Alternative Investment Funds Registration

Alternative Investment Fund (AIF) registration refers to the process of obtaining formal recognition from regulatory bodies, allowing these funds to legally operate and raise capital. Registration is usually overseen by a regulatory authority, such as the Securities and Exchange Board of India (SEBI) or similar bodies in other jurisdictions. The registration process ensures that the fund complies with the required regulations, maintains transparency, and meets the required operational standards. 

Registered AIFs are allowed to raise capital from investors and invest in various alternative asset classes, such as private equity, hedge funds, real estate and commodities, etc. It is important for fund managers to ensure that the AIF operates within the limits and regulations set by the regulators. Registered AIFs have a structured framework to ensure protection of investors' interests, which increases the trust factor among potential investors. This registration process not only provides legitimacy to the fund but also assures investors that the fund complies with prevailing rules and guidelines, thereby reducing the risks associated with alternative investments.

What is Alternative Investment Funds (AIFs)?

Alternative investment funds (AIFs) refer to investment vehicles that pool capital to invest in non-traditional assets, such as private equity, hedge funds, real estate, venture capital, infrastructure, and other alternative sectors. Unlike traditional investment options like stocks, bonds or mutual funds, AIFs offer investors opportunities for exposure to assets less correlated to traditional markets. The primary appeal of AIFs lies in their high returns and potential for diversification. These funds typically have a long-term investment horizon and often target high-net-worth individuals, institutional investors, or sophisticated investors. AIFs also offer a more flexible investment approach, allowing managers to explore unconventional investment strategies that may not be available through traditional investment vehicles.

Alternative Investment Funds - Category One

Category I alternative investment funds especially focus on investing in startups, SMEs, and 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, SME funds, and venture capital funds.

CATEGORY 1(AIF)

• Venture Capital Funds
• SME Funds
• Social Venture funds
• Infrastructure Funds
• And other such other funds may be prescribed under the regulation.
• "Angel Investment Funds” was introduced by SEBI in 2013, under the head of Venture Capital.  

Alternative Investment Funds - Category Two

• AIFs that 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.

CATEGORY 2(AIF)

• Funds which is not included under “Category 1 ”and “Category 3”
• And other funds which are not used for borrowing and only for carrying day-to-day operation
• Private Equity Funds and Debt Funds.
• Category I and II of AIF are not permitted to invest more than 25% of the investible funds in one Investee Company
• 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)

Alternative Investment Funds - Category Three

• Alternative Investment Funds 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.

Hedge funds:

• An investment that is planned or designed to protect the investment portfolio from market uncertainty, while generating positive returns in both up and down markets. It is an investment that shifts the risk of an investment portfolio or which balance the risk of an investment portfolio.
• 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.

The benefits of AIFs registration are: 

• Regulatory Compliance: Registered AIFs comply with all relevant regulatory requirements, ensuring transparency and trust with investors.
• Increases Investor Confidence: Being registered adds a layer of credibility and increases investor confidence, as they are assured that the fund is operating within the legal framework.
• Access to a Larger Investor Base: Registration opens the door for institutional investors, high-net-worth individuals, and other large-scale investors who prefer to invest in a registered fund.
• Operational Efficiency: With registration, AIFs follow a set of established guidelines and practices, which enhance operational efficiency and risk management.
• Attracts Global Investors: AIFs registered with recognized regulatory bodies can attract international capital, increasing the potential investor base.
• Legal Protection for Investors: Registered AIFs must adhere to legal standards that protect investor interests and ensure that funds are managed in accordance with the terms and conditions outlined.

Role of SEBI in Alternative Investment Funds Registration

The Securities and Exchange Board of India (SEBI) plays an important role in regulating alternative investment funds (AIFs) in India. SEBI ensures that AIFs operate in a transparent and efficient manner, maintaining investor confidence. SEBI’s primary function in relation to AIFs is to provide a framework of rules and regulations that govern their operations, to ensure that they adhere to high standards of conduct and fairness. SEBI is responsible for registering and classifying AIFs into three categories: Category I, II, and III, based on their investment strategies. Each category has different regulatory requirements and investor protection. SEBI also sets guidelines for disclosure of information, which ensures that investors receive accurate and timely updates on the performance and risks associated with their investments. Additionally, SEBI ensures that AIFs maintain appropriate governance structures and risk management practices. The Board conducts regular audits and inspections to monitor compliance with regulations. This helps maintain a level playing field and reduces the risk of fraud or mismanagement.

