Alternative investment funds (AIF)
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Alternative investment funds mean funds established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign for investing it in accordance with a defined investment policy for the benefits of its investors.
Alternative investment funds not include funds covered under the SEBI (mutual funds) regulation, 1996, SEBI (collective investment schemes) regulation 1999, or any other regulation of the board to regulate fund management activities. Basically alternative investment is assets other than stocks, bonds and cash (commodities).
Alternative investment funds act as a defence rather than an offense investment; long-term investors are grasping the importance of including alternative investments into the diversification of their portfolios. They also give the investors a risk/return profile that is different from that of equities, bonds or cash. Alternative investments include real estate investment trusts, hedge funds, private equity, venture capital, commodities, MLPS, REITs, trust deeds and real assets such as rare coins, art, wine and precious metals. They have a low correlation to stocks and bonds and reap in benefits and are less volatile.
Why alternative investment funds:
- Alternative investment funds can help in overcoming the effects of market volatility (market fluctuation) on a portfolio while providing attractive returns.
- A "diversified" portfolio of stocks and bonds has been moving nearly in lock step with the stock market.
- Alternative investments look beyond public markets and look at opportunities available in both private and unlisted markets, providing a wider choice of investment opportunities.
Categories of alternative investment funds:1. Category I 2. Category II 3. Category III
Category I alternative investment funds especially focuses on investing in start-ups, SMEs, social ventures. These are the key sectors as they are considered to be economically or socially desirable according to the government. Being socially desirable initiatives, profit may or may not be a motive of category I. Example: category I AIFs includes Angle funds, infrastructure funds, SMEs funds and venture capital funds.
AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
Alternative Investment Funds which adopt diverse or complex trading strategies and may adopt leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds; PIPE Funds, etc. are registered as Category III AIFs.
An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate. Most of the AIFs registered with SEBI are in trust form.
“Angel fund” is a sub-category of Venture Capital Fund under Category I Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations.
"Angel investor" means any person who proposes to invest in an angel fund that is start ups, small business and satisfies one of the following conditions, namely,
- An individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:
- Has early stage investment experience, or
- Has experience as a serial entrepreneur, or
- is a senior management professional with at least ten years of experience;
- A body corporate with a net worth of at least ten crore rupees; or
- AN AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996. Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than `25 lakh from an angel investor.
Debt fund is an Alternative Investment Fund (AIF) that invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund. In this regard, it is clarified that, since Alternative Investment Fund is a privately pooled investment vehicle, the amount contributed by the investors shall not be utilized for purpose of giving loans.
Funds of funds:
Fund of Funds, in general parlance as gathered from publicly available sources is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. In the context of AIFs, a Fund of Fund is an AIF which invest in another AIF.
How to get registered as an Alternative Investment Funds:
- Applicant should made application for registration to SEBI in FORM A as provided in regulation along with all the necessary docs.
- After filling application the applicant will receive a reply from SEBI within 21 working days.
- The applicant must mentioned in covering letters as the whether :
- it is required with SEBI as a venture capital funds.(if yes, provide the details)
- it has been undertaking the activities of an AIF prior to such application (if, yes provide the details)
- it is applying for registration of new funds.
- As an integral part of the registration process the applicant will submit the following:
- FORM A appropriately filled, numbered, duly signed and stamped
- Application fees of Rs. 10,00,00 (in way of draft in favour of The Securities and Exchange Board of India, payable at Mumbai)
- The applicant shall also make an online application.
- The applicant are advised to go through SEBI (Alternate Investment Fund) regulation 2012, for checking the eligibility criteria and such other details.
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Grant of Certificate of Registration
- SEBI shall take into account requirements as specified in the Regulations for the purpose of considering grant of registration. If satisfied that the applicant fulfils the requirements as specified in the Regulations, SEBI shall approve the application and inform the applicant of the same.
- On receipt of approval from SEBI, the applicant must pay registration fee of Rs.5,00,000/- (If applicant is not registered with SEBI as a Venture Capital Fund) / Registration fees (If applicant is registered with SEBI as a Venture Capital Fund) of Rs. 1,00,000/- to SEBI by way of bank draft in favour of “The Securities and Exchange Board of India”, payable at Mumbai.
- On receipt of registration/ re-registration fees, SEBI will grant the applicant the certificate of registration as an Alternative Investment Fund.
Tenure and listing of Alternate Investment fund:-
- For AIFs scheme launched under category I and II shall be close ended, the tenure shall be determined at the time of application and shall be for minimum three years.
- Category III alternative investment funds may be open ended or closed ended.
- Extension of the tenure of the close ended Alternative Investment Fund may be permitted up to two years subject to approval of two-thirds of the unit holders by value of their investment in the Alternative Investment Fund. In the absence of consent of unit holders, the Alternative Investment Fund shall fully liquidate within one year following expiration of the fund tenure or extended tenure.
- Units of close ended Alternative Investment Fund may be listed on stock exchange subject to a minimum tradable lot of one crore rupees. Such listing shall be permitted only after final close of the fund or scheme. However, listing on stock Exchanges is purely voluntary.
List of documents to be submitted for seeking In-principle approval for listing units of AIF scheme
Certified true copy of the following Agreements / documents:
- Draft Information / Placement memorandum. Hard as well as soft copy.
- Investment Management Agreement. (In case of 1st Listing)
- Certification of registration of Alternative Investment Fund issued by SEBI. (In case of 1st Listing)
- Custodian Agreement. (In case of 1st Listing)
- R & T Agreement. (In case of 1st Listing)
- Trust Deed (if applicable)
- Memorandum & Articles of Association of the issuer (in case of 1st listing)
- Resolution passed by trustee in case of AIF is established as trust or Board of directors in case AIF is established as Company or by partners in case AIF is established as a Limited Liability partnership at their meeting approving listing of units of close ended AIF on the BSE Ltd.
- An undertaking from the CEO/ compliance officer that AIF is in compliance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 as amended and all the other applicable laws.
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SEBI may cancel the registration on non fulfilment of following condition:
- the Alternative Investment Fund shall abide by the provisions of the Act and these
- the Alternative Investment Fund shall not carry on any other activity other than permitted activities.
- The Alternative Investment Fund shall forthwith inform the board in writing, if any information or particulars previously submitted to the board are found to be false or misleading in any material particular or if there is any material change in the information already submitted.
- An Alternative Investment Fund which has been granted registration under a particular category subsequent to registration, except with the approval of the board
In terms of Regulation 29 of AIF Regulations, an Alternative Investment Fund shall be wound up:
- When the tenure of the Alternative Investment Fund or all schemes launched by the Alternative Investment Fund, as mentioned in the placement memorandum is over; or
- If seventy five percent of the investors by value of their investment in the Alternative Investment Fund pass a resolution at a meeting of unitholders that the Alternative Investment Fund be wound up; or
- In case of a trust, if it is the opinion of the trustees or the trustee company, as the case may be, that the Alternative Investment Fund be wound up in the interests of investors in the units; or
- If the Board so directs in the interests of investors