Alternative Investment Fund – An Overview
If you decide to invest in an AIF, you need to verify if it is registered with the Securities and Exchange Board of India (SEBI) as an Alternative Investment Fund.
The SEBI registered AIF seeks registration in the trade of the categories listed below:
1) Category I AIF –
Category I Alternative Funds invest in ventures in the early-stage or start-ups or social ventures or infrastructure sectors or Small and Medium Enterprises, which the Indian Government or the regulatory bodies consider as economically or socially viable.
This category includes different SME funds, venture capital funds, infrastructure funds and social venture funds.
2) Category II AIF –
This category comprises funds which do not fall in either Category I or III and neither undertake any leverage other than just to meet the regular day-to-day expenses for operational requirements.
This fund usually consists of the debt funds or private equity funds, which do not receive any specific incentives or concessions from the government or any other regulatory body.
3) Category III AIF –
The funds in this category deploy complex or diverse trading strategies as well as are usually invested in either listed derivatives or unlisted ones.
This set of Alternative Funds include the hedge funds or some other funds which are traded to earn short term gains and are open-ended. All the funds which are not under the purview of any specific incentive or concession given by the government or any other regulatory body is generally included in this group.
Read a complete guide on Alternative Investment Funds and how to invest in them.
SEBI Rules and Regulations complying with the Alternative Investment Funds
Any Alternative Investment Fund (AIF) registered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 are usually incorporated as a company or a trust or an LLP (Limited liability partnership).
These regulations were implemented for the first time on 21st May 2012 and are aimed at regulating the activities performed by the private pool of funds via the AIF route.
Research states that most of the SEBI registered AIFs are available in trust form and no entity can be classified as an AIF unless it has obtained a registration certificate from the SEBI.
Any existing fund that is classified as an Alternative Investment Fund but is not registered with the SEBI, will continue to operate if it has made an application for registration under sub-regulation (5) till the application is disposed of.
The schemes that are already existing will be allowed to complete their designated tenure, according to the commitments already made till SEBI grants them as registered under regulation (6).
There are certain listed criteria under the AIF regulations on the number of investors and the validity of the registration certificate of the entity.
SEBI guidelines specify that no AIF scheme should have more than one thousand investors except for an angel fund, which could have up to a maximum of forty-nine angel investors. You should be aware that the AIF cannot subscribe to the units publicly rather can only invest through private placement by the issue of the information memorandum or placement memorandum.
The validity of the registration certificate is maintained intact till the Alternative Investment Fund is dissolved.
If you were to invest in an AIF, you would be curious to know about its several launch schemes. The AIF is allowed to launch schemes in accordance with the filling of the placement memorandum with the Securities and Exchange Board of India.
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However, the AIF is entitled to pay a scheme fee of INR 1 Lakh to SEBI, at least thirty days prior to the launch in order to fill the placement memorandum.
There is an exception to the payment of scheme fees in case it is an angel fund or it is the first scheme launched by the AIF.
For all the SEBI registered category I and II AIFs, which do not take any leverage are required to submit a report to SEBI on a quarterly basis; while category III AIFs submit the report on a monthly basis.
These reports are submitted via email irrespective of whether the AIF has started any activity or not, as physical reports are not entertained.
They are sent to SEBI within seven calendar days from the end of the quarter or the month, depending on the category of the AIF.
The amount of leverage undertaken by Category III Alternative Investment Fund should not exceed more than twice that of the NAV of the fund. All information pertaining to the AIF is stated in the SEBI (Alternative Investment Funds) Regulations 2012 and circulars are available on the SEBI website.
Procedure to be followed to be registered with SEBI as an AIF
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All the applicants should make an application under Form A as provided in the SEBI (Alternative Investment Funds) Regulations, 2012 along with the requisite supporting documents. The applicant has to pay an application fee of INR 1,00,000/- to SEBI.
Once SEBI approves the application, a registration fee or a re-registration fee or a scheme fee as applicable has to be paid.
Thereafter, different categories of the AIF has to pay the registration fee, as specified below:
Category I Alternative Investment Funds – INR 5,00,000
Category II Alternative Investment Funds – INR 10, 00,000
Category III Alternative Investment Funds – INR 15,00, 000
Angel Funds – INR 2,00, 000
If you have invested in the AIF and are not happy with any of its policies, you can register your complaint with SEBI via its digital grievance redressal system which is centralized in nature called SCORES or SEBI Complaint Redressal System (SCORES), where the investors can lodge their complaints against the AIFs.
Additionally, any dispute resolution for the AIF can be done by the Manager or Sponsor, who lay down the process for resolution of disputes between any two parties like the investors, Manager, Sponsor or the Alternative Investment Fund, through arbitration or any specific mechanism as mutually decided between the investors and the AIF.
New Amendments brought in by SEBI in 2020
In the financial world, the Security Exchange Board of India (“SEBI”) lays down the rules and regulations for primary and secondary security markets in India.
