Why Investors Are Opting for Alternative Investment?

Why Investors Are Opting for Alternative Investment?

The concept of alternative funds may have seemed to cater to the investment needs of only large institutional investors, given the relative complexity in the concept and working of these funds.
However recent changes have opened up this investment option to a larger segment of the society. This is because, though these alternative investment funds were introduced in India only in 2021, they saw a huge influx of demand as the benefits associated with various types of alternative investment funds are more advantageous than one can expect.
The year on year increase in the principal fundraised as depicted in the table below is a clear indication of the gaining popularity of AIFs. (data source: SEBI)
September 2018 September 2019 September 2020
INR 115564. 58 crores INR 154762. 286 crores INR 197159.7 crores

 

 

This alternative investment platform includes funds from angel investors, hedge funds, private equity, venture capital among others. These funds are not covered by the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities.

Subject to meeting gate criterion; all Indian citizens, Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCI) can choose to invest in Alternative Investment Funds.

 

 

What are Alternative Investment Funds?

 

It is a fact that investment in AIF or Alternative Investment Funds differs from those in conventional investment tools or options like our stocks, bonds and debt market instruments.

AIF consists of a fund incorporated by privately pooled investment vehicles that gathers funds from sophisticated HNI investors. In order to benefit its investors, these investments are governed by a defined investment policy of AIF but are not guided by principles of SEBI regulations or other regulations of the Board to regulate fund management activities.

Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI regulates investments in AIF. An Indian AIF may be formed as a trust, a company, Limited Liability Partnership (LLP) or a corporate body. Trust is the most common form in which AIFs are registered.

SEBI classified Alternative Investment Funds under three fundamental categories based on the types of investments they encompass – viz. Category I AIF, Category II AIF and Category III AIF. As mentioned earlier, they entail angel funds, private equity, hedge funds, venture capital, etc.

It is to be noted that any AIF generally does not permit more than 1000 investors. Thus the investment fees and minimum investments required in each of the funds are higher than any conventional investment platforms.

However, transaction costs in alternative investments platforms are lower as turnover is lower compared to traditional options. Liquidity options are less in AIFs and information relating to these funds is not available publicly most of the time.

Here’s everything you need to know about alternative investment funds 

 

Who can Invest in Alternative Funds?

A sophisticated investor who is looking for diversifying his/ her risk in various asset portfolios and willing to take the inherent/ underlying risk involved in these unlisted and illiquid securities is an ideal investor for an Alternative Investments Company.

Usually, Foreigners, resident Indians, PIOs, OICs and NRIs are eligible to invest in various types of alternate investments.

Permissible limits to invest in alternative investment funds are defined as below –

 

Investor type Permissible limit in INR
General investors Maximum 1 crore
Angel investors Minimum 25 lakhs
Senior Management (like directors, VPs, fund managers) Minimum 25 lakhs

 

 

Maximum numbers of investors allowed are –

  • for AIF – 1000 investors (if the AIF is formed as a company under Companies Act, 1956)
  • for angel fund – 49 angel investors

Since funds are raised only through private placements by sophisticated investors, and AIF cannot go for large public subscription under any circumstance.

 

Minimum fund corpus mandated by SEBI is –

  • for AIFs – at least INR 20 crores
  • for angel fund – INR 10 crores

 

Alternative investment strategy allows funds for any AIF to be raised by private placements from High Net-worth Investors.

 

Following are the steps to AIF listing in Stock Exchange:

1) A placement memorandum is required to be filed with SEBI to launch a scheme under the alternate investment platform. INR 1 lakh is to be paid as a scheme fee while placing the memorandum. This is to be done at least 30 days before the launch of the scheme. However, angel fund investors are exempt from this payment for the first time they launch schemes under AIF.

2) It takes 21 days for the application to be evaluated by SEBI and update investor on the status on the success rate of the application.

3) Once registered, an amount of INR 5 lakhs is to be submitted as registration fee for the fund to be classified as an AIF in India.

4) Then the Alternate Investment Fund connects with stock exchanges in order to list the following defined norms with an agreement for investment management.

The necessary documents are –

  • Custodian agreement,
  • Draft information or a placement memorandum,
  • Trust deed,
  • MOA and AOA i.e. Memorandum of Association and Articles of Association of the issuer
  • A written undertaking from the Compliance Officer or the CEO that the particular AIF is in accordance with the SEBI(AIF) Regulations, 2012.

 

An investor requires his/ her income proof, ID proof and the PAN card to be able to invest in an AIF or Alternative Investment platform.

 

Start your alterative investment funds today with Koppr !

 

Categories of Alternative Investment Funds (AIFs)

There are 3 distinctive categories in which SEBI has classified the Alternative Investment Funds –

1) Category I AIF.
2) Category II AIF and
3) Category III AIF

 

Each of Category I and II AIFs is needed to be closed-ended schemes with a minimum tenure of 3 years. Category III AIFs, however, may be open or closed-ended as desired. [Ref. Regulation 13(1) and 13 (3)]

Each category has to have a minimum investment of INR 20 crores. However, Angel Fund (a subcategory of AIF I) can also have INR 10 crores as its fund. Investors have a choice to invest in any of the 3 categories or sub-categories as found below.

