Friday, August 19, 2016

SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS,

SEBI (ALTERNATIVE INVESTMENT FUNDS) REGULATIONS, 2012

Disclaimer: These FAQs are prepared with a view to guide market participants on SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”). For full particulars of laws governing the Alternative Investment Funds (AIFs), please refer to the Acts/Regulations/Guidelines/Circulars etc. appearing under the Legal Framework Section of SEBI website i.e. www.sebi.gov.in. Any queries about the AIF Regulations can be addressed to the Investment Management Department, Division of Funds I , SEBI.

1. What is an Alternate Investment Fund (“AIF”)?

Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which 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.


AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Further, certain exemptions from registration are provided under the AIF Regulations to family trusts set up for the benefit of ‘relatives‘ as defined under Companies Act, 1956, employee welfare trusts or gratuity trusts set up for the benefit of employees, ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc. [Ref. Regulation 2(1)(b)]

2. In what categories can an applicant seek registration as an AIF?

Applicants can seek registration as an AIF in one of the following categories, and in sub-categories thereof, as may be applicable: [Ref. Regulation 3(4)]

• Category I AIF:

o Venture capital funds (Including Angel Funds)

o SME Funds

o Social Venture Funds

o Infrastructure funds

• Category II AIF

• Category III AIF

3. What are Category I AIFs?

AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified. [Ref. Regulation 3(4) (a)]

4. What are Category II AIFs?

AIFs which 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. [Ref. Regulation 3(4)(b)]

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.

5. What are Category III AIFs?

AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. [Ref. Regulation 3(4) (c)]

Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.

6. What is ‘Angel Fund’?

“Angel fund” is a sub-category of Venture Capital Fund under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations.

In case of an angel fund, it shall only raise funds by way of issue of units to angel investors. “Angel investor” means any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely,

(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:

(i) has early stage investment experience, or

(ii) has experience as a serial entrepreneur, or

(iii) is a senior management professional with at least ten years of experience;

(‘Early stage investment experience’ shall mean prior experience in investing in start-up or emerging or early-stage ventures and ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.)

(b) a body corporate with a net worth of at least ten crore rupees; or

(c) an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than `25 lakh from an angel investor.

7. What is ‘debt fund’?

Debt fund is an Alternative Investment Fund (AIF) which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund. [Ref. Regulation 2(1)(i)]. These funds are registered under Category II.

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

8. What is Fund of Funds?

Fund of Funds, in general parlance as gathered from publicly available sources s an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. In the context of AIFs, a Fund of Fund is an AIF which invest in another AIF.

9. In which legal forms can an AIF be set up?

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. [Ref. Regulation 2(1)(b)]

10. What is the corpus of the AIF?

“Corpus’’ is the total amount of funds committed by investors to the AIF by way of a written contract or any such document as on a particular date. [Ref. Regulation 2(1) (h)]

11. What is the limit specified under AIF regulations for number of investors?

No scheme of an AIF (other than angel fund) shall have more than 1000 investors. (Please note that the provisions of the Companies Act, 1956 shall apply to the AIF if it is formed as a company). In case of an angel fund, no scheme shall have more than forty-nine angel investors.

However, an AIF cannot make invitation to the public at large to subscribe its units and can raise funds from the sophisticated investors only through private placement.

12. Who is the Sponsor of the AIF?

‘’Sponsor’’ is any person(s) who set up the AIF and includes promoter in case of a company and designated partner in case of a limited liability partnership. [Ref. Regulation 2(1)(w)]

13. Can an AIF launch schemes?

Yes. An AIF may launch schemes subject to filing of placement memorandum with SEBI.

Further, it may be noted that prior to launch of scheme, an AIF is required to pay Rs. 1 lakh as scheme fees to SEBI while filing the placement memorandum. Such fee shall be paid atleast 30 days prior to launch of scheme. However, payment of scheme fees shall not apply in case of launch of first scheme by the AIF (other than angel fund) and to angel funds.

14. What is the validity of the certificate of registration of an AIF?

The certificate of registration of an AIF shall be valid till the AIF is wound up. [Ref. Regulation 3(7)]

15. Can Venture Capital Funds registered under the repealed SEBI (Venture Capital Funds) Regulations, 1996 seek re-registration under SEBI (AIF) Regulations?

