Tag: alternative investment funds india

In today’s market in India there are several ways of investment by way of mutual funds, stocks etc. and the unconventional options like Alternative Investment funds. 

If you are looking for the best way to invest then AIFs are a very good option to invest if you are ready to take additional risk. 

In order to avail good profits out of AIFs, you need to be well read about these funds. These funds have a bright future in India especially with the high net worth individual clients.

So in this blog we will delve deeper to understand different ways to invest in AIF and its benefits thereof.

What is an Alternative Investment Fund?

Alternative Investment fund is a fund which is privately pooled from the Indian or foreign investor for investing in accordance with a defined investment policy for the benefits of its investors.

AIFs in India are established either as a company, Trust or LLPs or a corporate body. This asset class includes venture capital funds, private equity, angel funds and hedge funds.

If an investor is meeting all the investment criteria then AIFs are the best option for them to choose.

These Funds do not come under the purview of Securities and Exchange Board of India (SEBI) mutual fund regulations.

However, AIFs product comes under the purview of regulation 2(1) (b) of the regulation Act, 2012 of SEBI.

SEBI classifies AIFs into 3 broad categories as in Category I, Category II and Category III.

Classification of Alternative Investment Funds

SEBI has classified the AIFs into three broad groups as-

Category I

Category I usually invests in startups or in small or medium enterprises for ventures in their early stages or infrastructure or social venture etc.

These sectors are considered as socially desirable or economical by the government of India as well as for the regulatory bodies.

Sub-Categories of Category I of AIF

• Venture Capital Funds- these ventures invest in the start ups and emerging businesses which have a long term growth curve. These ventures take part in day to day operations of the businesses.
• Angel Funds- These funds comply with the regulations of Chapter III-A of the SEBI AIF regulation for making investments.
• Small and Medium Enterprises Funds- In this investments are done in small and medium enterprises. The minimum investments for these funds are capped at INR 1 crore, with a minimum tenure of lockin period of three years.

Category II

Category II AIF do not take any sort of leverage or borrowing except meeting day to day operations of the company.  The minimum corpus for this scheme is INR 20 Crore, with a tenure for lockin period for 3 years.

There is no incentive or concession from the government side on these funds.

Sub-categories of Category II

• Private Equity Funds- These funds take complete ownership of the company as they cannot raise funds by equity and investments, with a lock-in period ranging between four to seven years.
• Debt Funds- These funds generally invest in the debt securities. Investments in these funds are either done in listed or unlisted companies according to the fnd objectives.
• Funds to Funds- These funds follow a strategy of investment to invest in other Alternative Investment Funds. 

Category III

These funds apply in various trading strategies like future and margin trading, arbitrage and derivative trading while investing in listed or unlisted derivatives.

They are two types of funds as close ended and open ended funds and are way less regulated than the traditional funds.

Sub-Categories 

• Hedge Funds- These Funds pool investments from private investors to invest in international as well as domestic markets using several trading as well as investment strategies. These funds include a hefty fee of about 2% of the investment and about 20% share of the profits.
• Private Investment in Public Equity- These fund managers in this strategy often buy stocks of publicly traded companies, but at a discounted price. 

How to invest in any AIF

If you are ready to take risk then investments in AIF is the best option. You have to be eligible to invest in AIFs usually it is the resident Indians, NRIs i.e. who have settled abroad and foreigners. If you are a general investor, your permissible limit will be INR 1 crore whereas the minimum investment limit is INR 25 Lakh for the angel investors.

And investors who are willing to make an investment in unlisted companies, then you should be prepared to undertake the associated underlying list. An AIF cannot openly invite the public to subscribe to its units, rather they can only raise funds from the esteemed investors through a private placement.

After payment of the registration fees, once the certification is done by SEBI that the AIF has been registered, the AIF contacts the stock exchanges for the listing of the funds by submitting an investment management agreement or a placement memorandum, in accordance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. You have to submit your income proof, ID proof and the PAN card to invest in an AIF. 

Contact BIAT Consultant for your AIF registration needs at info@biatconsultant.com. 

The year 2020 has gone for good as it affected many businesses including alternative investment funds which leaves investors in dismay amidst widespread job loss and business shutdowns.

These markets faced serious concerns around the life of funds centered around-

• Early Termination
• Liquidation and
• Extension of the Funds

In this blog we will discuss Alternative Investment Fund and primarily we will discuss category I and II in this blog, as in India these both funds are close ended funds registered under SEBI.