Category I AIF comprises of:

  • Venture Capital funds (including Angel funds)
  • SME funds
  • Social venture capital funds
  • Infrastructure funds

Simply put, AIFs that invest in start-ups or early-stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as economically or socially advantageous and shall include in this category of alternate funds.

 

Category II AIF:

Category II AIFs include all those alternate funds that do not fall in Category I and III. They do not assume leverage and/ or borrowing except to meet regular operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012. [Ref. Regulation 3(4)(b)]

PE Funds, REIT or Real Estate funds, funds from distressed assets among others are registered under Category II AIF.

 

Category III AIF:

Funds like hedge funds, PIPE funds, etc, comprise of Category III AIFs.

The alternate investment strategy employed in this alternate fund involves complex trading strategies and is likely to employ leverage including through investments in listed or unlisted derivates as well. [Ref. Regulation 3(4)(c)]

Given the above, it is the hedge funds, private equity, venture capital, real estate and, oil and gas where most of the alternative investments are made. However, some are likely to invest even in art & antiques, collectables and, gems and precious metals.

Here’s a complete guide on how to invest in alternative investments funds

 

Let us understand the most common alternative investments:

1) Hedge Funds:

In hedge funds investments are mostly done into the array of securities and are limited generally to publicly traded instruments. The alternate investment strategies undertaken are many, as the aim of the fund managers here is to generate returns in both bull and bear market conditions.

 

2) Venture Capital:

Wealthy investors prefer to invest their funds into promising start-up companies that are privately owned and have potential long-term growth prospects. These companies are generally in their early stage of growth or even at the start-up stage; but have an aim to grow rapidly and eventually go for BOT (build operate and transfer) either through merger, acquisition or IPO (initial public offer) offering.

 

3) Private Equity:

Perhaps the biggest bands of investments fall under private equity where all private investments other than venture capital are encapsulated. PE fund is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity.

While there are many benefits investing in hedge funds and venture capital investments that attract alternate fund investors, the majority of investors enjoy the advantages they get by investing in private equity alternatives as that is where the gap lay.

 

 

Advantages of Investing in Alternative Funds

 

1) Generally do not correlate to the stock market:

Any investor who has been in the stock markets for some time is sure to have made some big wins and major losses as well. While gains made them feel great, the losses have surely caused heartburn.

Thus such investors, who have been in the stock market and are nearing retirement or aims to take retirement shortly, can look at alternative funds as a great way to diversify their portfolios to mitigate volatility in the markets.

Just as in any investments in the market, investments in AIFs too are subject to volatility but the potential to make higher returns in traditional market instruments via inflation hedging mechanism and robust diversification.

Being uncorrelated to the stock market, it makes investments in privately held AIFs less reactive to market ups and downs. For example, let us see and investment in a mortgaged property or rental property.

Even though the market may have been extremely volatile over the past one year, the borrower or the tenant would have been making their loan repayments or rent as usual in most cases.

 

2) Investments are subject to less volatility:

any investments made in equity or bond markets, are subject to market fluctuations and that makes investments risky for investors, especially the short term ones.

These fluctuations can be as a result of an array of factors and need not necessarily be connected directly to the real asset in question. Since shares of AIFs are not traded publicly in the traditional stock markets, they remain guarded against the volatility of traditional public investments.

Moreover, one’s investments in the alternate funds are typically backed by real assets.
While some may argue that if one would remain invested in the stock market for a long time, say, 8 to 10 years, the investor is likely to overcome the volatility and still gets an average of about 8 – 10 per cent return. But what they need to understand that the volatility mars the power of compounding.

As a result in private alternative investments platform, the effect of the power of compounding is much higher compared to traditional markets.

 

3) Ownership:

If you are investing in direct equity of any company in the traditional stock market, what you are entitled to be a paper asset as a very small/ nominal owner to the said properties of the company.

There is no question of having your name imprinted in the any of the assets of the company you invest in.

However in case of AIFs, given the number of maximum investors are limited, your investments are totally not gone for loss in case an AIF were to disappear.

That is because; the investors would retain their ownership in the mortgage and the rights as a lender to the business/ property.

 

4) Passive Investments:

Time is money for the HNI investors who pool funds various types of alternative investments. It is true that they generally may have funds that lay idle and they would be keen to find avenues to increase their wealth too.

Investing in stock markets or multiple homes or other tangible assets may not always be a feasible option as that demands a lot of their attention and time which is an expensive ask for such set of personnel.

Alternative investment companies have posed them with a great option for investment in real assets for medium to long term that comes with less volatility and high returns subject to underlying risk for a seasoned educated investor.

 

5) Tax norms:

Tax norms for alternative investment funds vary for each category. Let us take understand the taxability for each category –
AIF Category I and II are pass-through instruments. The AIFs do not need to bear any tax on their earnings.

The earnings are taxable in the hands of the investors who need to pay a tax per their tax slabs. In case there have been capital gains on the shares, then it entails 10% or 15% tax based on the holding periods.

AIF Category III on the other hand is taxed at the highest income tax slab level at 42.7%. However, this happens at the fund level itself. The investor receives the returns post-tax deducted by the fund itself.

