Alternative-Investment-Funds

All about – Alternative Investment Fund (AIF)

Introduction

Alternative Investment Funds, or AIFs, started in 2012 after market regulator SEBI drafted the AIF laws and have expanded at a 20% annual rate over the last decade.

According to Economic Times, the Indian AIF sector has generated Rs 6.4 lakh crore in commitments, representing a 7-fold increase in the previous five years as of March 31, 2022.

Demand for private equity (PE) and debt-fueled the fast rise of AIFs. Investors prefer AIFs because their listed equities portfolios are more specialized or themed and are more standard than mutual funds (MFs). New-age technology firms mostly drove the frantic rise in private equity, typically unlisted and only available through the AIF route.

With all that discussed, let’s find out more about the Alternative Investment fund.

What are Alternative Investments Funds?

Alternative Investment Funds or AIFs are private and pooled investment vehicles that collect funds from high rollers, including domestic and foreign investors, for investment in accordance with an investment policy established for the benefit of the AIFs investors.

They differ from traditional investments such as debt securities, equity stocks, etc., as it is a special investment category fund that invests in private equity, hedge funds, managed funds, venture capital, etc.

Institutions and high-net-worth people often invest in AIF since it requires a significant investment amount. It combines investor money and invests them in several investment categories authorized by SEBI to benefit investors.

Meaning of Alternative Investment Fund

According to the laws, an AIF is a fund founded or registered in India as a Limited Liability Partnership (LLP), corporation, trust, or body corporate that-

It is a privately pooled investment fund that collects assets from investors, both domestic and international, and invests them according to a specified investment philosophy to benefit its investors.

It excludes funds subject to the SEBI (Collective Investment Schemes) Laws, 1999, the SEBI (Mutual Funds) Regulations, 1996, or any other SEBI (Securities and Exchange Board of India) regulations governing fund management operations.

The following are not AIF-compliant.

  • A family trust is established to benefit “relatives” as defined by the Companies Act of 2013.
  • Employee Stock Ownership Plan (ESOP) 
  • Employee welfare trusts, sometimes known as gratuity trusts, are established for the benefit of employees.
  • Corporations are defined as holding companies under Section 46(2) of the Companies Act of 2013.
  • Other unique purpose entities, such as securitization trusts not formed by fund managers, are subject to a different regulatory framework.
  • Funds controlled and managed by Securitization or Reconstruction Companies registered with the RBI under Section 3 of the SRFAESI 2002.
  • Any such money pool that is directly controlled by another body in India.

Types of Alternative Investment Funds in India

SEBI has categorized Alternative Investment Funds into 3 categories:

Category I

Category I AIF engages in early-stage initiatives, including –

  • Small and Medium Enterprises (SMEs), 
  • startups, 
  • social ventures, 
  • infrastructure, or 
  • other sectors/areas deemed socially or economically acceptable by the government or authorities. 
  • SME funds, infrastructure funds, venture capital funds, social venture funds, and other similar designated AIFs are examples of Category I AIF investments.

AIFs fall under this category since they are expected to have a favorable economic impact. This category includes funds for which the SEBI, the Government of India (GOI), or other Indian authorities may consider granting incentives or concessions.

Examples of Category I AIF – Capital Trust, 9Unicorns Accelerator Fund.

Category II

This type of AIF comprises debt funds or private equity funds that do not get any special incentives or concessions from the GOI or any other regulator.

Category II AIFs include 

  • Private Equity Funds (PE funds), 
  • Real Estate Funds, 
  • Distressed Asset Funds, etc.

Category II AIFs are those that do not borrow or use leverage other than to satisfy day-to-day operating needs and are approved under the SEBI (Alternative Investment Funds) Regulations, 2012.

Examples of Category II AIF – PE, Debt-Fund, A91 Partners Trust II

Category III

AIFs in Category III utilize complicated or diversified trading methods and leverage, including investments in listed or unlisted derivatives.

This category includes-

  • Hedge funds or
  • funds that trade for short-term profits, as well as other open-ended funds that get no particular concessions or incentives from the GOI or any other regulator.

Examples of Category III – Aditya Birla Sun Life Insurance Trust I

Roles of AIFs in India 

AIFs create new investment possibilities and services to diversify financial sources. It also contributes to the reform of macroeconomic drivers, financial sector regulation post-crisis, and two crucial industry developments.

