AIFs are hence investment schemes that involve securitized and non-public products such as private equity funds, venture capital funds, hedge funds, real estate funds, commodity and infrastructure funds among others. They employ complex trading techniques to strive for higher returns though this will mean high risks. Available to qualified purchasers and sophisticated investors such as large financial institutions, AIFs are less regulated than standard funds still. As they offer comparatively less liquidity than the traditional financial instruments, they bring in the diversification and probable superior returns in the long-run.
In India, Alternative Investment Funds (AIFs) Registration are regulated by SEBI under different regulation from that of mutual funds. By SEBI Regulations 2012, they are privately operated mutual funds that can mobilise domestic as well as foreign funds and which can function as a body corporate, company, LLP or trust.
AIFs are also private pooled investment vehicle investment pooling schemes that are different from mutual investment pooling schemes that are floated in public issues such as an IPO. They mainly fail in attracting, self-employed business persons and corporation because they embrace high levels of risks and minimum levels of investments.
Advantages of Alternative Investment Funds (AIFs)
- Portfolio Diversification: Non-traditional investments are made, and their relation with traditional markets is usually low or ungeared providing portfolio diversification.
- Higher Return Potential: Leveraged returns, private equity, venture capital, and distressed assets are the general investment aims of many AIFs.
- Access to Unique Investment Opportunities: The investment focus of AIFs as mostly offering access to market segments and investment types that are usually unavailable through conventional financial instruments such as property, infrastructure, and goods.
- Expert Management: AIFs have well-qualified persons to manage it and make an informed decision in the investment processes.
- Tailored Investment Strategies: There are many AIFs, which make use of sophisticated products such as leverage, derivatives and arbitrage hence can take more flexible investment styles.
- Capital Appreciation over Time: As a result, AIFs are more appropriate for long- term investors because they incur investments for the long-term more frequently.
- Reduced Market Volatility Impact: AIFs may reduce exposure to volatility since the assets in which these funds invest are less sensitive to public market glide.
- Potential Inflation Hedge: Inflation buster Some AIFs for Instance, those with investment in real assets such as real estate or commodities, help to offer protection against inflation.
Exemptions from Alternative Investment Funds (AIFs)
- Family Trusts: Stock acquisition or owning vehicles developed purely for the advantage of a family or a limited group of shareholders are usually excluded.
- Employee Welfare Trusts: This means that what are referred to as employee benefit trust or schemes, including ESOPs or other retirement benefits, do not qualify to be categorized as AIFs.
- Holding Companies: All those entities which are possessing shares of other companies with the motive of having controlling interest and not for the purpose of receiving gains from investment are not covered under AIF classification.
- Special Purpose Vehicles (SPVs): Entities incorporated mainly for the purpose of serving a single, special need –for instance, to effect a merger or an acquisition are common examples of those most likely to be excluded.
- Funds regulated under other specific legislation: Among them the Mutual Funds, Collective Investment Schemes and Venture Capital Funds as defined under other laws are outside the ambit of AIFs.
- Securitization Vehicles: They are structures developed to bring together assets for securitization and are not regarded as AIFs.
- Employee and Employee Benefit Schemes: Those used to meet an employee benefits or compensation requirement are usually excluded.
- Insurance Contracts and Pension Funds: Nonetheless, insurance funds or pension schemes that operate under their individual regimes are not considered AIFs.
Categories of Alternative Investment Funds (AIFs)
Category I AIFs: Such funds target sectors that are socially or economically relevant and are mostly associated with economic development. Some of them include venture capital funds, social venture funds, infrastructure funds and the angel funds. They are enjoying favourable regulatory treatment because of their positive effect to the economy and the society. These funds are mostly prohibited from employing leverage (debt) other than for working capital requirement.
Category II AIFs: This category of funds does not attract special incentives or privileges or limitations on investment activities of the fund. Some of these are private equity funds, debt funds and Fund of Funds. Category II AIFs can invest in almost any type of asset and don’t have restrictions on the amount of leverage they can employ, although there are limits.
Category III AIFs: Such funds use various and often sophisticated trading techniques such as short selling or buying derivatives both listed or unlisted. They are for quick profits by instruments such as hedge funds that engage in the buying and selling of different securities and applying techniques like buying two securities with opposing portfolios, selling securities one does not own and employing borrowed money. Thus, the issuance of key information documents for Category III AIFs is better suitable for high-risk high-returns investors.