 

6) Redressal of complaints:

SEBI has set up a web-based central grievance redressal system by the name of SEBI Complaint Redress System (SCORES) at http://scores.gov.in for investors to lodge their complaints, if any, against AIFs.

Further for dispute resolution, the AIF Regulations calls for each AIF by itself or by the Sponsor or Manager, is required to formulate and roll out procedures for dispute resolutions for investors, AIFs, Sponsors or Managers via arbitration or similar machinery as mutually arrived and agreed between investors and the Alternative Investment Fund.

All of the above and more have resulted in the increasing popularity of investments in alternative investment funds. So the educated HNI investors, who are willing to invest in unlisted and illiquid securities to absorb the underlying risk, find AIFs a viable and attractive vehicle to diversify the risk of their investment portfolios.

 

Start Investing in Alternative Investment Funds Today!

 

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How to Invest in an Alternative Investment Fund (AIF) in India?

How to Invest in an Alternative Investment Fund (AIF) in India?

Today’s Indian Financial Market is flooded with varied options of investments like the traditional options namely, mutual funds, stocks etc. and the unconventional options like Alternative Investment Funds.

If you are perplexed about where to invest your investible surplus, Alternative Investment Funds are a very good option currently, provided you are willing to take the additional risk.

To invest in an AIF and reap good profits, you need to be well-read about these funds, which have a bright future in India especially with the High Net-worth Individual (HNI) clients.

So let us delve deeper to understand the different nuances of Alternative means of investing in funds and its benefits thereof. 

 

What is an Alternative Investment Fund?

Alternative Fund Investment AIF varies from regular traditional asset class investments like stocks, securities, debt securities and debentures etc.

AIF refers to a privately pooled fund formed by investments made by some sophisticated and private investors, who are risk lovers and are keen on taking a high risk with surplus money.

The AIF in India is established either as a company, Limited Liability Partnership (LLP), trust or a corporate body. This asset class includes venture capital funds, private equity, angel funds and hedge funds.

If you are an investor meeting all the investment eligibility criteria and prefer to have a well-diversified portfolio, the Alternative Investment Fund is the best option for you.

All the Indians like the Non-Resident Indians, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs), are allowed to invest in the Alternative Investment Funds. 

The alternative investment platform includes investment options like private equity, hedge fund, venture capital, and angel fund etc., according to the drafted investment strategy for investing in the AIF.

These funds do not come under the purview of the Securities and Exchange Board of India (SEBI) mutual fund regulations. 

Here a complete guide on Alternative Investment funds 

However, the Alternative Investment products come under the purview of Regulation 2 (1) (b) of the Regulation Act, 2012 of SEBI. 

The Securities and Exchange Board of India classifies the Alternative Investment Funds into three broad categories as in Category I, Category II and Category III.

Since the transaction costs for Alternative Funds are lower than the traditional investments, minimum investment limit and processing fees required to invest in AIFs are steeper than the conventional investments. Due to lower turnover, the cost of transaction in AIFs are lower than the traditional investments.

The specialty of Alternative Funds lies in the fact that they have lesser potential to advertise to the potential investors and hence do not share any information relating to the fund publicly. 

 

Classification of Alternative Investment Funds

The Securities and Exchange Board of India (SEBI) registered Alternative Investment Funds can be categorised into three broad groups, as under:

 

1) Category I Alternative Investment Fund:


Category I Alternative Investment Funds usually invest in start-ups or Small and Medium Enterprises or ventures in their early-stages or infrastructure or social ventures, etc.

These sectors are considered as socially desirable or economical by the Government of India as well as the regulatory bodies.

Here are the sub-categories of investment under Category I of AIF:

 

  • Venture capital funds:

     

    This is a type of financing of equity that primarily invests in start-ups and emerging businesses which have been planning for a long term growth curve.

    Venture capitalists often participate in the regular operations of the company. They cannot borrow funds directly or indirectly to manage their operations.

    The venture capital funds are close-ended investments with a bare minimum period of about three years, which can be extended up to two more years with prior approval from the AIF unit holders under special circumstances.

    Though investments in other subcategories of Category I Alternative Investment Funds are permissible, investments in Fund of Funds (FoFs) are not allowed.

 

  • Angel Funds

    Angel funds are a subcategory of venture capital funds which comply with the regulations of Chapter III-A of the SEBI AIF Regulations for making investments.

    They usually comprise individual investors who have net tangible assets not less than INR 2 crores, with a minimum of ten years of senior professional experience.

    They also refer to a corporate body having a bare minimum net worth of INR 10 crore and do not accept investments lesser than INR 25 lakhs for a maximum duration of three years.

 

  • SME (Small and Medium Enterprises) Funds

    These funds are usually invested in small and medium enterprises, micro-enterprises which could be listed or unlisted. Since SME funds provide equity finance for the NBFCs, the debt is raised through them.

    The minimum investment for these funds is capped at INR 1 Crore, with a minimum tenure for lock-in tenure of three years, which can be extended further by two more years.

 

  • Social Venture Capital Funds

    These funds are also known as ‘Impact Funds’ as they provide funding for ventures that have a positive impact on lives, while they analyse the social impact that is created by the business on the society.

