Alternative Investment Fund (AIF) in India

A collection of investment funds pooled together to be infused in venture capital, private equity, hedge funds, and other forms of investments is known as ‘Alternative Investment Fund’ (AIF). It can also be considered a kind of investment that is different from the traditional investment options like bonds and stocks.

Laws related to AIF are defined in Regulation 2(1)(b) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (SEBI).

• AIF refers to any privately funded investment fund, be it from Indian or foreign sources, in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).
• Basically, in India, AIFs are private funds that do not fall under the jurisdiction of any regulatory agency in India.

Starting an Alternative Investment Fund

To be able to start an AIF, you need to take care of a few things:

• Apply to SEBI.
• Authorization letter.
• Be eligible as per SEBI compliances.
• Submit the final application.

Once the review process is complete, you shall receive the Grant of Registration Certificate.

Different Types of AIFs in India

AIFs are categorized into three major categories by SEBI.

Category 1

AIFs under this category majorly invest in startups, SMEs or any sector considered economically and socially viable by the government. Some of them are:

• Venture Capital Fund (VCF)

Modern entrepreneurial businesses looking for large financing during their initial days may approach VCFs for assistance to tackle any financial issue. They usually invest in startups that have a high growth potential. High net-worth individuals (HNIs) who invest in VCFs basically adopt a high-risk high-return strategy while distributing their resources.

• Angel Funds

Angel investors invest in growing startups and majorly bring business management experience to such companies. Startups that do not receive funding from VCFs gain funds from them, in which case the minimum investment made by each investor is INR 25 lakhs.

• Infrastructure Funds

These funds are invested in infrastructure companies, i.e., companies managing railway construction, port construction, etc. Investors that are devoted towards infrastructure development invest funds in such companies.

• Social Venture Funds

Funds invested in socially responsible companies are made by social venture funds. They are considered a form of philanthropic investment but are known to generate good returns for investors.

Category 2

This category includes AIFs that have not been given any specific incentive or concession by the government or any other regulator.

• Private Equity Funds

Private equity funds are involved with investments in unlisted private companies. It is relatively difficult for unlisted companies to raise funds by issuing equity and debt instruments. Such funds often come with a lock-in period that ranges from 4 to 7 years.

• Debt Funds

Debt securities of unlisted companies often receive funds from such AIFs. Such businesses usually adhere to good corporate governance models and have a high potential for growth. As they have a low credit rating, investing in them is a risky business for investors.
Note: Under SEBI guidelines, money collected by debt funds cannot be used to give loans.

• Fund of Funds

These funds are invested in other AIFs. They do not have a specific investment portfolio and mainly focus on investing in other AIFs.

Category 3

This includes AIFs such as hedge funds that trade with an intent to make short term returns or others that are open ended and that receive no specific incentives or concessions by the government or any other Regulator.

• Private Investment in Public Equity (PIPE) Fund

PIPE funds are invested in shares of publicly traded companies, where they acquire shares at a discounted price. Considering the less paperwork and administration, investment through PIPE is considered to be more convenient than going for a secondary issue.

• Hedge Funds

Hedge funds gather money from renowned investors and institutions and invest in both domestic and international debt and equity markets. They are known to usually adopt aggressive investment strategies to generate ample returns for their investors.

Note: Hedge funds are relatively more expensive as fund managers may charge a fee of 2% or more for asset management while also levying 20% of the returns generated as part of their fees.

Who is Eligible to Invest in AIF?

• Resident Indians, NRIs, foreign nationals.
• Minimum investment limit is INR 1 crore for investors, while the minimum amount for directors, employees and fund managers is INR 25 lakhs.
• AIFs have a minimum lock-in period of 3 years.
• Number of investors in all schemes is limited to 1000, except angel funds, where the number is limited to 49.

Benefits of AIF Investments

Investing in AIF can provide you with the following benefits:

Portfolio Diversification

AIFs distribute the funds in a range of assets which is more than most other investment vehicles. This helps build a diverse portfolio that protects investments during times of market volatility or financial crisis.

Profitable Returns

AIF investment returns are quite profitable considering such funds have several investment options. Compared to the conventional investment options, it is a much better source of passive income for investors. Besides, the returns gained are not prone to fluctuations as they are not linked with the stock market.

Security Against Volatility

Investing in AIFs are an excellent way to protect investments from volatility and stabilize your portfolio. Such schemes do not put all the funds in investment options that trade publicly. Due to this, they are not connected to broader markets and are not affected by the ups and downs of the fluctuations.

Process for Listing and Trading AIF on BSE

• AIF shall approach BSE to seek in-principle approval for the Listing and Trading of units.
• After receiving approval from BSE, AIF shall approach SEBI to get approval.
• After receiving approval from SEBI, AIF may approach BSE to Listing and Trading.

Documents Required for Listing and Trading AIF on BSE

A certified true copy of the following agreements/documents are required:

• Draft information/placement memorandum (hard and soft copy).
• Investment management agreement (in case of 1st listing).
• Certification of registration of AIF issued by SEBI (in case of 1st listing).
• Custodian agreement (in case of 1st listing).
• R&T Agreement (in case of 1st listing).
• Trust Deed (in case of 1st listing).
• Memorandum & Articles of Association of the issuer (in case of 1st listing).
• Resolution passed by Trustee in case of AIF is established as Trust, or by Board of Directors in case AIF is established as a Company or by Partners in case AIF is established as an LLP at their meeting approving listing of units of close ended AIF on the BSE Ltd.
• An undertaking from the CEO or compliance officer stating that AIF is in compliance with SEBI, as amended, and all other applicable laws.

