Any fund established or incorporated in India that is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors is referred to as an Alternative Investment Fund or AIF. AIF does not include funds regulated by the SEBI (Mutual Funds) Laws, 1996, the SEBI (Collective Investment Schemes) Regulations, 1999, or any other Board regulations governing fund management. Furthermore, the AIF Regulations grant certain exemptions from registration to family trusts established for the benefit of relatives as defined by the Companies Act, 1956, employee welfare trusts or gratuity trusts established for the benefit of employees, ‘holding companies’ as defined by Section 4 of the Companies Act, 1956, and so on.
Category I AIF:
Venture capital funds (Including Angel Funds)
SME Funds
Social Venture Funds
Infrastructure funds
Category II AIF
Category III AIF
AIFs that invest in start-up or early-stage ventures, social ventures, infrastructure, SMEs, or other sectors or areas that the government or regulators deem to be socially or economically desirable, including venture capital funds, SME funds, social venture funds, infrastructure funds, and other Alternative Investment Funds that may be specified.
AIFs that are not classified as Category I or III and do not use leverage or borrow only to satisfy day-to-day operating needs, as approved by the SEBI (Alternative Investment Funds) Regulations, 2012. Real estate funds, private equity funds (PE funds), distressed asset funds, and other types of funds are all classified as Category II AIFs.
AIFs trade in a variety of ways and employ leverage, such as investing in listed or unlisted derivatives. Category III AIFs include hedge funds, PIPE Funds, and other types of funds.
Debt funds are Alternative Investment Funds (AIFs) that invest primarily in debt or debt securities of listed or unlisted investee firms in order to achieve the Fund’s stated goals. These funds are classified as Category II funds. It should be noted that because the Alternative Investment Fund is a privately pooled investment vehicle, the funds supplied by the investors will not be used to make loans.
“Angel Fund” is a sub-category of Venture Capital Fund under Category I alternative Investment Fund that obtains funds from angel investors and invests in compliance with AIF Regulations Chapter III-A. An angel fund will only be able to raise capital by selling units to angel investors. “Angel investor” refers to someone who wants to invest in an angel fund and meets one of the following criteria:
An individual investor with at least two crore rupees in net tangible assets, excluding the value of his primary dwelling, and who:
Has early-stage investment experience, or
Has experience as a serial entrepreneur, or
Is a senior management professional with at least ten years of experience;
A company with at least ten crore rupees in net value; or
A VCF registered under the SEBI (Venture Capital Funds) Laws, 1996, or an AIF registered under similar regulations.
Angel funds must take an investment of not less than ’25 lakh from an angel investor for a period of up to three years.
According to publicly accessible information, a fund of funds is an investment strategy that involves maintaining a portfolio of other investment funds rather than investing directly in stocks, bonds, or other assets. A Fund of Fund, in the context of AIFs, is an AIF that invests in another AIF.
An AIF scheme (other than an angel fund) may not have more than 1000 investors. (Please note that if the AIF is incorporated as a company, the requirements of the Companies Act, 1956 will apply.) No plan may have more than 49 angel investors in the case of an angel fund. An AIF, on the other hand, cannot invite the general public to subscribe to its units and can only receive capital from skilled investors through private placement.
Any individual who establishes the AIF is referred to as a “sponsor,” which includes the promoter in the case of a business and the designated partner in the case of a limited liability partnership.
An AIF can be founded or incorporated in the form of a trust, a company, a limited liability partnership, or a body corporate under the SEBI (Alternative Investment Funds) Regulations, 2012. The majority of SEBI-registered AIFs are in trust form.
The entire amount of funds committed to the AIF by way of a written contract or other similar agreement as of a specific date is referred to as the “corpus.”
Yes. The launch of schemes by an AIF is contingent on the submission of a placement memorandum with SEBI.
It should also be mentioned that an AIF must pay Rs. 1 lakh in scheme fees to SEBI prior to the commencement of the scheme while filing the placement memorandum. This charge must be paid at least 30 days prior to the start of the plan. Payment of scheme fees is not required in the case of the AIF’s first scheme (other than an angel fund) and angel funds.
