Traditionally, an investor could enter the capital markets , and beyond, via a range of “managed”options like a PMS and a mutual fund apart from executing specific trades or transactions as per her personal decisions.
There was a major change in 2015 when, while presenting the Union budget for financial year 2016, the finance minister announced that foreign investments would be allowed in alternative investment funds (AIFs). Since then, more than 350 AIFs have established themselves as alternative investment options for HNIs offering access to a wide variety of asset classes apart from equities and including real estate, private equity, art and wine, debt markets and so on.
An AIF is an investment vehicle established to pool in funds for investing in real estate, private equity and hedge funds. It is in the form of a trust or a company or a limited liability partnership (“LLP”) or a body corporate. It refers to any privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership(LLP) which are not presently covered by any Regulation of SEBI governing fund management (like, Regulations governing Mutual Fund or Collective Investment Scheme)nor coming under the direct regulation of any other sectoral regulators in India-IRDA, PFRDA, RBI. Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
AIF Regulations make it mandatory to obtain certificate of registration from SEBI – Regulation 2(1)(b) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. and are segregated into three categories based on the type of funds
- Category-I:Venture funds, social venture funds and infrastructure funds (expected to get incentives from the government)
- Category-II: Private equity funds and debt funds (prohibited from raising debt, except for meeting their day-to-day operational requirements)
- Category-III:Trading with a view to making short-term returns and includes Hedge Funds among others
AIFs raise funds through private placement and they cannot accept from an investor an investment of value less than Rs. 1 Cr.
- Minimum investment from an individual is Rs 1 crore.
- The overall corpus of the AIF should be at least Rs 20 crores (Rs 10 crores for angel funds)
- There should not be more than 1,000 investors at any point in time.
- The fund manager or promoter should have contributed at least 2.5% or Rs 5 crores, whichever is less, to the initial capital.
One AIF can float several schemes. Investors in these funds are large lnstitutional, high net worth individuals and corporates.
AIFs of Category I and II are not permitted to invest more than 25% of the investible funds in one Investee Company while it is 10% for Category III AIFs.
Units of close ended AIFs are allowed to be listed on a stock exchange (but only after final close of the fund or scheme) subject to a minimum tradable lot of 1Crore rupees.
All AIFs are required to comply with the reporting norms to SEBI on a quarterly basis (for Category I, II AIFs and for those Category III AIFs which do not employ leverage) or on a monthly basis (for Category III AIFs which employ leverage). The reporting formats and the method of reporting is specified in the circular dated July 29, 2013.
Category III AIFs also have to additionally comply with norms pertaining to risk management, compliance, redemption and leverage as specified in the circular. The leverage for a Category III AIF is specified not to exceed 2 times i.e. the gross exposure after offsetting for hedging and portfolio rebalancing transactions should not exceed 2 times the NAV of the fund.
AIF’s are still some way behind mutual funds, which have around Rs 24 lakh crore in assets under management while the AIF industry had made investments worth Rs 60,000 crore. This is partly because AIFs have a relatively limited audience as they deal in more complex, higher-risk investments than mutual funds, and require a minimum investment of one crore rupees but the evidence is that HNIs are increasingly drawn to this asset class and it will become a major industry as all target segments start to perform.
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