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.
Meaning Of Alternate Investment Fund
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-
- It is a privately pooled investment vehicle that gathers funds from investors, including Indian investors and foreign investors, to invest it as per a defined investment policy to benefit its investors.
- It does not include funds covered under the SEBI (Collective Investment Schemes) Regulations, 1999, SEBI (Mutual Funds) Regulations, 1996 or any other regulations of SEBI (Securities and Exchange Board of India) regulating fund management activities.
The following is not considered as AIF-
- Family trust that is set up for benefitting the ‘relatives’ as defined under Companies Act, 2013.
- ESOP (Employee Stock Ownership Plan) trust that is set up under the SEBI (Share Based Employee Benefits) Regulations, 2014 or as permitted under Companies Act, 2013.
- Employee welfare trust or gratuity trust set up for the benefit of employees.
- Holding companies as defined under Section 46(2) of the Companies Act, 2013.
- Other special purpose vehicles that are not established by fund managers, including securitisation trusts, are regulated under a specific regulatory framework.
- Funds managed by a securitisation company or reconstruction company registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
- Any such pool of funds that are directly regulated by any other regulator in India.
Categories Of Alternate Investment Fund
Applicants can seek registration as an AIF in one of the following categories as may be applicable-
Category I AIF
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.
Category II AIF
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.
Category III 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.
Eligibility Criteria For Alternate Investment Fund Registration
The eligibility criteria for applying for registration as Alternate Investment Fund are-
- The applicant, manager and sponsor are fit and proper persons as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
- The manager of the key investment team of AIF has –
- adequate experience and at least one key personnel having five years of experience in managing pools of capital or advising, in the fund, wealth, asset, portfolio management or in the business of selling, buying and dealing of securities or other financial assets,
- At least one key personnel having professional qualification in accountancy, finance, commerce, business management, capital market, economics or banking from an institution or university recognised by the Central Government or any State Government.
- The applicant at the time of registration has specifically stated the targeted investors, investment objective, investment style, proposed corpus, strategy and proposed tenure of the fund or scheme.
- The Memorandum of Association (MoA) of a company or the Trust Deed of a Trust or the Partnership deed of an LLP gives permission to carry on the activity of AIF.
- The applicant should be prohibited by its MoA and Articles of Association (AoA) or Partnership Deed or Trust Deed to make an invitation to the public for subscribing to its securities.
- If the applicant is a Trust, the Trust Deed is duly registered under the Registration Act, 1908.
- If the applicant is an LLP, it is duly incorporated, and the partnership deed is filed with the Registrar of Firms as per the provisions of the Limited Liability Partnership Act, 2008.
- In case an applicant is a body corporate, it is established or set up under the laws of the Central or State Legislature, and it has permission to carry on the activities of AIF.
Registration Of Alternate Investment Fund
- The application for grant of AIF Registration Certificate can be made to the SEBI for Categories I, II and III AIF in Form A as stated in the First Schedule of the Regulations along with the necessary documents.
- The registration application should be accompanied by a non-refundable application fee as stated in Part A and paid in the manner stated in Part B of the Second Schedule of the Regulations.
- The SEBI will take into account the requirements specified in the Regulations before considering the grant of Registration Certificate to the applicant.
- Generally, after receipt of the registration application, the applicant receives a reply from the SEBI within 21 working days. However, the time taken for granting registration depends on how quickly the requirements are adhered to by the applicant.
- The applicant must state in the covering letter of the application whether-
- It is registered with the SEBI as a Venture Capital Fund. If the answer is yes, the details must be provided.
- The applicant has been undertaking the activities of AIF before filing the application for registration. If the answer is yes, the details must be provided.
- The applicant is applying for registration of a new fund.
- The applicant should also file an online application in terms of the SEBI guidelines from time to time.
Grant Of Registration Of Alternate Investment Fund
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.
Documents Required For Alternate Investment Fund Registration
The documents that are to be produced along with the application for registration are-
- Certificate of Incorporation or Registration of the applicant entity.
- Partnership Deed in the case of the AIF registration is by a Partnership registered under the Limited Liability Partnership Act, 2008.
- Original Deed of Trust in case of the AIF registration is by a society or trust registered under the Trusts Act, 1882.
- Information of the directors and shareholders with respect to the AIF.
- Copy of the Placement Memorandum of the applicant entity.
- Contact information and other information of the applicant entity.
- Any other business information relating to the expansion plans of the company or LLP.
- Address and particulars of the Registered Office of the applicant entity.
- Memorandum of Association and Articles of Association of the applicant entity.
Compliances After Alternate Investment Fund Registration
The compliances to be followed by the applicant after obtaining the AIF Registration Certificate are-
- The AIF must comply with the reporting requirements as stated by the SEBI from time to time.
- The AIF must regularly check the SEBI website for any circulars, updation or guidelines issued from time to time by the SEBI relating to the AIF activity.
- The AIF must intimate to SEBI any material changes in the details that are already furnished to it within a reasonable time.
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