To register Alternative Investment Funds in India, several eligibility criteria must be met:

• Legal Structure: The AIF must be constituted as a trust, company, or limited liability partnership (LLP), with a charter document (MOA, Trust Deed, or Partnership Deed) including provisions related to carrying out the activities of an AIF.
• Registered Trust/Partnership: If structured as a trust or partnership firm, the respective deed (Trust Deed/Partnership Deed) must be registered with the appropriate registrar under applicable laws.
• Restriction on Public Subscription: The charter document must include provisions that prohibit inviting the public to subscribe to the AIF’s securities.
• Fit and Proper Criteria: The Applicant, Sponsor, and Manager must meet the "fit and proper" criteria as outlined in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
• Certification Requirement: At least one key personnel in the investment team of the AIF’s Manager must have passed the NISM Series-XIX-C: Alternative Investment Fund Managers Certification Examination.
• Infrastructure and Manpower: The Manager and Sponsor must possess the necessary infrastructure, resources, and skilled manpower to effectively discharge their responsibilities.
• Clear Investment Strategy: The applicant must provide a clear description of the investment objectives, strategy, proposed corpus, tenure, and target investor base.
• Minimum Corpus: The AIF must have a minimum corpus of Rs. 20 crores, or Rs. 5 crores in the case of an Angel Fund.
• Minimum Investment Amount: The minimum investment amount per investor should be INR 1 crore for standard AIFs and INR 25 lakhs for Angel Funds.
• Minimum Investment for Manager’s Employees/Directors: Employees or directors of the Manager must invest a minimum of INR 25 lakhs in the AIF.
• Investor Limitations: An AIF can have a maximum of 1000 investors, while an Angel Fund can have no more than 200 investors.
• Fund Structure: Category I and Category II AIFs are close-ended, whereas Category III AIFs are open-ended.

Who is not eligible for AIF?

According to the SEBI guidelines following entities would not be considered as Alternative Investment Fund:

• Trust or gratuity with the principal objective of employees benefit
• A family trust with the principal objective of benefits to ‘relatives’
• Any ESOP Trusts registered under the Securities and Exchange Board of India
• Other special entities not established by fund managers, such as securitization trusts, regulated under a specific regulatory context

STATISTICS

Statistically, the most often used form to build AIF is trust however Private/Public Company or LLP. Specifically, the concern is for the "Sponsor" and "Manager" to run AIF Vehicle as per their Investment Policy. More precisely Manager should possess the required qualification and experience to manage the fund in better and optimum returns to the unit holder. The sponsor should maintain their continuing interest as per the corpus or limit set by SEBI by its regulation on each category of AIF.

To date, altogether 721 entity is registered as AIF in SEBI doing investment as per their Investment Policy.

Numerically, we can observe the most popular segment nowadays been AIF-II Category, followed by Category III and then Category I, Conclusion is driven by the following statistics:-

As per the given data by SEBI, it is very clear and obvious that Category II has a good amount of commitments and raised then invested as per their investment policy followed by Category III. However, in the case of Category I, It seems only 50% is raised out of its commitment and only 80% out of raised funds is used for Investment.

Some documents required in AIFs Registration are: 

• Proof of identity of fund managers and other key personnel
• Charter Documents
• Financial statements and audited reports (if applicable)
• Details about fund's investment strategy and asset classes
• Taxation-related documents and registration proof
• Copies of prior investments, if any

Registering an alternative investment fund (AIF) in India involves several key steps that must be carefully followed to ensure compliance with Securities and Exchange Board of India (SEBI) regulations.

• Application to SEBI: The registration process begins by submitting an application to SEBI using Form A in the specified format. This includes a cover letter detailing whether the AIF is already registered as a Venture Capital (VC) fund or if it's a new fund seeking registration. The AIF must ensure that it meets the eligibility criteria outlined by SEBI before submission.
• Payment of Application Fee: Along with the application, the AIF needs to provide a bank draft for the application fee, which is mentioned in the cover letter addressed to SEBI.
• SEBI Evaluation: After receiving the application, SEBI will evaluate it based on its compliance with the SEBI (Alternative Investment Funds) Regulations, 2012. The evaluation process may take up to 21 days or longer, depending on the complexity of the application.
• Registration Fee: If the application is approved, the AIF must then pay the registration fee to SEBI in order to obtain official registration. The exact fee may vary, depending on whether the AIF is registering for the first time or re-registering an existing fund.
• Compliance and Reporting: Once registered, the AIF is required to comply with SEBI's reporting and other regulatory guidelines. This includes disclosing any material changes to SEBI and adhering to the ongoing compliance requirements set by the regulatory body.

The fees for registering an alternative investment fund (AIF) depend on a number of factors, including the type of fund, its size, and the regulatory jurisdiction. Generally, fees are influenced by the structure of the fund (e.g. private equity, hedge fund or real estate), as each may have different regulatory and compliance requirements. Fund size plays a role, as larger funds may incur higher registration and legal costs due to more extensive disclosures and filings. The complexity of the Fund’s investment strategy and the number of investors it targets may also affect registration fees. In addition, the legal, accounting, and administrative services required to operate the fund contribute to the overall cost. Finally, specific regulations and authorization fees, which vary by country or region, can further affect the total cost of registration.

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