    These funds have a minimum investment amount of INR 1 crore and lock-in period up to three years, which can be extended further by up to two more years.

    The SVC funds engage in theme-based investments in India, namely education, agriculture, affordable healthcare and clean energy.

 

Apart from facilitating seed investment, these funds also help the businesses with operational as well as technical support whilst laying down the regulations for governance and compliance, for additional funding. Usually, the returns are shared by both the investors and the fund. 

 

  • Infrastructure funds


    These funds mainly invest in companies that develop infrastructure and housing projects, while raising capital even from different private investors and permitting only one thousand investors per scheme.

    These funds include investments made in infrastructure projects namely roads, railways, municipal solid waste, water as well as renewable energy.

    These close-ended funds are tradable on the stock exchanges with a minimum tradable amount of INR 1 crore and a minimum tenure for lock-in period of three years,   which is expandable up to two more years.

    Usually, the investors can easily liquidate their investments within a period of one year of the expiry of the tenure of the fund. Infrastructure funds get a lot of incentives and concessions for investment and can thus invest in various other subcategories of Category I AIF, though cannot do so in Fund of Funds (FoFs).

2) Category II Alternative Investment Fund

Category II AIFs do not undertake any sort of borrowing or leverage except for meeting the daily operational requirements.

The minimum corpus for these schemes is under INR 20 crores with a minimum amount of investment being INR 1 crore, with a minimum tenure for lock-in period of three years.

They are allowed to invest only with other AIFs or buy stocks of unlisted companies. These funds engage in the activity of hedging and accept joint investments, where the investment amount cannot be lesser than INR 1 crore.

There is no incentive or concession from the Government for these funds. Following are the subcategories under Category II AIF:

 

  • Private Equity (PE) Funds

    Private Equity funds take complete ownership of the company as they cannot raise funds by equity and invest in unlisted private companies. These funds have a fixed tenure for investment, with a lock-in period ranging between four to seven years.

 

  • Debt Funds –

    These funds generally invest in debt securities. The investments are done in either listed or unlisted companies according to the fund objectives, while they may be facing a debt crunch. 

 

  • Funds of Funds

    The funds of funds (FoFs) invest in several alternative investment funds, which follow a strategy of investment to invest in other Alternative Investment Funds. They cannot make their own dedicated investment portfolio and do not issue any units of the specific fund to the open public.

 

3) Category III Alternative Investment Funds

SEBI registered Alternative Investment Funds of Category III, apply various trading strategies like futures and margin trading, arbitrage and derivatives trading while investing in listed or unlisted derivatives.

These funds are of two types – open-ended or closed-ended funds and are way less regulated than the traditional funds.

Thus, their information is not published regularly and the Indian Government does not give leeway for investing in these funds.

They are classified into two types: 

 

  • Hedge Funds

    Hedge funds pool investments from private investors to invest in internationals as well the domestic markets using several trading as well as investment strategies.

    They are held for long or short positions in securities and in listed or unlisted derivatives. They use leveraging options and strategies and are aggressively managed.

    They are quite expensive as compared to its peers as the fund managers charge a hefty fee of about 2% of the investment and about 20% share of the profits.

    Since the hedge funds are vulnerable to market movements, associated risks and returns are higher as compared to traditional investments.

     

  • Private Investment in Public Equity (PIPE)

    The fund managers in this strategy often buy stocks of publicly traded companies, but at a discounted price. This helps the businesses to put in or infuse substantial capital into the operation of the business.

    These transactions require less administrative work as compared to a secondary public issue while helping the medium and small-sized businesses to fund their projects with ease.

    It is easier to fund an issue with PIPE as compared to any secondary issue, which makes PIPE the most preferred method of capital inflow due to discounted share price value.

 

SEBI Regulations devised for the Alternative Investment Funds

 

If you are planning to invest in any Alternative Investment Fund (AIF) registered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, you need to be aware that these funds are usually incorporated in the form of a company or a trust or a limited liability partnership (LLP).

These regulations came into force for the first time on 21st May 2012 and usually aim at regulating the activities performed by the private pool of AIF. All information pertaining to the AIF is stated in the SEBI (Alternative Investment Funds) Regulations 2012 and circulars are available on the SEBI website.

There are certain listed criteria under the AIF regulations on the number of investors and the validity of the registration certificate of the entity.

SEBI guidelines specify that no AIF scheme should have more than one thousand investors except for an angel fund, which could have up to a maximum of forty-nine angel investors.

You should be aware that the AIF cannot subscribe to the units publicly rather can only invest through private placement by the issue of the information memorandum or placement memorandum.

If you were to invest in an AIF, you would be curious to know about its several launch schemes.

The AIF is allowed to launch schemes in accordance with the filling of the placement memorandum with the Securities and Exchange Board of India.

However, the AIF is entitled to pay a scheme fee of INR 1 Lakh to SEBI, at least thirty days prior to the launch, in order to fill the placement memorandum. There is an exception to the payment of scheme fees in case it is an angel fund or it is the first scheme launched by the AIF.

 

Read a complete guide on SEBI rules for Alternative Investment Funds

 

How to invest in any Alternative Investment Fund?