It acts as a surveillance mechanism for all the participants in the security market for intermediaries such as Stock Brokers, Stock Exchanges and Portfolio Managers, etc.
Few amendments were specified in the circulars released by SEBI in 2020. If you have invested in an AIF, it is pertinent for you to take a closer look at each of the specifications mentioned therein:
The first circular was released on February 5, 2020, and was based on the Disclosure Standards for the Alternative Investment Funds (AIFs).
The need to streamline the proforma for the information and disclosure standards has fostered SEBI to lay down a template for the Private Placement Memorandum (PPM), which contains specific information for the prospective investors in a SEBI specified format.
This template has two parts, Part-A which consists of the minimum disclosures and Part-B, the supplementary section, which comprises some additional information.
Adhering to the compliance clause, an annual audit of the PPM by the AIF is made mandatory.
If you are the Trustee or the Board or the Designated Partner of the Alternative Investment Fund, the audit findings and corrective steps will be communicated to you.
Although the subscription agreement has to be in sync with the PPM, there are some exceptions to the AIFs, where these PPM guidelines are not applicable:
- Angel Funds
- SEBI registered AIFs or schemes, where each investor commits to a minimum capital contribution of INR 70 crores and also provides a fund waiver, as mentioned by the Annexure to CIRCULAR-I.
- SEBI introduced a mandatory benchmarking framework to monitor the performance of AIFs to let investors make an informed decision and the Benchmarking Agencies to make a customized performance report.
Any association of Alternative Investment Funds which has at least 51% membership in AIFs, shall enter into a Benchmarking Agreement with a Benchmarking Agency.
This agreement consists of the mode and manner of data reporting, information specific to data that needs to be reported, and other terms pertaining to confidentiality of the data received by the Benchmarking Agency.
All sorts of fund information including cash flow data of the schemes are also reported to the agency. However, the Performance benchmarking criteria is not applicable to the Angel Funds, which are a constituent of Category I.
The second circular that was released on June 12, 2020, consisted of the clarification of the Disclosure Standards stated in Circular I for the AIFs.
The first clarification aimed to provide a timeline to the audit requirement, mainly at the end of each financial year.
It also stated that the results of the audit should be communicated to the Trustee or the Board or the Designated Partners of the AIF within six months from the end of the financial year.
However, these provisions are not applicable to those AIFs that have not raised any funds from their investors.
The earlier membership amount of 51% has been replaced by 33% to enter into a Benchmarking Agreement with a Benchmarking Agency.
This circular was released on June 30, 2020, specifying the collection of stamp duty on the issue, transfer and sale of AIF units. The Registrar & Share Transfer Agents (RTA) appointed by the AIFs are responsible for collecting the stamp duty on transfer, issue and sale of units of AIF.
The Alternative Investment Funds would comply with the amended Stamp Act and rules with effect from July 01, 2020. Till the time an RTA is appointed,
AIFs shall keep the applicable stamp duty for transactions in a designated bank account. Once the RTAs are appointed, the said amount is given for onward remittance to the states and Union Territories according to the provisions of the amended Stamp Act.
The fourth circular specifies the processing of applications for the registration of AIFs and the schemes launched by SEBI.
The amendment made by the SEBI (AIF) Regulations, 2012 on October 19, 2020, stated that the Manager will be a part of the Investment Committee which will enable him to approve all the investment decisions of the AIF.
All the applications from external members from resident Indians will be processed for being a part of the Investment Committee whereas the applications from the non-resident Indians will be processed only after the clarification sought by SEBI has been resolved.
Recent updates from SEBI specifies that category II and III alternative investment funds (AIFs) which are established as a trust may be certified as a qualified buyer according to the SARFAESI Act and are eligible to subscribe to security receipts issued by asset reconstruction companies, adhering to certain regulatory norms.
Recent Updates in AIF’s
Certain amendments by SEBI in the last quarter of 2020 pertains to professional qualifications and experience criteria of the investment team, that needs to be fulfilled.
Amendment 4(g) specifies that at least one important member of the team working as a manager of the AIF with a minimum of five years of working experience in managing asset pools or in the business of actively dealing in securities.
It is pertinent to have at least one professional in the investment team with domain expertise in accountancy, finance, business management, economics, commerce, banking or capital market from a reputed institution.
Additionally, Regulation 20(6) specified that the Manager of the AIF is responsible for all decisions regarding investment in funds.
This rule also provides the manager with the leverage to delegate all the investment decisions to the Investment Committee, subject to a few conditions.
Hence all the members of the core investment committee will be equally responsible as the Manager for all investment decisions of the AIF, with the autonomy to approve all the investment decisions.
These provisions also state that all the external members whose names have not been disclosed in the specified placement memorandum initially will be appointed to the core investment committee with the prior consent of at least 75% of the investors depending upon their investment value in the AIF.