Alternative Investment Funds are established in India in the form of trust, Company, LLP or body corporate to collect funds from sophisticated investors (Indian or Foreign) as an investment as per the defined investment policy to return benefits to the investors in the form of Return on Investment. AIFs include venture capital, private equity funds, debt funds, etc.
AIFs are privately pooled investment vehicles. In laymen terms, AIFs collect the funds from investors and then put such funds to investment by providing a return on investment to the investors. They provide investors with a risk/return profile different from that of equities, bonds, etc. They are slightly related to bonds or stocks, provide great return and are less volatile.
Different Categories for Alternate Investment Funds
Following are the different types of categories under which an applicant can apply for AIFs registration in India:
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1
Category- I AIF
These kinds of AIFs primarily invest in startups, early-stage ventures, social ventures, infrastructure funds, SMEs, etc. These AIFs are beneficial in enhancing the overall Indian Economy, thus get incentives by SEBI and government.
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2
Category-II AIF
These funds are not allowed to borrow for any purpose other than to carry day-to-day transactions. These funds invest in any form of combination and include private equity funds, real estate private equity funds, debt funds, etc.
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3
Category-III AIF
Under these funds, there are short-term investments made, and later they are sold as hedge funds to make short-term benefits. Various hedge funds, PIPE funds, etc. form this category of AIFs.
Eligibility for Alternative Investment Fund Registration
Following conditions are necessary to be fulfilled for getting registered as AIFs:
- An entity shall be restricted through its MOA & AOA to invite the public for subscribing to its shares.
- A maximum number of investors shall not at any time exceed 1000.
- Trust deed duly registered under Registration Act 1908, shall also be furnished in case of an applicant for AIF registration is registered trust.
- A partnership deed is compulsorily furnished in case the applicant is LLP, and such deed shall be duly registered under the LLP Act 2008.
- Investors of AIF shall be either Indian or Non-Resident Indian.
Ineligibility for AIF registration
As per SEBI guidelines, the following entities are not permitted to be registered as AIFs:
- Trustor Gratuity registered whose principal objectives are of employee's benefits.
- Any family trust registered with the primary objective of providing benefits to the relatives.
- ESOP trust registered under SEBI.
- Any other entities not established as fund managers.
Registration Process
Following are the step by a step registration process of Alternative Investment Fund:
Apply To SEBI
An applicant shall apply in form A of SEBI (Alternative Investment Funds) Regulations, 2012 along with necessary following documents attached thereto:
- Details of registered addresses such as name, address, etc.
- Registration certificate of the company
- Name and Contact details of applicant such as contact number, E-mail Id, residential address
- Partnership deed, in case the applicant is registered LLP
- Trust deed, in case an applicant is a trust
- Business strategies and investment plans
- A draft copy of placement memorandum
Authorization Letter
Furnish an authorization letter in case an applicant or entity has authorized any director/promoter/or any such officer to act as an authorized signatory.
SEBI Compliances
To know whether an applicant is eligible or ineligible to be registered as AIF shall study the SEBI guidelines thoroughly.
Cover Letter
In case the applicant is registered with SEBI as a venture capital fund, it shall provide the details regarding the same in the cover letter. As well as it needs to report in covering letter whether it has been undertaking any activity as AIF or is applying registration for the new fund.
Final Submission Of Application
Online application is filed as per the guidelines of SEBI in this behalf. Properly filled, numbered, duly signed and stamped Form A accompanies by necessary documents and application fee of INR 100000 by way of a draft drawn in the favour of The Securities and Exchange Board of India, payable at Mumbai shall be submitted for the grant of certificate of registration.
Scrutinizing Of An Application
SEBI within 21 days of receipt of an application shall verify and reply to the applicant. Application is evaluated for its correctness by SEBI and SEBI on being satisfied with the same shall approve the application.
Grant Of Registration Certificate
On receipt of approval of SEBI, an applicant shall submit the following registration fee for the issuance of Certificate of Registration:
- INR 500000: If the applicant for AIF registration is of category-I
- INR 100000: If the applicant for AIF registration is of category-II
- INR 1500000: If the applicant for AIF registration is of Category-III
- Such a certificate is valid throughout the life of AIF until it is wound up.
Restrictions of AIFs
There are certain following restrictions on the fundraising of AIFs and investments made by such AIFs:
- AIFs are allowed to raise funds through Private Placement.
- AIFs cannot accept an investment of value less than INR 1 Crore from the investor.
- Not more than 1000 investors are allowed under this fund with the corpus limit of each scheme shall be INR 20 Crore.
- Promoter, sponsors, or manager shall have the continuing interest at least of the following:
- A) 2.5% Of The Initial Corpus
OR
B) INR 5 Crore
- AIFs registered under Category-I and Category-II are not allowed to invest 25% or more of their investment fund in the single investee company. While the same limit is 10% for Category-III AIFs.
- Close-ended AIFs are allowed to be listed on stock exchange up to minimum INR 1 Crore of a trading lot after the closure of scheme or fund.
Restriction on number of Investors/Members of AIFs
Following are the limits imposed on the number of investors or members under AIF regulations:
- AIF (other than Angel Funds) cannot have more than 1000 investors at any time.
- In the case of Angel Funds, no scheme can have more than 49 investors at any time.
- AIF is permitted to raise funds through Private Placement and cannot invite the public for the subscription of its shares.
Complaint Redressal Mechanism
Investors who have any grievances or complaints against AIFs shall redress the same. SEBI for this purpose has established a web-based centralized grievance redressal system known as SCORES (SEBI Complaint Redressal System).
AIF shall resolve the dispute, through its manager/sponsor/promoter in the form of arbitration or such other mechanism as decided on mutual terms between investors and AIF.