Requirements for setting up Alternative Investment Funds (AIFs)
- Registration Requirements
a) Must register with local regulatory authority (e.g., SEBI in India)
b) Required to specify category (I, II, or III) and investment strategy
a) Minimum corpus size requirement (e.g., INR 20 crore in India)
b) Minimum investor contribution (e.g., INR 1 crore per investor), ensuring that only sophisticated or high-net-worth investors participate.
c) Mandatory sponsor/manager investment (2.5% of corpus or INR 5 crore, whichever is lower)
a) Categories I and II must have closed-end structure
b) Category III may operate as open-ended
c) Must appoint key personnel including custodian
d) Regular audit and governance requirements
a) Regular financial disclosures
b) Portfolio composition reporting
c) Fee and expense transparency
d) Investment restrictions and leverage limits based on category
Documents required for Alternative Investment Funds (AIFs) Registration
- Application Form: The fund manager or sponsor must also provide a registration form filled out as per the regulatory requirement of the particular country (Form A in the case of India).
- Constitutional Documents: certified true copies of the AIF’s constitutional documents which can be trust deed/ partnership deed/ MOA/AOA through which legal structure of the fund is determined.
- Private Placement Memorandum (PPM): A legal document fully describing the fund and its goals, risks, and costs that identifies potential investors at which the fund aims to target at.
- Details of the Sponsor and Manager: About the sponsor and the manager of the fund, their experience, solvency, and ownership of the fund or its legal successor.
- Investment Management Agreement: A legal document that sets out the working relationship between a fund and the manager with reference to the management of the fund, managerial duties, charges & working procedures of the fund.
- Directors' and Key Personnel Profiles: Resume of directors and all other staff, along with fund managers together with their experience and competency to run the fund.
- Compliance and Risk Management Policies: Striking evidence of the AIF’s policies on risk management, compliance, as well as internal controls realized to illustrate the entity’s compliance with the regulatory frameworks as well as investor protection mechanisms.
- Custodian Agreement (for certain categories): For Category III AIFs, it may be necessary to enter a custodian agreement in order to protect the fund’s assets and to address the issue of compliance with legislation on the management of assets.
- Proof of Minimum Corpus: The documents and records that are original or certified showing that the AIF has complied with the minimum corpus requirement as prescribed by the regulatory authority or requirement of investors inclusive of photograph or face Mounted copy of bank statements of the AIF.
- Other Supporting Documents: Any further documents as an AIF party may wish to submit to the regulating body in accordance to AIF regulations including declarations of compliance, business plans or fee structures.
Procedure to get registered as an Alternative Investment Fund
- The Applicant for grant of registration as an Alternative Investment Fund under SEBI (Alternative Investment Funds) Regulations, 2012 should make an application to SEBI in Form A as provided in the Regulations along with all the necessary documents.
- Generally, on receipt of Application, the applicant will receive a reply from SEBI within 21 working days. The time taken for registration however, depends on how fast the requirements are complied with by the applicant.
- The applicant is advised to go through the SEBI (Alternative Investment Funds) Regulations, 2012 for checking the eligibility criteria and such other details which may help expedite the registration process.
- The applicant must mention in the covering letter as to whether:
a) It is registered with SEBI as a Venture Capital Fund. If yes, provide details.
b) It has been undertaking the activities of an AIF prior to such application. If yes, provide details.
c) It is applying for registration of a new fund.
- As an integral part of the registration process, the applicant will submit the following
a) Form A appropriately filled, numbered, duly signed and stamped.
b) Application fees of Rs.1,00,000/- by way of bank draft in favour of “The Securities and Exchange Board of India”, payable at Mumbai.
- The applicant shall also make an online application in terms of the guidelines as prescribed by SEBI from time to time.
Grant of Certificate of Registration
- For the purposes of granting registration, SEBI shall recognize that requirements are as specified in the Regulations. The requirement in the Regulations that has to be met is that the Applicant has to fulfil the criteria stipulated in these Regulations and has complied with all legal requirements of the SEBI if satisfied with the requirement SEBI shall approve the application and communicate to the applicant accordingly.
- The applicant, upon receiving approval from SEBI is required to pay the amount of Rs. 5,00,000/- (Prior to obtaining registration with SEBI as Venture Capital Fund) / Reregistration fee of Rs. 1,00,000/- (In case the applicant is already registered with SEBI as Venture Capital Fund) by way of cross cheque / Bank draft payable at Mumbai to SEBI.
- The applicant will be issued a certificate of registration as an Alternative Investment Fund on the receipt of registration/ re-registration fees.
Post- Registration compliance
- After registration the AIF is required to adhere to such reporting standards as may be prescribed from time to time by SEBI.
- The AIF must periodically visit SEBI website to find any update / circular/ guideline issued by SEBI from time to time with respect to the AIF activity.
- The AIF shall file with SEBI any change in the information provided to SEBI within a reasonable period of time.
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- Regulatory Advisory: Access to expert guidance on category selection (I, II, or III) and compliance requirements
- Document Review: In-platform review by experienced professionals before submission to SEBI
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- Regular Updates: Systematic updates about regulatory changes and new requirements
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