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Alternative Investment Fund (AIF) is a type of investment fund in India. Investors can use AIF for investing as well as getting benefits. It is a fund of funds that invests in asset classes other than bonds, stocks and cash. It pools funds from investors and invests them under different categories of investments as specified by the Securities and Exchange Board of India (SEBI) for the benefit of investors.
AIF consists of investment funds that are privately pooled that invest in private equity, venture capital, hedge funds, managed funds, etc. AIF means an investment that differs from conventional investments such as debt securities, stocks, etc. It is an investment option for high rollers, including domestic and foreign investors in India. Generally, institutions and high net worth individuals invest in AIF as it needs a high investment amount.
AIF is defined under Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“Regulations”). The regulations define AIF as a fund established or incorporated in India in the form of a Limited Liability Partnership (LLP) or company or trust or body corporate which-
The following is not considered as AIF-
Applicants can seek registration as an AIF in one of the following categories as may be applicable-
AIF that invest in early-stage ventures, startups, social ventures, Small and Medium Enterprises (SMEs), infrastructure or other sectors/areas considered by the government or regulators as socially or economically desirable are Category I AIF. Category I AIF investments include SME funds, venture capital funds, infrastructure funds, social venture funds and other such specified AIFs.
Under this category, AIFs are generally anticipated to have positive spillover effects on the economy. The funds for which the SEBI or Government of India (GOI) or other regulators in India might consider providing incentives or concessions are included under this category.
AIFs that do not fall under Category I and III and do not undertake borrowing or leverage other than to meet the day-to-day operational requirements and are permitted in the SEBI (Alternative Investment Funds) Regulations, 2012 fall under Category II AIF.
AIF under this category includes debt funds or private equity funds, which receive no specific incentives or concessions from the GOI or any other regulator. The various types of funds, such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc., are registered as Category II AIF.
AIFs that employ complex or diverse trading strategies and employ leverage, including investment in listed or unlisted derivatives, fall under Category III AIF. AIFs such as hedge funds or funds that trade for making short term returns or other such funds that are open-ended and for which no specific concessions or incentives are received from the GOI or any other regulator are included under this category.
The eligibility criteria for applying for registration as Alternate Investment Fund are-
The SEBI will take into account the requirements specified in the Regulations before considering the grant of Registration Certificate. After the SEBI is satisfied that the applicant fulfils the requirements, it will approve the application and inform the applicant of the same.
In case the applicant is not registered with the SEBI as a Venture Capital Fund, then a registration fee of Rs.5 lakh is to be paid to the SEBI on receipt of approval of the registration application. When the applicant is registered with the SEBI as a Venture Capital Fund, a registration fee of Rs.1 lakh is to be paid to the SEBI on receipt of the registration application’s approval.
After the receipt of the registration fee from the applicant, the SEBI will grant the Certificate of Registration of Alternative Investment Fund to the applicant in Form B. This Registration Certificate will be valid till the Alternate Investment Fund is wound up.
The documents that are to be produced along with the application for registration are-
The compliances to be followed by the applicant after obtaining the AIF Registration Certificate are-
The Securities and Exchange Board of India (SEBI) regulates the alternative investment funds in India.AIFs are defined in the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
According to the SEBI, AIFs can be established, registered, or incorporated in the form of LLP, company, trust, partnership firm or body corporate. Generally, the majority of AIFs are registered as a trust.
No, AIFs cannot go for public offering. It means that the shares and securities cannot be offered to the public. Thus, it cannot get listed or issue its shares and securities to the public.
Yes, it can get investment from NRI and Foreign investors as per the current FDI (Foreign Direct Investment) policies under the Foreign Exchange Management Act (FEMA).
The objective of AIF is different from mutual funds. AIF is a highly risky investment whereas mutual funds are considered less risky and are available to retail investors.
No. Category I and II AIFs are required to be close-ended and have a minimum tenure of three years. However, Category III AIFs may be open-ended or close-ended.
A sponsor is any person who sets up the AIF and includes promoter in case of a company and designated partner in case of a limited liability partnership.
Every scheme of an AIF (other than an angel fund) should have below 1000 investors. In the case of an angel fund, the scheme can have not more than 49 angel investors. An AIF can raise funds from sophisticated investors only through private placement but cannot make an invitation to the public at large to subscribe to its units.
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