 

If you are a risk-loving investor and like to diversify risk, you can invest in the SEBI registered Alternative Investment Funds.

You have to be eligible to invest in AIFs, usually, it is the resident Indians, Non-Resident Indians (NRIs) i.e. who have settled abroad and foreigners, who are eligible to make investments in Alternative Investment Funds.

If you are a general investor, your permissible limit will be INR 1 crore; whereas the minimum investment limit is INR 25 lakhs for the angel investors.

Similarly, the minimum amount for investment is INR 25 lakhs for the senior management like the directors, fund managers and all the people who work for the AIF.

If you are an investor who is willing to make an investment in these unlisted as well as partially illiquid securities, you should be prepared to undertake the associated underlying risk.

 

An Alternative Investment product cannot openly invite the public to subscribe to its units, rather they can only raise funds from the esteemed investors through a private placement.

So, if you are a potential investor, you have to invest through a private placement. AIF schemes launched by SEBI are supported by the filling of its placement memorandum.

After payment of the registration fees, once the certification is done by SEBI that the AIF has been registered, the AIF contacts the stock exchanges for the listing of the funds by submitting an investment management agreement or a placement memorandum, in accordance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. You have to submit your income proof, ID proof and the PAN card to invest in an AIF. 

To start your investment in AIF through Koppr, all you need to do is:

1) Log in to Koppr.com

Login to Koppr

 

 

 

 

 

 

2) Go to the ACT section as shown in the screenshot

AIF in India

 

 

 

 

 

 

3) Scroll through the details to the AIF that you are interested in and click on “I am Interested” tab

chennai super kings share

 

 

 

 

 

And start your exciting investment journey with AIF through Koppr.

Since the last seven to eight years, the AIF industry has been gaining popularity amongst the High Net worth Individuals (HNIs) as they prefer to diversify their surplus assets. The investment mechanism is fairly simple and is gradually becoming the most preferred vehicle for diversified investment amongst the risk-loving investors.

SEBI Rules & Regulations for Alternative Investment Funds (AIF)

SEBI Rules & Regulations for Alternative Investment Funds (AIF)

Alternative Investment Fund – An Overview

Alternative Investment Fund (AIF) refers to a privately held pooled fund incorporated within India in the form of a limited liability partnership or a trust or a company. It collects investment from both Indian as well as foreign investors for investing in accordance with a predefined chalked-out investment policy. for the benefit of its investors.

If you decide to invest in an AIF, you need to verify if it is registered with the Securities and Exchange Board of India (SEBI) as an Alternative Investment Fund.

The SEBI registered AIF seeks registration in the trade of the categories listed below:

 

1) Category I AIF –

Category I Alternative Funds invest in ventures in the early-stage or start-ups or social ventures or infrastructure sectors or Small and Medium Enterprises, which the Indian Government or the regulatory bodies consider as economically or socially viable.

This category includes different SME funds, venture capital funds, infrastructure funds and social venture funds.

 

2) Category II AIF –

This category comprises funds which do not fall in either Category I or III and neither undertake any leverage other than just to meet the regular day-to-day expenses for operational requirements.

This fund usually consists of the debt funds or private equity funds, which do not receive any specific incentives or concessions from the government or any other regulatory body.

 

3) Category III AIF –

The funds in this category deploy complex or diverse trading strategies as well as are usually invested in either listed derivatives or unlisted ones.

This set of Alternative Funds include the hedge funds or some other funds which are traded to earn short term gains and are open-ended. All the funds which are not under the purview of any specific incentive or concession given by the government or any other regulatory body is generally included in this group.

 

Read a complete guide on Alternative Investment Funds and how to invest in them.

 

SEBI Rules and Regulations complying with the Alternative Investment Funds

 

Any Alternative Investment Fund (AIF) registered under the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 are usually incorporated as a company or a trust or an LLP (Limited liability partnership).

These regulations were implemented for the first time on 21st May 2012 and are aimed at regulating the activities performed by the private pool of funds via the AIF route.

 

Research states that most of the SEBI registered AIFs are available in trust form and no entity can be classified as an AIF unless it has obtained a registration certificate from the SEBI.

Any existing fund that is classified as an Alternative Investment Fund but is not registered with the SEBI, will continue to operate if it has made an application for registration under sub-regulation (5) till the application is disposed of.

The schemes that are already existing will be allowed to complete their designated tenure, according to the commitments already made till SEBI grants them as registered under regulation (6).

 

There are certain listed criteria under the AIF regulations on the number of investors and the validity of the registration certificate of the entity.

SEBI guidelines specify that no AIF scheme should have more than one thousand investors except for an angel fund, which could have up to a maximum of forty-nine angel investors. You should be aware that the AIF cannot subscribe to the units publicly rather can only invest through private placement by the issue of the information memorandum or placement memorandum.

The validity of the registration certificate is maintained intact till the Alternative Investment Fund is dissolved.

 

If you were to invest in an AIF, you would be curious to know about its several launch schemes. The AIF is allowed to launch schemes in accordance with the filling of the placement memorandum with the Securities and Exchange Board of India.

