Alternative Investment Funds (“AIFs”) in India are governed by the Securities and Exchange Board of India (Alternative Investment Regulations), 2012 (“AIF Regulations”) and regulated by the Securities and Exchange Board of India (“SEBI”). The AIF Regulations regulate the registration, operation and winding up of the AIFs.
What is an AIF?
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.
- It is a privately pooled investment vehicle that gathers funds from investors, including Indian and foreign investors, to invest in 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.
What are the various categories of an AIF?
|• Venture capital funds (including angel funds)
• Small and medium enterprise funds
• Social venture funds
• Infrastructure funds
• Others as may be specified
Maximum 25% of investible funds can be invested in one investee company
|• Private equity funds
• Debt funds
Maximum 25% of investible funds can be invested in one investee company
|• Hedge funds
• Funds that trade for making short term returns, deploys diverse/complex trading strategies
– Maximum 10% of investible funds can be invested in one investee company
– They can invest in listed/unlisted companies, derivatives/complex/structured products
– Leveraging is permitted either through investment in derivatives/borrowing, subject to prescribed conditions
– FPIs can invest in Category III AIFs
– Category III AIF can invest in commodity derivatives (maximum 10% of investable funds in one commodity)
Facilitation of Participation by AIFs in Credit Default Swaps
To provide greater investment flexibility to Managers of AIFs and to facilitate deepening of the domestic Corporate Bond market, it has been decided to permit AIFs to participate in Credit Default Swaps (‘CDS’), not only as protection buyers, but also as protection sellers, subject to conditions for risk mitigation.
What is the regulatory limits on number of investors?
As per the AIF Regulations, an AIF is not permitted to make an invitation to the public to subscribe to its units/securities. Further, an AIF can raise funds from its investors only by issuance of units/securities through private placement.
An AIF (other than angel fund) shall not have more than 1,000 (one thousand) investors in any scheme. In case of an angel fund, no scheme shall have more than 200 (two hundred) angel investors.
An AIF may accept the following as joint investors for the purpose of investment of not less than INR 10,000,000 (Indian Rupees Ten Million):
- an investor and his/her spouse;
- an investor and his/her parent; and
- an investor and his/her daughter/son.
An investor is required to invest a minimum of INR 10,000,000 (Indian Rupees Ten million) in AIF. The above-mentioned investment limit may be reduced for employees and directors of the investment manager subject to receipt of a minimum investment of INR 2,500,000 (Indian Rupee Two Million and Five Hundred Thousand).
As per the AIF regulations, an angel fund is permitted to raise funds by way of issue of units to angel investors. Angel fund shall accept an angel investor for the purpose of investment of not less than INR 2,500,000 (Indian Rupee Two Million and Five Hundred Thousand) for a maximum period of 5 (five) years.
What is the minimum corpus of an AIF?
As per the AIF Regulations, a corpus is the total amount of funds committed by investors to the AIF in the form of a written contract or any such document, as on a particular date. As per AIF Regulations, the minimum corpus for an AIF shall be INR 200,000,000 (Indian Rupees Two Hundred Million). In case of an angel fund, the minimum corpus is INR 50,000,000 (Indian Rupees Fifty Million).
What is open ended and close ended AIF?
AIF Regulations does not provide definition for open ended and close ended AIF. However, as per the general understanding, open-ended AIF can be understood as the scheme that offer new units to the investors on a continuous basis. While, closed-ended AIF are the mutual funds, which offer new units to investors for a limited period only.
What is the Eligibility criteria for Alternative Investment Fund Registration?
- An applicant or entity is prohibited by its memorandum and articles of association from inviting the public to subscribe to its securities.
- Maximum number of investors can be 1000.
- If the applicant is a trust, then the applicant has to furnish the trust deed duly registered under provisions of the Registration Act,1908.
- In case, the applicant is a limited liability partnership, then a partnership deed duly filed with the Registrar under the Limited Liability Partnership Act, 2008 has to be furnished.
- Any individual be it an Indian, Non-Resident Indian or a foreigner can invest in an AIF.
- The applicant, Sponsor and Manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.
- The key investment team of the Manager of Alternative Investment Fund is eligible as per AIF regulations.
What are the 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
What is the process for registration of an entity as AIF with SEBI?
To obtain AIF registration, an entity has to follow the below steps:
Application in Form A
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 for Alternative Investment Fund registration, an applicant will make application with SEBI as per the regulations in the Form A along with the cover letter and other necessary documents.
Application Evaluation by SEBI
On the receipt of the application, SEBI will reply within 21 working days to the applicant. However, the process of registration totally depends on the applicant. If the compliances are filed by the applicant within the correct period, then the process would be seamless.
Ensure SEBI Compliances
For expedite the registration process, an applicant should go through the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
Here are the following details must be mentioned by the applicant in the cover letter:
- Whether it is registered with SEBI as a Venture Capital Fund, if yes, then provide details.
- Prior to the application, whether it has been undertaking activities of an AIF. If yes, then provide details.
- Applying for registration of a new fund.
