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