Alternative Investment Funds Registration

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 benefit of its investors. Basically, alternative investment is form of Vehicle for making an investment in India as an alternative source to various entities either in equity or debt.

Categories of Alternative Investment Funds

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.

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. Digitally with non-refundable application fees.

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

• Applications need to filed online vide its secured platform for filing an application with an enclosed Application Fees of INR 1,00,000 (Non-refundable) for all category of application.
• Once SEBI approval is granted, the applicant requires to pay application fees of INR. 5,00,000/- , INR. 10,00,000/- and INR 15,00,000 respectively for Category I  AIF excluding Angel Fund, Category II and Category III by way of bank draft in the favour of “The Securities and Exchange Board of India”, payable at Mumbai. In case of angel fund (Category I) though application fee is same but registration fee is only INR 2,00,000 instead of INR 5,00,000.

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.

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.