Note: The Exchange has the right to ask for documents other than the ones mentioned above.

Non-Refundable Processing Fee

Particulars	Fee
Per Placement Memorandum / Information Memorandum	INR 50,000

• GST is payable at the applicable rate on the processing fee.
• BSE reserves the right to revise the above fee structure.

List of documents to be submitted for Listing of Units of AIF (Post allotment of Units)

A certified true copy of the following agreements/documents are required:

• Letter of application for listing of units of scheme.
• Details of the applicant (in case of 1st issue/listing) and issue details.
• Certified True Copy of observations/comments received from SEBI on the placement Memorandum/Scheme Information Document (SID).
• A certified true copy of the Final Placement Memorandum/Scheme Information Document (SID) (soft copy is needed as well).
• Unit-holding pattern of unit-holders of the Scheme (as per format).
• A confirmation from the CEO/Compliance Officer related to allotment of units and the actual number of units allotted.
• A statement of complete collection details.
• Listing Agreement (in case of 1st Listing) as per SEBI LODR Regulations.
• Confirmation from CEO / Compliance Officer regarding compliance with the provisions of SEBI, including subsequent amendments thereof and SEBI circulars issued in this respect.
• Confirmation from National Securities Depository Limited (NSDL) and Central Depository Services Ltd. (CDSL) – ISIN activation.
• Confirmation from Registrar and Transfer Agents (RTA) on the final number of units to be allotted with NSDL, to be allotted with CDSL and to be issued under physical form.
• Undertaking from RTA on the units considered under switches that they have debited the units from the respective schemes and credited the applicable units in this scheme (if applicable).
• Confirmation received from NSDL / CDSL for credit.
• Confirmation from RTA regarding dispatch of Certificates / account statement / refund order.
• Annual listing fee plus applicable taxes.
• The Exchange would reserve the right to ask for documents other than those mentioned above.

Note: BSE will have the right to add, modify, delete, and revise any or all of the above requirements as they see fit. Submitting documents and fees would not amount to listing of units or grant of approval by BSE.

For Listing of Units of Schemes under AIF (Post Allotment of Units), non-refundable alternative investment scheme annual listing fee is to be paid year on year.

• Initial Listing Fees – Nil
• Annual listing fee – for tenure of the scheme – Payable per annum or part thereof:

Particulars	Fee Amount
Issue size up to INR 250 crores	INR 2,50,000
Above INR 250 crores and up to INR 500 crores	INR 3,75,000
Above INR 500 crores and up to INR 750 crores	INR 5,00,000
Above INR 750 crores and up to INR 1000 crores	INR 7,50,000
Above INR 1000 crores	INR 10,00,000

*Year-end means 31st March.

Note: GST would be payable at the applicable rate on the listing fees. Furthermore, BSE reserves the right to update the above fee structure.

Maximum Limit Prescribed for Overseas Investment by AIFs

Overseas investments by AIFs shall not exceed 25% of the investible funds of the scheme of the AIF depending upon the overall limit of USD 500 million – which is the combined limit for AIFs and Venture Capital Funds registered under SEBI.

Calculating Tenure of Any Scheme of the AIF

The tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme.

Limit Available to AIFs for Overseas Investments

The AIF may have a time limit of 6-months from the date of approval from SEBI to make allocated investments in offshore venture capital undertakings. If the applicant does not utilize the limits allotted within the stipulated period, SEBI may share such unutilized limits with other applicants.

Procedure for Obtaining Registration as an AIF from SEBI

• Applicant shall make an application in Form A as provided by SEBI along with necessary supporting documents.
• An application fees of INR 1,00,000 must be paid along with the application.
• After receiving an approval from SEBI, the Registration / Re-Registration fee / scheme fee must be paid.

The application in Form A must be submitted to the address mentioned below:

Investment Management Department Division of Funds-1

Securities and Exchange Board of India

SEBI Bhavan, 3rd Floor A Wing, Plot No. C4-A, ‘G’ Block,

Bandra-Kurla Complex, Bandra (E),

Mumbai – 400 051.

Registration Fee to be Paid by an AIF

Category I AIFs	INR 500000
Category II AIFs	INR 1000000
Category III AIFs	INR 1500000
Angel Funds	INR 200000

Winding Up Process

As per the terms stated under Regulation 11(2), information memorandum or placement memorandum issued by an AIF shall inter alia include details of how to wind up the AIF or the scheme. As per the terms stated under Regulation 29 of AIF Regulations, AIFs shall be wound up:

• When the tenure of the AIF or all schemes launched by the AIF, as mentioned in the placement memorandum, are over.
• If 75% of the investors by value of their investment in the AIF pass a resolution at a meeting of unit-holders for the AIF to be wound up.
• In case of trusts, if it is the opinion of the trustees or the trustee company, whatever the case may be, the AIF would be wound up in the interest of investors in the units.
• If the Board directs so, in the interest of investors.

The trustees, trustee company, Board of Directors, or the designated partner of the AIF shall inform the Board and investors of the situations that have led to winding up of the AIF. On and from the date this information is shared, no more investments shall be made on behalf of the AIF. The assets shall go through liquidation, collections of which shall be distributed to them after all liabilities have been satisfied, within one year from the date of intimation.

Conclusion

To reiterate, AIFs allow investors to allocate their funds in a wide range of assets allowing them to build a diverse portfolio while securing their investments in the fluctuating market.

SEBI setup a web-based centralized grievance redress system known as the ‘SEBI Complaint Redress System (SCORES)’ where investors can lodge their complaints related to AIFs. This system can be accessed at www.scores.gov.in