AIFs propose an exceptional way to diversify the investor’s portfolio across asset classes like equity, debt & real estate and furthermore across various industries & sectors. Product innovation and customized services are the hallmarks of an AIF.
The thirst for Alternative Investment Funds (“AIFs”) in India was amplified with the surge in venture capital investments. However, clenched in the clutches of confusion of many regulations, the Venture Capital Fund (“VCF”) vehicle came to be utilised by many other funds such as private equity (“PE”), private investment in public equity, real estate, etc., thereby making it laborious to give targeted concessions to VCFs to promote start-up or early stage companies.
This scenario thrusted the Securities and Exchange Board of India (“SEBI”) in 2012 to introduce the SEBI (Alternative Investment Funds) Regulations, 2012 (the “AIF Regulations”) and to recognise AIFs, such as PEs and VCFs, as a distinct asset class apart from promoter holdings, creditors and public investors.
Any privately pooled investment vehicle established or incorporated in India, in the form of a trust or a limited liability partnership (“LLP”) or a company or a body corporate, is not covered under any other SEBI or sectoral regulations. Such privately pooled investment vehicle may collect funds from investors, whether Indian or foreign, for investing such funds in accordance with defined investment policies.
Specific exclusions include employee stock option trusts, employee welfare trusts or gratuity trusts, holding companies, family trusts, special purpose vehicles not established by fund managers and regulated under a specific regulatory framework (e.g. securitization trusts), and funds managed by registered securitisation or reconstruction companies.
Apart from the registration and compliance requirements under the AIF Regulations, each AIF also needs to be found in compliance with the applicable statutes, depending upon the chosen structure of LLP or a company or trust. Apart from these, there are also filing and audit requirements for a company and an LLP. In such a case, a trust is the more beneficial structure amongst the existing AIFs in India, since the regulatory framework governing trust structures is minimal and allows the management independence regarding formulation of its own standards of governance.
The AIF Regulations make it unavoidable to obtain certificate of registration from SEBI for facilitating AIFs to operate under one of the following 3 categories:
Category I – AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure. Includes venture capital funds, SME funds, social venture funds, infrastructure funds, angel funds, etc.
Angel funds, which is of significant interest, means funds pooling investments from angel investors, having net worth of at least Rs. 10 Crores (if a body corporate); or net tangible assets of at least Rs. 2 Crores, excluding value of principal residence, and experience as a serial entrepreneur, or being a senior management professional with at least 10 years of experience (if individual).
Category II – AIFs, which do not fall in Category I or Category III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. Includes private equity funds or debt funds for which no specific incentives or concessions are provided by the government or any other regulator.
Category III – AIFs, which employ diverse or complex trading strategies and may leverage including through investment in listed or unlisted derivatives. Includes hedge funds or funds, which trade for short term returns, or open-ended funds, for which no specific incentives or concessions are given by the government or any other regulator.
Category I leverages on the tax benefits of pass-through status and the Finance Act, 2015, extended a pass-through status to Category II AIFs as a response to a long-standing industry demand. What it essentially means is that income on an investment fund (defined as a Category I or Category II AIF), is exempted from tax and such income is chargeable to income-tax in the hands of the unit-holder in the same manner as if the investments made by the investment fund has been made directly by the unit-holder. Overall, the AIF Regulations have been a welcome change and have been quite instrumental in providing separate incentives and imposing separate obligations for the various categories and subcategories of AIFs. Growth in Investments AIFs have observed huge growth over the last few years post introduction of new guidelines, as on June 30, 2017 the number of AIFs registered are 315 with SEBI and this list is expanding