 

Keep a track of all the new AIF schemes to be launched with Indian 1st Alternative Investment Platform Koppr

 

However, the AIF is entitled to pay a scheme fee of INR 1 Lakh to SEBI, at least thirty days prior to the launch in order to fill the placement memorandum.

There is an exception to the payment of scheme fees in case it is an angel fund or it is the first scheme launched by the AIF.

 

For all the SEBI registered category I and II AIFs, which do not take any leverage are required to submit a report to SEBI on a quarterly basis; while category III AIFs submit the report on a monthly basis.

These reports are submitted via email irrespective of whether the AIF has started any activity or not, as physical reports are not entertained.

They are sent to SEBI within seven calendar days from the end of the quarter or the month, depending on the category of the AIF.

The amount of leverage undertaken by Category III Alternative Investment Fund should not exceed more than twice that of the NAV of the fund. All information pertaining to the AIF is stated in the SEBI (Alternative Investment Funds) Regulations 2012 and circulars are available on the SEBI website.

 

Procedure to be followed to be registered with SEBI as an AIF

 

 Simple just register with Koppr and let us handle the below process for you. 

All the applicants should make an application under Form A as provided in the SEBI (Alternative Investment Funds) Regulations, 2012 along with the requisite supporting documents. The applicant has to pay an application fee of INR 1,00,000/- to SEBI.

Once SEBI approves the application, a registration fee or a re-registration fee or a scheme fee as applicable has to be paid.

 

Thereafter, different categories of the AIF has to pay the registration fee, as specified below:

 

Category I Alternative Investment Funds – INR 5,00,000

Category II Alternative Investment Funds – INR 10, 00,000

Category III Alternative Investment Funds – INR 15,00, 000

Angel Funds – INR 2,00, 000

 

If you have invested in the AIF and are not happy with any of its policies, you can register your complaint with SEBI via its digital grievance redressal system which is centralized in nature called SCORES or SEBI Complaint Redressal System (SCORES), where the investors can lodge their complaints against the AIFs.

Additionally, any dispute resolution for the AIF can be done by the Manager or Sponsor, who lay down the process for resolution of disputes between any two parties like the investors, Manager, Sponsor or the Alternative Investment Fund, through arbitration or any specific mechanism as mutually decided between the investors and the AIF.

 

New Amendments brought in by SEBI in 2020

In the financial world, the Security Exchange Board of India (“SEBI”) lays down the rules and regulations for primary and secondary security markets in India.

It acts as a surveillance mechanism for all the participants in the security market for intermediaries such as Stock Brokers, Stock Exchanges and Portfolio Managers, etc.

Few amendments were specified in the circulars released by SEBI in 2020. If you have invested in an AIF, it is pertinent for you to take a closer look at each of the specifications mentioned therein:

 

Circular I:


The first circular was released on February 5, 2020, and was based on the Disclosure Standards for the Alternative Investment Funds (AIFs).

The need to streamline the proforma for the information and disclosure standards has fostered SEBI to lay down a template for the Private Placement Memorandum (PPM), which contains specific information for the prospective investors in a SEBI specified format.

This template has two parts, Part-A which consists of the minimum disclosures and Part-B, the supplementary section, which comprises some additional information.

Adhering to the compliance clause, an annual audit of the PPM by the AIF is made mandatory.

If you are the Trustee or the Board or the Designated Partner of the Alternative Investment Fund, the audit findings and corrective steps will be communicated to you.

Although the subscription agreement has to be in sync with the PPM, there are some exceptions to the AIFs, where these PPM guidelines are not applicable:

  1. Angel Funds
  2. SEBI registered AIFs or schemes, where each investor commits to a minimum capital contribution of INR 70 crores and also provides a fund waiver, as mentioned by the Annexure to CIRCULAR-I.
  3. SEBI introduced a mandatory benchmarking framework to monitor the performance of AIFs to let investors make an informed decision and the Benchmarking Agencies to make a customized performance report.

 

Any association of Alternative Investment Funds which has at least 51% membership in AIFs, shall enter into a Benchmarking Agreement with a Benchmarking Agency.

This agreement consists of the mode and manner of data reporting, information specific to data that needs to be reported, and other terms pertaining to confidentiality of the data received by the Benchmarking Agency.

All sorts of fund information including cash flow data of the schemes are also reported to the agency. However, the Performance benchmarking criteria is not applicable to the Angel Funds, which are a constituent of Category I.

 

Circular II:

The second circular that was released on June 12, 2020, consisted of the clarification of the Disclosure Standards stated in Circular I for the AIFs.

The first clarification aimed to provide a timeline to the audit requirement, mainly at the end of each financial year.

It also stated that the results of the audit should be communicated to the Trustee or the Board or the Designated Partners of the AIF within six months from the end of the financial year.

However, these provisions are not applicable to those AIFs that have not raised any funds from their investors.

The earlier membership amount of 51% has been replaced by 33% to enter into a Benchmarking Agreement with a Benchmarking Agency.

 

Circular III:

 

This circular was released on June 30, 2020, specifying the collection of stamp duty on the issue, transfer and sale of AIF units. The Registrar & Share Transfer Agents (RTA) appointed by the AIFs are responsible for collecting the stamp duty on transfer, issue and sale of units of AIF.

