What are Alternative Investment Funds and how it is Categorized?

Author: Enterslice Ites

Regulation 2(1) (b) of SEBI (Alternative Investment Funds) Regulations, 2012 defines Alternative investment funds (AIFs). It has its connection to any privately pooled investment fund, whether it is from Indian or foreign sources, in the form of a trust or a company or a body corporate or even a Limited Liability Partnership. Thus, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.

Categories of Alternative Investment Funds (AIFs)

As per SEBI (Alternative Investment Funds) Regulations, 2012, the Alternative Investment Funds shall apply for registration in one of the following three categories as specified:

  • Category I: This chiefly invests in start-ups, SME's or any other sector which Govt. considers economically and socially viable. Category I includes venture capital funds, SME funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.
  • Category II: This includes Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator. This refers to 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 III: This category of AIFs includes and refers to hedge funds or any other funds which trade with a view to making short-term returns or such any other funds which are open-ended and further for which no specific incentives or concessions are given by the government or any other Regulator. This AIFs include various types of funds such as hedge funds, PIPE Funds, etc. and are registered as Category III AIFs.

What is the tenure and listing of Alternative Investment Funds?

For AIF scheme declared under Category I & II shall be close-ended, the tenure for them shall be determined at the time of application. They shall be for a minimum three years.

Category III Alternative Investment Fund may be open-ended or close-ended, both.

Further, the tenure of close-ended AIFs may be extended and may be granted a period up to two years but subject to the approval of two-thirds of the unitholders by the value of their investment in such AIF. In such case, if the approval/ permission of the unitholders not procured, then the AIF shall fully liquidate within one year following the expiration of the fund or extended tenure.

This units of close-ended AIF may be listed on a stock exchange but it must have a minimum tradable lot of at least one crore rupees. But this type of listing will be permitted only after the final close of the fund or scheme. However, such listing on stock exchanges is not mandatory but purely voluntary in nature.

What is an Angel Fund?

There is another type of fund called Angel fund. This "Angel fund" is a sub-category of Venture Capital Fund under Category I- Alternative Investment Fund. It raises funds from angel investors and invests this fund in accordance with the provisions of Chapter III-A of AIF Regulations.

In the case of this angel fund, it only issues units to angel investors and raises funds. "Angel investor" means and refers to any person who proposes to invest in an angel fund and further satisfying one of the following conditions,

1. it is an individual investor owning net tangible assets of at least two crore rupees but excluding the value of his principal residence, and who:

  • has early stage investment experience for this, or
  • has to experience as a serial entrepreneur/ businessman, or
  • is a higher level management professional having working experience of at least ten years;
  1. a registered company having a net worth of at least ten crore rupees; or
  2. An AIF having its registration under these regulations or a VCF with registration under the SEBI (Venture Capital Funds) Regulations, 1996.
  3. Angel funds shall accept, an investment of not less than `25 lakh from an angel investor but up to a maximum period of 3 years

What is 'debt fund'?

As the name suggests, a Debt fund is an Alternative Investment Fund (AIF) which invests primarily in debt or debt securities of listed or unlisted investee companies as per the stated objectives/ goals of this Fund. These types of funds are registered under Category II of AIFs.

In this regard, it is explained that, since Alternative Investment Fund is a privately pooled investment vehicle, the amount contributed by the investors shall not be used for giving loans etc.

All these AIFs are playing a very vital role in the field of investment and offer a variety of choices to the investors.