Alternative investment funds mean funds established or incorporated in India which is a privately pooled investment vehicle which 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. Basically, alternative investment is assets other than stocks, bonds and cash (commodities).
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.
- 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 lockstep with the stock market.
Category I alternative investment funds especially focuses on investing in startups, 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.
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
Form A - Application to SEBI
Form A applicant shall be submitted to SEBI with the principal objective of Alternative Investment Fund, as described in the Regulations along with all the necessary documents and cover letter.
Application Reviewed by SEBI
Usually, on receipt of Application, the applicant will get the reply from SEBI within the time duration of 21 working days. However, the time taken for registration totally depends on how fast the requirements are been complied with by the applicant.
Understand SEBI Compliances
It is advisable by to go through the SEBI (Alternative Investment Funds) Regulations, 2012, and understand the compliance guidelines
Application Cover Letter
Application Covering letter must include the following
- Weather Venture Capital already registered with SEBI. If yes, provide the complete details.
- Weather Venture Capital undertaking the activities of an AIF previously. If yes, provide the complete details.
- Or applying for registration of a new fund.
Registration Process and Payment
Once SBI approval is granted, the applicant requires to pay application fees of INR. 5,00,000/- (for SEBI unregistered Venture Capital Fund).
INR. 1,00,000/-(SEBI registered Venture Capital Fund) by way of bank draft in the favour of “The Securities and Exchange Board of India”, payable at Mumbai.
Compliance Post- Registration
- Registered AIF shall obey the reporting requirements as time to time specified by SEBI.
- Registered AIF shall often check the SEBI official website (www.sebi.gov.in) for any circulars/ guidelines /updates issued from SEBI with respect to the AIF activity.
- AIF must inform SEBI for any changes in the structure an AIF.
- An individual investor invest in start-up or growing companies
- An individual or organisation made an investment in the pre-profitability business by the company which pools money from individuals and institutions.
- Risk level This investment is highly risky since revenue stream is not certain
- This investment is comparatively less risky since the revenue stream is proven
- Investment size Investment size is limited to a few million
- Owing to pooling of funds, investment size can range from a few million to tens of million
- Types of investment are through Equity and SAFE (simple agreement for future equity) wherein the invested business gives the angel investor right to buy shares in the future equity offering
- Types of investment are through equity and/or convertible debt.
- Rate of return potential This investment has high return
- Returns are comparatively low
An investment that is planned or designed to protect investment portfolio from market uncertainty, while generating positive returns in both up and down markets. It is an investment which shifts the risk of an investment portfolio or which balance the risk of an investment portfolio.
Venture Capital Funds
- SME Funds
- Social Venture funds
- Infrastructure Funds
- And other Such other funds which may be prescribed under the regulation.
- "Angel Investment Funds” introduced by SEBI in 2013, under the head of Venture Capital.
- 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)