In case of an Authorized signatory, there is a requirement of submission of an authorization letter from the Directors/Trustees/Designated Partners of the Fund.
Payment of registration fee to SEBI
For registration, an online application shall be filed according to the guidelines prescribed by SEBI. An applicant will submit form A, which has to be properly filled, numbered, duly signed and stamped with the application fee of Rs.1,00,000/- by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or] by bank draft in favor of “The Securities and Exchange Board of India” at Mumbai.
Applicable Registration Fee
|Category of the Applicant
|Category I AIF (except Angel Funds)
|Rs. 500,000/- + 18% GST
|Category I AIF – VCF – Angel Fund
|Rs. 200,000/- + 18% GST
|Category II AIF
|Rs. 10,00,000/- + 18% GST
|Category III AIF
|Rs. 15,00,000/- + 18% GST
Grant of Registration Certificate
- Security and Exchange Board of India shall consider the requirements as prescribed in the SEBI (Alternative Investment Funds) Regulations, 2012, for the purpose of grant of registration.
- If SEBI is satisfied that the applicant fulfills all the requirements as mentioned in the regulation, then only SEBI will approve the registration application and convey the same to the applicant.
- Upon receipt of approval from SEBI, the applicant needs to pay the proper registration fee by way of the bank
- After receiving the registration fees, SEBI will grant the certificate of registration
Validity of AIF registration certificate
- AIF registration certificate is valid until the company is wound up.
What is private placement memorandum? Are there any regulatory requirements in relation to an AIF’s private placement memorandum?
Private Placement Memorandum (“PPM”) is considered as the information memorandum for AIFs which contains all the necessary information about the AIFs.
PPMs are required to contain all material information about the AIF including with respect to,
- Background of the key investment team of the investment manager,
- Targeted investors,
- Fees and all other expenses proposed to be charged,
- Tenure of the fund or scheme,
- Conditions or limits on redemption,
- Investment strategy,
- risk management tools and parameters employed,
- Key service providers,
- Conflict of interest and procedures to identify & address them and disciplinary history,
- The terms and conditions on which the investment manager offers investment services,
- Its affiliations with other intermediaries and manner of winding up of the AIF or the scheme.
SEBI has also released formats of PPM for each category of the AIF, which are to be followed by the prospective applicants for registration as AIFs. The formats include the minimum level of information which are required to be included in a private placement memorandum.
An applicant may seek exemption from following the format in the following cases:
- a) An angel fund may seek exemption from SEBI.
- b) An AIF or scheme of an AIF in which each invest or commits to a minimum capital contribution of INR 700,000,000 (Indian Rupees Seven Hundred Million) or USD 10,000,000 (United States Dollars Ten Million) or equivalent, in case of capital commitment in non-INR currency.
Is there any dispute resolution mechanism specified under the AIF Regulations?
As per the AIF Regulations, the AIF, by itself or through its manager or sponsor is required to specify the procedure for dispute resolution arising between the investors, AIF, manager or sponsor. The process may be through arbitration or any such mechanism as mutually agreeable between the investors and the concerned AIF.
What is the process for winding up of an AIF?
As per the AIF regulations, PPM of an AIF must include information on the manner of winding up of the fund. An AIF can be wound up in the following cases:
- a) on expiry of the tenure of the AIF/ scheme as mentioned in the PPM;
- b) if the trustee or the trustee company directs in the interest of the investors;
- c) if 75% (Seventy-Five percent) of investors by the value of their investment pass a resolution for winding up at a meeting of unit holders; or
- e) If SEBI directs in the interest of the investors.
Further, an AIF set up as a limited liability partnership, as a company, as a body corporate shall be wound up in accordance with the provisions of the respective statutes under which they were constituted. It is the duty of the trustee or the trustee company or the director or designated partners to intimate the investors and SEBI, the circumstances leading to winding up. No investment shall be made from the fund after receiving such intimation.
The assets of the AIF are required to be liquidated in accordance with the PPM and the proceeds are to be distributed among the investors after satisfying all liabilities, within 1 (one) year from the date of intimation. The certificate of registration has to be surrendered back to the SEBI on winding up.
What are the conditions under which an AIF will be said to be liable for default?
As per the AIF Regulations, an AIF would be said to be in default when it:
- Contravenes the provisions of the SEBI Act, 1992, or the AIF Regulations.
- fails to furnish or furnishes false / misleading information to SEBI.
- does not submit periodic reports or returns as required.
- does not co-operate in any enquiry, inspection or investigation conducted by SEBI.
What are the 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, updations 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.
From the above discussion, we can conclude that the Alternative Fund Investment Registration is mandatory for investors seeking to setup the business of Angel Funding, Venture Capital, etc.
At present, among the investors, AIF registration is in high demand. Due to better returns and all other facilities, AIF attracts Investors to obtain registration.
As we have observed, the registration process of AIF is hassle-free if you fulfill all its eligibility criteria and have all the required documents. Once SEBI has scrutinized the records and is satisfied with every detail, it will grant the applicant with the certificate of registration of AIF.