Office Location

Delhi:

E-5, 2nd Floor, Defence Colony
New Delhi - 110024
Tel : 011-24336744

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Mumbai:

Office No. 1410, 14th Floor, Maker Chamber V, Nariman Point, Mumbai
Tel : +91 22-22873499

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Gurgaon:

Level 18, One Horizon Center, Golf Course Road, DLF Phase 5, Sector 43, Gurgaon 122002, India
Tel : +91 124 668 8146 / +91 124 668 8147

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Mumbai (Entertainment and Media Practice)

Office No. 213, 2nd Floor, A-wing, Crystal Plaza, Andheri Link Road, Andheri (W), Mumbai.
Tel : 022-62360762

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Mumbai (Corporate and Transactional Practice)

909/A, Capital Building, Bandra Kurla Complex, East Mumbai- 400098

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Bangalore:

21/2, 1st Main Road,
Opp Indian overseas Bank,
Gandhinagar,
Bengaluru - 560009

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Kanpur:

77A, Cantt., Kanpur - 208004

ALTERNATE INVESTMENT FUNDS - BRIEF

1. SEBI introduced the SEBI (Alternate Investment Funds) Regulations, 2012
(AIF Regulations) in May 2012. These regulations replaced the SEBI (Venture
Capital Funds) Regulations, 1996 (hereinafter VCF Regulations) with effect from
May 21, 2012. However, VCFs existing as on that date would continue to be
regulated by VCF Regulations till the fund or scheme managed is wound up. All other and subsequent VCFs would be required to be governed under the AIF Regulations.

2. As per the list released by SEBI, there are about 77 Alternate Investment Funds registered with SEBI (up to September 30, 2013).
3. The definition of Alternate Investment Fund [as provided in Regulation 2(b)] provides that “any fund established or incorporated in India in the form of a trust or company or LLP or a body corporate which is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.” The definition excludes Mutual Funds, family trusts, ESOP schemes, holding companies, Special Purpose Vehicles not established by fund managers and funds managed by SARFESI Act, 2003.
4.  SEBI stated that the AIF regulations will broadly cover all types of funds under three categories. All AIFs can apply for registration under one of the categories below:
Category I AIFs: These funds are close ended, adhere to the investment restrictions as instructed for each sub-category and shall not engage in leverage i.e. any activity to multiply gains and losses like borrowing money, buying fixed assets and using derivatives. Regulations provide that SEBI or Government of India or other Indian regulators may consider certain incentives or concessions for these funds, depending upon the specific need of each type of funds. Among the funds included in this category are Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds and Angel Funds. The minimum tenure of these funds should be 3 years.
Category II AIFs: These funds are close ended with no investment restrictions. However these funds are not allowed to engage in leverage other than meeting day-to-day operational requirements, as per the regulations and they will not attract any specific incentives or concessions from SEBI, Government of India or any other regulator. Among the funds included in this category include Private Equity Funds, Debt Funds, Fund of Funds and unclassified funds that don’t fall under either category I or category III and have a minimum tenure of 3 years.
Category III AIFs:  These funds can be open ended or closed ended and are allowed to engage in leverage within the prescribed board limits. Among the funds included are Hedge Funds which, according to SEBI, have negative externalities i.e. these funds make decisions which may impose a negative effect on other funds, thereby leading to inefficiencies in the market. These funds will be regulated through Board’s directions in areas such as operational standards, conduct of business rules, prudential requirements, restrictions on redemption, and conflict of interest.
5. Registration: All Alternative Investment Funds (AIFs), whether operating as Venture Capital Funds, Angel Investment Funds, Private Equity Funds, Real Estate Funds or Hedge Funds should be registered with SEBI.
6. Corpus: AIFs should have a minimum corpus of Rs 20 crore and they shall not accept any investment less than Rs 1 crore from an investor. Angel Funds, however, need to have a minimum corpus of at least Rs. 10 crore and they shall not accept any investment less than Rs. 25 lakhs. The fund should not have more than 1000 investors and the fund manager should have continuing interest of minimum 2.5% of the initial corpus or Rs 5 crore, whichever is lower. The fund manager or sponsor of an Angel Fund shall have a continuing interest minimum 2.5% of the initial corpus or Rs 50 lakh, whichever is lower. The fund manager is not allowed to continue the interest through the waiver of management fees.
7. Funds can launch schemes, following the filing of  information memorandum with the Board along with applicable fees, and fund units can be listed on the stock exchange subject to a minimum tradable lot of Rs. one crore, however they are forbidden to raise funds through the exchange. For Angel Funds, no scheme of the angel fund shall have more than 49 angel investors.
8. Limits To Investment: AIFs are not allowed to invest more than 25% of the funds in one Company and are forbidden to invest in associate companies. They should also provide investors with financial information of portfolio companies as also material risks and how these are managed on an annual basis.
9. Investment Conditions (Fund wise)


