Alternative Investment Funds
AIFs offer an excellent way to diversify the investor’s portfolio across asset classes like equity, debt and real estate and across industries and sectors. Product innovation and customized services are the hallmarks of an AIF.
A Brief Introduction
The need for
Alternative Investment Funds (“AIFs”) in Indiawas boosted with the surge in venture capital investments. However, caught in the confusion of many regulations, the Venture Capital Fund (“VCF”) vehicle came to be used by many other funds such as private equity (“PE”), private investment in public equity, real estate, etc., thereby making it difficult to give targeted concessions to VCFs to promote startup or early stage companies.
It is in this background that in 2012 the Securities and Exchange Board of India (“SEBI”) introduced the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”) and to recognise AIFs, such as PEs and VCFs, as a distinct asset class apart from promoter holdings, creditors and public investors.
What is an AIF?
Any privately pooled investment vehicle, established or incorporated in India, in the form of a trust or a company or a limited liability partnership (“LLP”) or a body corporate, not covered under any other SEBI or sectoral regulations. Such privately pooled investment vehicle may collect funds from investors, whether Indian or foreign, for investing such funds in accordance with defined investment policies
Specific exclusions include family trusts, employee stock option trusts, employee welfare trusts or gratuity trusts, holding companies, special purpose vehicles not established by fund managers and regulated under a specific regulatory framework (eg. securitization trusts), and funds managed by registered securitisation or reconstruction companies.
Apart from the registration and compliance requirements under the AIF Regulations, each AIF also needs to be compliant with the applicable statutes, depending upon the chosen structure of trust, LLP or a company. Apart from these, there are also filing and audit requirements for a company and an LLP. As such, a trust is the more favoured structure amongst the existing AIFs in India, since the regulatory framework governing trust structures is minimal and allows the management independence with respect to formulating its own standards of governance.
Registration as AIF
The AIF Regulations make it mandatory to obtain certificate of registration from SEBI for enabling AIFs to operate under one of the following 3 categories:
Category I – AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure. Includes venture capital funds, SME funds, social venture funds, infrastructure funds, angel funds, etc.
Angel funds, which is of particular topical interest, means funds pooling investments from angel investors, having net worth of at least Rs. 10 Crores (if a body corporate); or net tangible assets of at least Rs. 2 Crores, excluding value of principal residence, and experience as a serial entrepreneur, or being a senior management professional with at least 10 years of experience (if individual).
Category II – AIFs, which do not fall in Category I or Category III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Includes private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other regulator.
Category III – AIFs, which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Includes hedge funds or funds, which trade for short term returns, or open ended funds, for which no specific incentives or concessions are given by the government or any other regulator.
The eligibility criteria/conditions are as follows:
- Investors can be Indian, NRI or foreign. However, for angel funds, Investors should be angel investors only.
- Minimum corpus should be Rs. 20 Crores for each scheme and Rs. 10 Crores for angel funds;
- Minimum investment by each investor should be Rs. 1 Crore, or Rs. 25 Lakhs (in case of employees/directors/fund manager of AIF or angel investors), as applicable.
- There are however no minimum investment requirement on units of AIF issued to the employees of the manager for profit sharing;
- Maximum number of investors can be 1000 for each scheme and 49 in case of angel funds.
- Category I and II AIFs can be close ended only, with a minimum tenure of three years, while Category III AIFs can be both open and close ended.
- Management fees is generally fixed at a certain percentage of the corpus, annually, and/or carried interest, to provide further incentive to the manager.
- Units of close ended AIFs may be listed on stock exchange, subject to a minimum tradable lot of Rs. 1 Crore and such listing of AIF is permitted only after final close of the fund or scheme.
- In addition to the above, the AIF Regulations prescribe general and specific investment conditions for each category AIF and SEBI can also specify additional requirements/criteria for all/specific AIFs. Upon contravention of any of the provisions of the AIF Regulations, including the minimum corpus requirement as stated above, the penalties are as provided under the SEBI (Intermediaries) Regulations, 2008, which include suspension or cancellation of certificate of registration, debarment, etc.
Pass-through Taxation of AIFs
Category I enjoys the tax benefits of pass-through status and the Finance Act, 2015, extended a pass-through status to Category II AIFs as a response to a long standing industry demand.
What it essentially means is that income on an investment fund (defined as a Category I or Category II AIF), is exempted from tax and such income is chargeable to income-tax in the hands of the unit-holder in the same manner as if the investments made by the investment fund has been made directly by the unit-holder.
Overall, the AIF Regulations have been a welcome change and have been quite successful in providing separate incentives and imposing separate obligations for the various categories and subcategories of AIFs.
Growth in Investments
AIFs have witnessed high growth over the last few years post introduction of new guidelines, As on June 30, 2017 the number of AIFs registered are 315 with SEBI and this list is growing.
As on March 31, 2017 the amount of commitments raised is Rs 84,303 crores which represents an increase of 102% over the corresponding period as on March 31, 2016. (Rs 38,878 crores)
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