  • To give flexible choices for taking long and short positions for investment gains.
  • To provide investors with clear, quantifiable, attainable, relevant, and time-bound possibilities.
  • To develop innovative business models for alternative investing businesses and people.
  • To create a platform for global alternative asset managers by creating in-house operational teams.
  • To create ways for secure and consistent income development.
  • To give the advantages of diversity.

Is it mandatory to register AIF with SEBI?

Yes, it is mandatory to register AIF with SEBI.

SEBI must evaluate the standards mentioned in the rules while awarding a registration certificate. Following satisfaction, the SEBI will approve the application and notify the applicant.

After receiving SEBI approval, an applicant must pay a registration fee of Rs. 5,00,000/- (for fresh application ) and a re-registration fee of Rs. 1,00,000/- (for existing Venture Funds) to SEBI via bank draft.

SEBI shall provide a COR to the applicant upon receipt of registration/re-registration costs.

Registration Process for Alternative Investment Fund

  1. An application must be submitted to SEBI with the relevant category in Form A. 
  2. The application must be accompanied by a non-refundable application fee specified in Part A and paid in the manner specified in Part B of Exhibit 2 to the Regulations. 
  3. SEBI considers the requirements laid down in the regulations before granting an applicant a certificate of registration. 
  4. Generally, upon receipt of a registration request, the applicant will receive a response from her SEBI within h21 working days. However, the time it takes to grant registration depends on how quickly the applicant meets the requirements. 
  5. Applicants should state in the cover letter of the application whether they are registered with SEBI as a venture capital fund. If the answer is yes, you will need to provide details. 
  6. Applicant performed AIF activities before applying for registration. If the answer is yes, you will need to provide details. 
  7. The applicant applies for registration of a new fund. 
  8. Applicants are required to submit an online application from time to time in accordance with SEBI guidelines.

Criteria for Alternative Investment Fund Registration

The following are the qualifying requirements for applying for registration as an Alternate Investment Fund:

  1. The applicant, manager, and sponsor meet the conditions outlined in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
  2. The AIF’s key investment team manager has 
    • Adequate experience and at least one key personnel with five years of experience in managing pools of capital or advising in the fund, wealth, asset, or portfolio management business or in the business of selling, buying, and dealing in securities or other financial assets.
    • At least one key individual with a professional qualification in accountancy, finance, commerce, business management, capital market, economics, or banking from an institution or university recognized by the Central Government or any State Government.
  3. At the time of registration, the applicant precisely defined the targeted investors, investment purpose, investing style, intended corpus, strategy, and projected term of the fund or scheme.
  4. The Memorandum of Association (MoA) of a business, the Trust Deed of a trust, or the Partnership deed of an LLP grants authorization to carry out AIF activity.
  5. The applicant should be barred by its Memorandum of Association and Articles of Association (AoA), Partnership Deed, or Trust Deed from inviting the public to subscribe to its securities.
  6. If the applicant is a trust, the Trust Deed is registered in accordance with the Registration Act of 1908.
  7. Suppose the applicant is a Limited Liability Partnership (LLP). In that case, it is lawfully established, and the partnership deed is submitted to the Registrar of Firms in accordance with the provisions of the Limited Liability Partnership Act, 2008.
  8. If an application is a corporation, it is founded or established under the statutes of the Central or State Legislature, and it is authorized to carry out AIF’s operations.

Documents Required for Registration of Alternative Investment Funds 

Documents to be submitted with the application for registration are:

  1. Certificate of incorporation or registration of the applicant entity.
  2. A partnership deed in the case of AIF registration was done by a partnership company registered under the Limited Liability Partnerships Act 2008.
  3. The original trust deed in the case of AIF registration is from a company or trust registered under the Trusts Act of 1882.
  4. Director and shareholder information about AIF. 
  5. Copy of the Placement Memorandum of the applicant entity. 
  6. Contact information, etc., of the applicant organization. 
  7. Other business information related to the company’s or LLP’s expansion plans. 
  8. Address and details of the registered office of the applicant company. 
  9. MOA and AOA Articles of Incorporation of Applicant Company.

Conclusion

Depending on the AIF’s nature, it may seek to acquire substantial holdings in possible target firms. The FinAccountants team has extensive expertise in advising both and can provide assistance with

  • Pricing and target evaluation
  • Negotiating with the vendor
  • Due Diligence
  • Creating financial projections and financial models
  • Formal business appraisals
  • Complete business disposal advice
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