CATEGORY – I

CATEGORY – II

CATEGORY – III

  • Shall invest in companies which are body corporate or limited liability partnership or venture capital undertaking.
  • Fund of Category I AIF may invest ONLY in units of Category I AIF of same sub-category.
  • One shall not borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than thirty days, or not more than four occasions in a year and not more than ten percent of the corpus.
  • Venture Capital Funds:
  • Minimum two-thirds of the corpus shall be invested in unlisted equity shares or equity linked instruments of a venture capital undertaking or in companies which are listed or proposed to be listed on a SME exchange or SME segment of an exchange.
  • Maximum 1/3rd of the corpus should be invested in
  • any initial public offer  of a venture capital undertaking whose shares are proposed to be listed
  • any debt where the fund has already invested via equity
  • preferential allotment
  • equity shares of sick industries whose shares are listed.
  • Any special purpose vehicles which are created by the fund for the purpose of facilitating or promoting investment.
  • Such funds shall be exempted from regulation 3 and 3A of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 in respect of investment in companies listed on SME Exchange.

 

  • SME Funds
  • Minimum 75% of the corpus shall be invested in unlisted securities or partnership interest of venture capital undertakings or SMEs or in companies listed or proposed to be listed on SME exchange;
  • Such funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making under Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.
  • Such funds shall be exempt from regulation 3 and 3A of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 1992 in respect of investment in companies listed on SME Exchange.
  • Social Venture Funds
  • Minimum 75% of the corpus shall be invested in unlisted securities or partnership interest of social ventures.
  • May accept grants
  • May give grants to social ventures, provided that appropriate disclosure is made in the placement memorandum
  • May accept returns on their investments which may be lower than prevailing returns for similar investments.

 

  • Infrastructure Funds
  • Minimum 75% of the corpus shall be invested in unlisted securities or venture capital undertaking or companies which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects.
  • May also invest in listed securitized debt instruments.
  • Angel Funds

Angel funds shall invest only in venture capital undertakings which:

  • are incorporated in India and are not more than 3 years old; and
  • have a turnover not exceeding Rs.25 crore; and
  • are unlisted,
  • are not promoted, sponsored or related to an Industrial Group whose group turnover is in excess of Rs.300 crore,
  • has no family connection with the investors proposing to invest in the company.
  • Should invest primarily in unlisted investee companies or in units of other Alternative Investment Funds as may be specified in the memorandum.
  • Fund of Category II AIF may invest ONLY in units of Category I AIF of same sub-category.
  • May not borrow funds directly or indirectly and shall not engage in leverage except for meeting temporary funding requirements for not more than thirty days, not more than four occasions in a year and not more than ten percent of the corpus.
  • May also engage into hedging but subjected to guidelines given by Board.
  • May enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making.
  • Exempted from regulation 3 and 3A of Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations,1992 in respect of investment in companies listed on SME Exchange subjected to certain conditions:
  • the fund shall disclose any acquisition or dealing in securities pursuant to such due diligence, within two working days of such acquisition or dealing, to the stock exchanges where the investee company is listed;
  • such investment shall be locked in for a period of one year from the date of investment.

 

  • may invest in securities of listed or unlisted investee companies or derivatives or complex or structured products
  • may invest in units of Category I or Category II Alternative Investment Funds
  • may engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit, as may be specified