No, any Alternative Investment Fund program (other than an angel fund) must have a minimum capital of twenty crore rupees. A corpus of at least ten crore rupees is required for an angel fund.
An AIF can attract money from any competent investor, including Indians, foreigners, and non-resident Indians, who are willing to take on the risk of investing in predominantly unlisted or illiquid securities. However, an AIF (other than an angel fund) will not take an investment of less than one crore rupee from an investor. The minimum investment amount for investors who are employees or directors of the AIF or employees or directors of the Manager is twenty-five lakh rupees.
To ensure that the Manager/interests sponsors are aligned with those of the AIF’s investors, the AIF Regulations require that the sponsor/manager have an ongoing interest in the AIF, which cannot be achieved by the waiver of management fees. Such interest shall be not less than two and a half percent of the corpus or five crore rupees, whichever is less, for Category I and II AIFs, and not less than five percent of the corpus or ten crore rupees, whichever is less, for Category III AIFs. Angel funds must pay interest of at least two and a half percent of the corpus or fifty lakh rupees, whichever is lower.
No, Category I and II AIFs must be closed-ended and have a three-year minimum duration. AIFs under Category III might be open-ended or closed-ended.
The AIF Regulations include both general investment criteria that apply to all AIFs and specialized investment conditions that apply to a particular type or sub-category of AIFs. The AIF Regulations, Chapters III and III-A provide information on investment conditions.
All AIFs must comply with the general obligations, responsibilities, and transparency standards set out in Chapter IV of the AIF Regulations. Chapter IV outlines the AIF’s unique investor disclosure duties, including conflict of interest, information on fund investments, fees, different risks, valuation, and so on.
AIFs may also give additional information to investors in the placement memorandum, in addition to what is required by the AIF Regulations. What must information about fees and charges be mentioned in the placement memorandum? Every AIF must include as an annexure to its placement memorandum a thorough tabular example of how the fees and charges will be applied to the investor, including the distribution waterfall.
These modifications may include, but are not limited to:
The sponsor/manager has changed (not including an internal restructuring within the group)
Changes in the sponsor/control manager’s
Changes in the fee structure or hurdle rate that might result in increased costs for unitholders
However, in the event of major developments that have a significant impact on the investor’s choice to continue to participate in the AIF, the procedure outlined in Circular No. CIR/IMD/DF/14/2014, dated June 19, 2014, must be followed. The trustee of the AIF (in the case of a trust) or the sponsor (in the case of any other AIF) will be in charge of managing the process, ensuring compliance, and keeping SEBI up to date on developments.
The tenure of any AIF scheme is computed from the date of the plan’s final closure.
Overseas investments by AIFs are limited to 25% of the AIF’s investible funds, subject to a total maximum of USD 500 million (combined limit for AIFs and Venture Capital Funds registered under the SEBI (Venture Capital Funds) Regulations, 1996).
Investors can file complaints against AIFs using SEBI’s web-based centralized grievance resolution system, SEBI Complaint Redress System (SCORES), which can be found at http://scores.gov.in. Furthermore, the AIF, either directly or through the Manager or Sponsor, is required by the AIF Regulations to establish a procedure for resolving disputes between the investors, the AIF, the Manager, or the Sponsor through arbitration or any other mechanism mutually agreed upon by the investors and the AIF.
An AIF may accept the following individuals as joint partners for a minimum investment of one crore rupees:
An investor and his/her spouse
An investor and his/her parent
An investor and his/her daughter/son
In the case of the aforementioned investors, no more than two people may participate as joint investors in an AIF. In the case of any additional investors acting as joint investors, the minimum investment amount of one crore rupees would apply to each investor. The term “joint investors” refers to a situation in which each investor contributes to the AIF.
The AIF will have a 6-month time constraint to make allocated investments in offshore venture capital enterprises after receiving SEBI clearance. If the applicant does not use the given limitations within the time frame, SEBI may assign the unutilized limit to other applicants.