AIF Registration | Alternative Investment Fund Registration

What is an AIF

Alternative Investment Fund [AIF] are a class of pooled investment funds which invest in venture capital, real estate, private equity, hedge funds, managed futures. In other words, an AIF refers to an investment which is different from the conventional avenues of investment such as stocks, debt securities, etc.Alternative Investment Fund [AIF] are not covered under the jurisdiction of any regulatory body in India nor are they classified under the Mutual fund regulations laid down by the SEBI. AIF’s are defined under Regulation 2(1) (b) of the SEBI (Alternative Investment Funds) Regulation, 2012 as “privately held and managed pool of investment fund of either domestic or foreign origin, organised in the form of a body corporate, company, LLP (limited liability partnership), or a trust. An AIF can be established in any of the forms mentioned above.AIF’s are private pooled investment funds and are not available through the forms of public issues (like Initial Public Offerings) which are applicable to Mutual Funds or other collective investment Schemes.Generally, high net worth individuals and institutions invest in Alternative Investment Funds as it requires a high investment amount, unlike Mutual Funds

What does not fall under the purview of AIF?

There are certain types of trusts which do not fall under the purview of AIF:➲ Family trusts➲ ESOP trusts➲ Employee welfare trusts➲ Holding companies➲ Securitization trusts➲ Other special purpose vehicles like securitization trusts➲ Registered securitization companies or reconstruction company funds➲ Any fund governed by other Indian regulators

Benefits of Alternative Investment Fund | AIF

➲ AIF's provide Greater flexibility and scope in relation to traditional investment options➲ AIF’s offer very lucrative risk-return ratio➲ AIF’s present greater diversification of funds and low correlation➲ Provides various opportunities to make investments in unlisted companies and high-yielding funds.➲ AIF’s offer structured products with ample risk mitigation. Thus, attracting HNI’s to make investments in AIF’s

Eligibility Criteria for registration of AIF Registration || Legal Requirement for AIF Registration

A. Charter document like MOA or Trust Deed or Partnership Deed shall have clauses pertaining to carrying on the activity as an Alternative Investment FundB. In case of a trust or partnership firm, the respective Trust Deed or Partnership Deed shall be registered with the respective registrar in accordance with the applicable lawsC. The charter document shall contain provisions prohibiting an invitation to the public to subscribe to its securitiesD. The Applicant, Sponsor and Manager shall be “fit and proper” as prescribed in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008E. The members of the key investment team of the investment manager of the Alternative Investment Fund shall possess adequate experience and shall comprise of at least 1 (one) key personnel having a minimum of 5 years of relevant experienceF. Manager & Sponsor of an AIF shall possess the necessary infrastructure and manpower to discharge its activitiesG. The Applicant shall clearly describe the objectives of investment, the strategy of investment, proposed corpus of the Fund, its tenure and targeted investors.H. An AIF should have a minimum corpus of at least Rs. 20 crores (For an Angel Fund, the minimum corpus has been placed at INR 5 crores)I. The minimum amount of investment to be brought in by every investor in an Alternative Investment Fund should be INR 1 crore. However, the minimum investment by an investor is prescribed at INR 25 lakhs for Angel Fund.G. The minimum investment by an employee or director of the Manager of an Alternative Investment Fund shall be INR 25 lakhs or more.H. It is not mandatory for an employee of the Manager who is participating in the profits to make any investments in the AIFI. An AIF scheme cannot have more than 1000 investors whereas an Angel Fund cannot have more than 200 investorsJ. Category I and Category II Alternative Investment Funds are close-ended funds, whereas category III Alternative Investment Funds are open-ended FundsK. The minimum tenure for Category I and Category II AIF is 3 years whereas for ANGEL FUNDS the maximum tenure 5 years. There is however a provision for extension of tenure of an AIF which requires the approval of the Unit Holders comprising of at least 2/3^rd in value corpus.L. AIF Regulations restrict solicitation or collection of funds by category 3 AIF, except by way of private placement in accordance with the provision of the Companies Act, 2013 as there is no specific provision for the same in AIF RegulationsM. Units of an Alternative Investment Fund may be listed on stock exchange only after final closure of the fund or scheme, subject to minimum tradable lots of INR 1 crore.

Categories of Alternative Investment Fund

Alternative Investment Funds are classified in 3 sub-categories

A. Category I AIF:

• Venture capital funds (Including Angel Funds)
• SME Funds
• Social Venture Funds
• Infrastructure funds

B. Category II AIF

C. Category III AIF

Category I Alternative Investment Fund

Funds which invest in economically and socially viable early-stage StartUps, Small and Medium Enterprises and new businesses with unique products or services with high potential for growth. Several promotional and incentivizing initiatives have been taken by the government for such funds due to the growth prospect and employment creation fuelled by such funds. These funds have proved to be very helpful to the startup ecosystem in India.

