SEBI (Alternative Investment Funds) Regulations, 2012 also known as AIF Regulations were brought into force to regulate and govern the various funds which were operating unregulated and weren’t covered under any of the regulations issued by Securities and Exchange Board of India.
Alternative Investment Funds are privately pooled investment vehicles operating with a predetermined investment policy. With a view to regulate such investment vehicles AIF Regulations were introduced. These regulations made it mandatory for Alternative Investment Funds to get registration and operate in within the ambit of these statutes.
What are Alternative Investment Funds?
AIFs are privately pooled investment vehicles which pool fund from sophisticated investors and in turn make investment in a predetermined investment strategy in accordance with the fund documents/ private placement memorandum.
In accordance with Regulation 2 (b) of the SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012 an Alternative Investment Fund is a privately pooled fund which:
-> Is/are established / incorporated in India
-> Is established in the form of a trust, company, LLP or a body corporate
-> Is a privately pooled investment vehicle
-> Is/are not covered under the following regulations:
> Any other regulations specified by SEBI for regulation of funds.
-> Is not a trust in any of the following categories:
> Family trusts: established under the Companies Act, 2013 for the benefit of relatives.
> ESOP trusts: established under SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme), Guidelines, 1999 or as permitted under Companies Act, 2013
> Employee welfare trusts or gratuity trusts established for the welfare of employees
> Holding companies defined under Section 2(46) of the Companies Act, 2013
> Securitization trusts
> Other special purpose vehicles like securitization trusts
> Registered securitization companies or reconstruction company funds
> Any fund governed by other Indian regulators
Functions of Alternative Investment Fund
The main functions of an Alternative Investment Fund are:
-> Pooling / Collecting funds from sophisticated Investors
-> Investing such pooled funds on the basis of the Private Placement Memorandum specifying the investment strategies to be implemented.
-> Such investments are made keeping in mind the benefit and vested interests of the investors to the fund.
Prerequisites / Eligibility for Registration of AIF
AIF Regulations have laid down the following eligibility criteria for registrations of an Alternative Investment Fund:
1. The AIF (applicant) shall raise fund through private collection only. The incorporation documents of the fund (MOA & AOA, trust deed, partnership deed etc.) shall restrict the applicant from making an invitation to the public to subscribe to its securities.
2. The minimum corpus of any scheme listed under the AIF shall be INR 20 crores (INR 10 Crores for Angel Funds).
3. In case the AIF is incorporated in the form of a trust or partnership or LLP, the trust deed or the partnership deed shall be registered with the respective registrar, in accordance with the applicable provisions.
4. In case the AIF is established as a company then the MOA shall contain the objects in consonance with the operations of an AIF and specifically restrict the AIF from inviting public deposits.
5. The manager/sponsor of the AIF must have a continuing interest in accordance with the AIF Regulations i.e. For Category I and Category II, 2.5% or Rs. 5 Crores (INR 50 lakhs for Angel Funds), whichever is lower, AND In the case of a Category III AIF, 5% or Rs. 10 Crores, whichever is lower.
5. Category I & Category II AIFs have a restriction to investment a maximum of 25% of their total corpus in ONE COMPANY.
6. Category III can invest only 10% of its total Corpus in ONE Company
7. The Key Investment team of the Fund Manager shall comprise of at least one person with relevant professional qualification and a minimum experience of 5 years in:
> advising or managing pools of capital; or
> fund / asset / wealth / portfolio management; or
> the business of buying, selling and/ or dealing in securities and / or other financial assets.
8. Manager or Sponsor of the AIF shall have the requisite infrastructure and manpower in order to properly discharge its activities.
9. Investment strategy of the AIF shall be predetermined and specified in the private placement memorandum of the fund.
Grievance Redressal Mechanism
1. It is mandatory for an AIF to disclose its grievance redressal mechanism in its Private Placement memorandum.
2. AIF should resolve any complaint or grievances raised by an investor with SEBI through SCORES (online grievance redressal system established by SEBI).
3. AIF must resolve such issues (if any) through its sponsors or managers) via arbitration or a mutually decided mechanism.
4. AIFs must disclose the data pertaining to investor complaints and the redressal status of any complaints / grievances received against AIFs or any of their schemes
Restrictions of AIFs
Restrictions On The Fundraising Of AIFs And Investments
There are certain following restrictions on the fundraising of AIFs and investments made by such AIFs:
- AIFs cannot accept an investment of value less than INR 1 Crore from the investor.
- Not more than 1000 investors are allowed under this fund, with the corpus limit of each scheme shall be INR 20 Crore.
- Promoter, sponsors, or manager shall have the continuing interest at least of the following:
- 2.5% Of The Initial Corpus
Invest minimum 5 crore. For Category AIF category III , the continuing interest shall be not less than 5% of the corpus or Rs. 10 crores, whichever is lower.
- AIFs registered under Category-I and Category-II are not allowed to invest 25% or more of their investment fund in a single investee company. In contrast, the same limit is 10% for Category-III AIFs.
- Close-ended AIFs are allowed to be listed on the stock exchange up to a minimum of INR 1 Crore of a trading lot after the closure of the scheme or fund.