The Alternative Investment Funds would comply with the amended Stamp Act and rules with effect from July 01, 2020. Till the time an RTA is appointed,

AIFs shall keep the applicable stamp duty for transactions in a designated bank account. Once the RTAs are appointed, the said amount is given for onward remittance to the states and Union Territories according to the provisions of the amended Stamp Act.

 

Circular IV:


 The fourth circular specifies the processing of applications for the registration of AIFs and the schemes launched by SEBI.

The amendment made by the SEBI (AIF) Regulations, 2012 on October 19, 2020, stated that the Manager will be a part of the Investment Committee which will enable him to approve all the investment decisions of the AIF.

All the applications from external members from resident Indians will be processed for being a part of the Investment Committee whereas the applications from the non-resident Indians will be processed only after the clarification sought by SEBI has been resolved.

 

Recent updates from SEBI specifies that category II and III alternative investment funds (AIFs) which are established as a trust may be certified as a qualified buyer according to the SARFAESI Act and are eligible to subscribe to security receipts issued by asset reconstruction companies, adhering to certain regulatory norms.

 

Recent Updates in AIF’s

 

Certain amendments by SEBI in the last quarter of 2020 pertains to professional qualifications and experience criteria of the investment team,  that needs to be fulfilled.

Amendment 4(g) specifies that at least one important member of the team working as a manager of the AIF with a minimum of five years of working experience in managing asset pools or in the business of actively dealing in securities.

It is pertinent to have at least one professional in the investment team with domain expertise in accountancy, finance, business management, economics, commerce, banking or capital market from a reputed institution.

 

Additionally, Regulation 20(6) specified that the Manager of the AIF is responsible for all decisions regarding investment in funds.

This rule also provides the manager with the leverage to delegate all the investment decisions to the Investment Committee, subject to a few conditions.

Hence all the members of the core investment committee will be equally responsible as the Manager for all investment decisions of the AIF, with the autonomy to approve all the investment decisions.

These provisions also state that all the external members whose names have not been disclosed in the specified placement memorandum initially will be appointed to the core investment committee with the prior consent of at least 75% of the investors depending upon their investment value in the AIF.

 

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Alternative Investment Funds (AIF’s)

Alternative Investment Funds (AIF’s)

The Indian market is saturated with different types of mutual funds and other investment options.
Alternative Investment Fund (AIF) is one of such alternative investment options for the high net worth individuals (HNIs), that entices them with its non-conventional mode of investment. How beneficial is it to the investor is indeed a thought to ponder upon.

 

 

What are Alternative Investment Funds (AIFs)?

Alternative Investment Fund or AIF refers to any private fund established in India, not available through Initial Public Offerings (IPOs) or any other forms of a public issue that are applicable under the Mutual Funds and Collective Investment Schemes that are registered with SEBI.

They deal in funds like real estate, private equity and hedge funds, pooled from both Indian or foreign sophisticated investors, for investing it, in accordance with specific investment policy for the benefit of its investors.

These funds do not comprise of any funds registered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 to regulate the fund management activities.

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AIFs have been gaining widespread acceptance in India especially amongst the higher class as very strong investible platforms, though they were registered by the Securities and Exchange Board of India (SEBI) only six years back.

With gaining popularity, the total principal amount raised by AIFs rose to nearly INR 1.1 trillion in Q12019, a growth of nearly 79% than what it was in Q12018.

 

Are you eligible to invest in the Alternative Investment Funds?

If you are a risk-loving investor who likes to diversify risk amidst the asset portfolio and is eligible to invest, you can invest in the Alternative Investment Funds.

Usually, the resident Indians, Indians who have settled abroad (NRIs) and foreigners are eligible to make investments in Alternative Investment Funds.

For general investors, the permissible limit is INR 1 crore. Whereas for angel investors, the minimum investment is INR 25 lakhs.

Likewise, the minimum amount for investment is INR 25 lakhs for the senior management like the directors, fund managers and all the people working for the AIF.

Any investor willing to invest in these unlisted and illiquid securities should be prepared to undertake the underlying risk.

As per SEBI guidelines, any AIF will have not more than 1000 investors.

Whereas, in case of an angel fund, no scheme should have more than forty-nine angel investors.

An AIF cannot openly invite the public to subscribe its units, rather can only raise funds from the esteemed investors through a private placement.

Launch of schemes by AIF is supported by the filling of placement memorandum with SEBI. It is a norm to pay a scheme fee of INR 1 lakh to SEBI, while filing the placement memorandum, prior to at least 30 days of the due date of the launch of the scheme.

However, this payment is exempted for the angel fund investors and the first time schemes launched by the AIF.

Once the payment is made, SEBI evaluates the application and intimates the investor within twenty-one days about the status of the application and its success rate.

Once it is informed to the investor that its registration is successful from SEBI, an amount of INR 5 lakhs have to be submitted as the registration fees for being classified as an Alternative Investment Fund in India.

Once SEBI certifies that the AIF has been registered, the AIF contacts the stock exchanges for a listing of the funds by submitting an investment management agreement, draft information or a placement memorandum, a custodian agreement, a trust deed, memorandum & articles of association of the issuer and an undertaking from the CEO/ compliance officer that AIF is in accordance with Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.