Different Types of Alternative Investment Funds

1. AIf Category I- This category has a positive effect on the financial system. The AIf programme includes funds that make advances to sectors that have significant economic and social viability and includes Venture Capital Funds, SME Funds, Social Venture Capital Funds and infrastructure Funds.
2. AIF Category II- This category of funds used to meet day to day expenses that are permitted by SEBI. This category also includes AIF debt funds. Based on the state objectives of the fund, investments are done primarily by listed/unlisted investee corporates in this fund. 
3. AIF Category III- This AIF program comprises of all those funds that are likely to result in negative externalities involving complicated strategies in trading and degenerative systematic risk involved in leveraging and includes –

1. Hedge Funds
2. Private Investment in Public Equity (PIPe) funds

Salient features of AIF

Following are the salient features of AIF-

1. Category I and II are given for a term of 3 years and can be extended for 2 more years with the approval of at least two third of investors by value. Category III on the other hand has the option of being open ended or close ended.
2. SEBI mandates the filing of information memorandum for stipulated fees. 
3. AIF under category I and II may be listed on stock exchange provided the tradable lot comprise a minimum amount of INR 1 Cr. However, stock exchange programmes cannot be opted by any AIF to raise funds.
4. The permitted upper limit of investible funds for any investee company is 25% for any AIF programmes/schemes.
5. As per SEBI, all AIFs are required to have qualified Institutional Buyer status.
6. Proper guidelines are available in AIF regulations in order to avoid any conflict in future.
7. On an annual basis all AIFs are required to provide the investors with the composite financial details around portfolio company and material risk involved along with the strategies used to manage them.
8. As per guidelines SEBI reserves the right of investigation and/or inspection of the AIFs and also issues further necessary guidelines as required.

Termination of Alternative Investment Funds

AIFs generally expire when the fixed term of the fund as documented in the fund papers expires.

However there is always a prior termination of AIFs as mentioned in the clause of the agreement. AIF regulations also talks about early termination of AIFs.

It is obvious that both the investors and fund managers are aligned and focus all strategies and efforts towards the continuation of the fund till its original expiry date; more so investments in funds with longer tenure are designed to reap returns over a designated time period.

The principal objective being the maximisation of the value of the portfolio by aligning with the time available based on the tenure of the fund. For this asset class, the planned ‘orderly exit’ helps the fund to optimize the risk and return opportunities.

For AIF Category I, there is a distinct difference between liquidation and termination (winding up) of the fund. Liquidation should ideally happen within 12 months of termination of the fund. Understanding the difference becomes important in drawing giveback provisions for investors.

Categories of Alternative Investment Funds are registered and regulated as per the SEBI (Alternative Investment Funds), 2012. They are privately pooled investment vehicle who are in the business to collect funds from the sophisticated investors either Indian or otherwise and utilize them for the making the investment as per their policies.

 

Categories of AIF

 

As we know the gist of the fact that there are three categories of Alternative Investment Funds, in this blog we will discuss in detail the categories of AIF. AIF regulation have clearly specified as 3 different categories of AIF, then can be registered in Regulation 3 (4) of chapter 2.

 

As per Alternative Investment Fund regulation, registration can be done with SEBI under any 3 of the three below mentioned category:-

 

Category I

 

Under this category those funds are considered which can give good effect in the Indian economy. For example, if an investor is investing in startup, small and medium sized enterprise etc, then it is considered as good investment as these may give good effect in the economy of the country. These sectors are considered as socially or economically desirable and as result, government and sectors also gives discount, concession or incentive to them.

 

Category I AIFs includes-

 

1. Venture Capital Funds
2. SME Funds
3. Social Venture Funds
4. Infrastructure Funds etc.

 

Category II

 

Basically those which do not fall under category I and III fally under this category. They only take leverage and borrowings to meet operational requirements and such other activities permitted by the AIF regulations.

 

Category II includes-

 

1. Private Equity Funds
2. Debt Funds Etc.

 

Category III

 

Under this category diverse and complex trading strategies, unlike the other two categories. They can even make an investment in listed as well as unlisted derivatives.

 

This category includes

 

1. Hedge Funds
2. Funds which trade with an objective to make short term returns
3. Funds which are open ended etc.

 

Along with the application fees of Rs. 1,00,000/- is to be paid, where no fees for its registration is required to pay.