A] Category I comprises the following funds:

➲ Venture Capital Fund (VCF)Venture Capital Funds are Category I Alternative Investment Funds which provide funding to startups, early-stage venture capital projects or to a small or medium-sized business, to own a part of its equity.VC’s generally prefer funding businesses, that are already established or that are in their growth stage & have a long-term potential to mitigate their risk of losing investments.VC’s act as a pool which collects money from various investors who are willing to undertake equity investments in ventures. VC’s, in turn invest this money, in multiple prospective projects including start-ups and SME’s. Such investments are made considering a calculated risk after taking elaborate note of several factors linked to the growth of the projects they invest in.Unlike any collective investment schemes or mutual funds or hedge funds, investors of a VC get a pro rata share of every business the VC has invested in.High Net Worth Individual Investors, from India and abroad, who seek high risk-high return ratio highly prefer investing in Venture Capital Form of AIF, Thus, contributing towards the growth of our economy.➲ Angel Fund [AF]An “Angel Investor” refers to an individual who is willing to invest in and “ANGEL FUND”. Angel funds are pretty much similar to Venture Capital Funds. The primary difference between the two is what money they use to invest.This kind of funds comprises of various “angel” investors who contribute to the pool of funds known as the “ANGEL FUND”. Such funds prefer to invest in early-stage or budding start-ups for their growth.When and “Angel Investor” invests in such funds, they are issued units of such fund.  Angel Funds have a comparatively higher risk-return ratio. The source of returns on investments by such funds are the dividends from the profits that their investee companies make once they achieve growth and profitability.➲ Infrastructure Fund [IF]Infrastructure funds invest specifically to invest in companies incorporated for the purpose of development of infrastructure projects. This kind of fund facilitates investment for investors who prefer to put money in infra development projects since the infrastructure sector has considerably high entry barriers and relatively lower levels of competition. Such funds also enjoy various tax benefits and subsidies from the government of India.Investment in Infrastructure funds generally yields double-fold returns in the form of capital growth and dividend income.➲ Social Venture Fund [SCF]Social venture funds [SCF’s] are a result of the evolution of socially responsible investing in India. This type of AIF’s typically invests in companies which focus on making profits and solve environmental as well as social issues simultaneously. Despite the investments being benevolent in nature, the expectation of returns is not far-fetched as the investees would still make profits.The target investment opportunities for SCF’s are typically the social welfare projects carried out of developing countries as they have great potential for growth as well as social change.Social Venture Funds engage the latest technology, best managerial practices and huge resource pool towards the target project with an aim at carving out a win-win situation for all the stakeholders including investors, enterprises and society in general by investing in social and infrastructure projects.➲ SME FUNDSME (small and medium enterprise) funds fall under the Category 1 SIF (Alternative Investment Funds) that prefer investing in listed/unlisted micro, small and medium enterprises.SME sector is an impediment to the growth of an emerging economy. This Sector generally tends to meet their debt capital requirements through collateral-based lending offered by NBFC’s and other financial institutions. However, there has been a constantly increasing GAP between the demand and supply of debt capital to this sector. A substantial portion of the SME sector lacks collateral security required for collateral-based lending preferred by the Banks and NBFC’s. Also this sector fails to attract the risk investors like Venture funds, angels funds as SME’s don’t offer a high risk-return ratio. Thus, creating a vacuum for equity-based funding for such companies as equity funds are normally directed towards start-ups or established listed and unlisted companies with high return potential.SME funds help bridge this gap of capital requirement faced by the SME sector by offering equity financing to these companies. SME FUNDS earn returns if the investee company reports substantial growth above minimum return (Say 8-10 %) or if the company gets listed on stock exchange attracting public investment(s).

Category II Alternative Investment Fund

Classification of Category II funds is often done by elimination meaning that: All those funds that are not described under category I and III AIF, fall under category II. Category II funds invest in various equity debt securities come and attract no incentives or concessions by the government. Such funds typically invest in unlisted private companies.

Funds resort to borrowing or leveraging funds for its underlying activities in accordance with the provisions laid down by SEBI. Some examples of Category II Alternative Investment Funds [CATEGORY II AIF] are Private Equity Funds [PE Funds], Real Estate Funds, Debt Funds and funds established for distressed assets.

Category 2 Alternative Investment Funds shall not engage in borrowing or leveraging activities except for temporary funding needs of up to 10 % of their investible funds for a period ranging from 30 to 365 days.

Category II comprises the following funds:➲ Private Equity (PE) FundPrivate Equity funds is a Category 2 Alternative Investment Fund which basically normally invests in unlisted private companies against a share of their ownership. Unlisted private companies are not allowed to raise capital by issue of equity or debt instrument to the public. Hence, they turn towards PE funds to fulfil their funding requirements.Further, PE Funds mitigate their risk by offering its investors with a diversified portfolio of equities managed by highly experienced fund managers. PE funds typically invest for a time period ranging between 4 to 7 years. Post the investment period, PE Funds expect to be able to exit the investment with a considerable profit.➲ Debt FundDebt Fund are privately pooled funds established for primarily investing in debt instruments of listed as well as unlisted companies.Debt Funds prefer investing in companies with high growth potential & good corporate practices going through a capital crunch as they can be a good investment option for debt fund investors. However, Companies with low credit score generally offer debt securities with a high yield but also accompany with high risk. SoAs per the SEBI Regulations, the amount invested in Debt Fund cannot be utilised for the purpose of giving loans, as Alternative Investment Fund is a privately pooled investment vehicle.➲ Fund of FundsFund of funds as the name suggests is a combination of various Alternative Investment Funds. Such funds don’t make their own portfolio or sector-specific investments. Fund of funds is established to invest in a portfolio comprising of other AIFs. Unlike the fund of funds in case of mutual funds, FUND OF FUNDS under AIF are not permitted to invite capital from the public or issue their units to publicly.