Venture Capital Funds (VCFs) registered under the repealed SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”) may seek re-registration under SEBI (Alternative Investment Funds) Regulations, 2012 subject to approval of two-third of their investors by value of their investment.

As against other applications for registration as Category I- VCFs who have to pay Rs. 5 lakhs as registration fees, VCFs registered under the VCF Regulations are required to pay Rs. 1,00,000 only as re-registration fees.

16. What will be the status of the Venture Capital Funds registered under SEBI (Venture Capital Funds) Regulations, 1996 after notification of AIF Regulations?

Venture Capital Funds registered under SEBI (Venture Capital Funds) Regulations, 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up and such funds shall not launch any new scheme after notification of the AIF Regulations. Further, the existing fund or scheme shall not increase the targeted corpus of the fund or scheme after notification of AIF Regulations. However, VCFs may seek re-registration under these regulations subject to approval of two-thirds of their investors by value of their investment. [Ref. Regulation 3(2)]

17. Is an AIF permitted to make an invitation to the public to subscribe to its securities?

No. AIFs are privately pooled investment vehicles. AIFs shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called. As an eligibility criterion for registration as an AIF, the applicant is required to be prohibited by its memorandum and articles of association/ trust deed/ partnership deed from making an invitation or solicitation to the public to subscribe to its securities. [Ref. Regulation 4(b)]

18. Can an AIF change its category pursuant to registration?

Yes. As per Circular No. CIR/IMD/DF/12/2013 dated 07th August, 2013, only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make application for change in category. Such AIFs are required to make an application in Form A along with necessary supporting documents. Application fees of Rs. 1,00,000/- must be paid along with the application to SEBI. AIFs are not required to pay registration fees for such applications.

If the AIF has received commitments/ raised funds prior to application for change in category, the AIF shall be required to send letters/emails to all its investors providing them the option to withdraw their commitments/ funds raised without any penalties/charges. Any fees collected from investors seeking to withdraw commitments/ funds shall be returned to them. Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF Regulations.

The AIF shall not make any investments till deployment of fund as per the scheme other than in liquid funds/ banks deposits until approval for change in category is granted by SEBI.

On approval of the request from SEBI, the AIF is required to send a copy of the revised placement memorandum and other relevant information to all its investors. [Ref. Circular No. CIR/IMD/DF/12/2013 dated 07th August, 2013]

19. Can an AIF launch a fund/scheme of any size?

No. Each scheme of the Alternative Investment Fund (other than angel fund) shall have corpus of atleast twenty crore rupees. In case of an angel fund, it shall have a corpus of at least ten crore rupees.

20. Can an AIF raise any amount of funds from any investor?

An AIF may raise funds from any sophisticated investor whether Indian, foreign or non-resident Indians, who inter alia undertake risk of investing in primarily unlisted or illiquid securities. However, AIF (other than angel fund) shall not accept from an investor, an investment of value less than one crore rupees. In case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be twenty five lakh rupees. [Ref. Regulation 10 (c)]

21. Is the sponsor/management mandated to have an interest in AIF?

In order to ensure that the interest of the Manager/Sponsor is aligned with the interest of the investors in the AIF, the AIF Regulations require that the sponsor/manager shall have a certain continuing interest in the AIF which shall not be through the waiver of management fees.

For Category I and II AIFs, such interest must be not less than two and half percent of the corpus or five crore rupees, whichever is lesser and for Category III AIFs, the interest must be not less than five percent of the corpus or ten crore rupees, whichever is lesser. For angel funds, such interest shall be not less than two and half percent of the corpus or fifty lakh rupees, whichever is lesser. [Ref. Regulation 10 (d)]

22. Can an AIF opt to be close-ended or open-ended, as it desires?

No. Category I and II AIFs are required to be close ended have a minimum tenure of three years. Category III AIFs may be open ended or close ended. [Ref. Regulation 13(1) and 13 (3)]

23. What are the investment conditions for AIFs?

The AIF Regulations provide for certain general investment conditions applicable to all AIFs as well as specific investment conditions applicable to the specific category/sub-category thereof. For the investment conditions, one may refer to Chapter III and III- A of the AIF Regulations.

24. What are the reporting requirements to SEBI for AIFs registered with SEBI?

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