You need to submit your income proof, ID proof and the PAN card to invest in an AIF.

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Types of Alternative Investment Funds (AIFs)

SEBI classifies the private investment funds into three distinct categories – the first, second and third category funds, with the minimum investable amount being INR 20 crores. However, the angel fund, a subcategory of AIF-I, has a lesser fund corpus of INR 10 crores.

 

Let us discuss each of these fund types to get a better understanding of the categories:

  • Category I –This category consists of Venture Capital Funds, Infrastructure Funds, Startup or Early-stage funds, beneficial and lucrative to the Indian market thereby enhancing growth.These funds are entitled to receive incentive benefits or concessions from the SEBI and the Indian Government.These funds generally make investments in social set-ups like NGOs, new ventures, Small and Medium Enterprises, infrastructure and other sectors which are considered crucial for the country from an economic or social viewpoint.So if you are looking to invest in any of these ventures, Category I funds are the best option.

 

  • Category II –This category has private equity funds, real estate funds and funds for distressed assets, which are essentially the real estate PE funds.They usually reduce the exposure to risk by giving diversified fund portfolios managed by seasoned fund managers.Hence, it is a very lucrative investment option for you as it provides the double benefit of a conservative investment option and a hedging mechanism by means of an alternative investment option.They do not undertake leverage or borrowings except to meet their daily operational requirements as specified by the SEBI Regulations, 2012.

 

  • Category III – This category of AIFs are a very different group of privately held funds like PIPE funds and hedge funds.These funds deploy a pool of complicated trading strategies like margin trading, arbitrage, trading in futures and derivatives etc. to reap profits.This category of AIF has the flexibility to make investments in derivatives, both listed and unlisted, as stated by SEBI (Alternative Investment Funds –AIF) Regulation Act, 2012.If you are planning to invest in hedge funds, this category of Alternative Investment Funds (AIFs) is certainly a good option.

 

Does the Alternative Investment Fund have a Sponsor?

The investment funds are organised in the form of an LLP, a corporate body, trust or company.

There are a few exemptions from registration that are provided under the AIF Regulations to family trusts set up, for the benefit of ‘relatives‘ as defined under Companies Act, 1956.

Few employee welfare trusts or gratuity trusts are set up for the benefit of employees, ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc.

While you invest in the AIF, it’s pertinent for you to know who is a sponsor for that designated AIF.

A sponsor is someone who has established the AIF and for a company, it is the promoter.

A designated partner is a sponsor for the Limited Liability Partnership.

Every sponsor should be aligned to the need of the investors and have to abide by the few regulations that have been formulated.

The constant involvement of the sponsor has to be retained in this fund, which cannot be the fee waiver.

The sponsor will not fund any amount lesser than 2.5% of the whole corpus of INR 5 crores, whichever is lower for the fund categories I and II.

The contribution for category III will be 5% of the total or INR 10 crores, whichever is lesser.

The sponsorship amount for the angel investors should not be lesser than 2.5% of the fund or INR 50 lakhs, the one which is lower.

 

Flip sides of Alternative Investment Funds (AIFs)

Alternative investment funds (AIFs) are becoming a household name as they get into the funds of high net worth individuals (HNIs).

There are many pros and cons of making an investment in an alternative investment fund in India, that you should be aware of.

These non- traditional investments include assets which yield higher profits when compared to bonds, mutual funds and stocks.

Alternative investments are not in sync with the investments in the financial market, rather they diversify the portfolio to mitigate volatility.

Any market-related stock is volatile and its rate of returns are expected to be higher than that of traditional investments by the means of inflation, hedging and portfolio diversification.

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On the flip side, these investments are quite complicated and incur heavier fees than the traditional investment options.

You will find that most of the AIFs are invested in not-so-fluid investments, which makes them exit the fund regularly.

As we all know, if there are higher returns, risks will also be higher.

Tax Implications for AIFs

Alternative Investment Funds are privately held investment vehicles that have been pooled together with investments from high net worth individuals (HNIs). There are few taxation norms that each and every AIF has to abide by.

Usually, it is found that the funds in Category I and Category II are considered to be pass-through vehicles, which implies that they don’t have to pay any tax on their earnings.

But if you are an investor, you have to pay the tax according to the designated tax slabs.

The investors are entitled to pay 15% or 10% depending on the investment period if the fund has any capital gains on stocks.

Funds in category III AIFs are also taxable as per the highest tax slab level of income (42.7%), and the returns are passed on to the investors, but after deducting the relevant taxes.

 

Current Market Statistics

Data estimated with the SEBI states that alternative investment fund (AIFs) investments increased to INR 1.4 lakh crores in Q42019, registering an increase of 53% from a figure of INR 92,825 crores in Q42018.

AIF investments in Q32019 was recorded at INR 1.25 lakh crores.

Out of the three categories of Alternative Investment Funds, the category I AIFs pumped in INR 13,904 crore, category II Rs 92,433 crore and category III Rs 35,777 crore during Q42019.

Above source: Economic Times

The Category-I AIFs include the infrastructure, social venture and venture capital funds, which get grants and incentives from the government and other regulatory bodies.

The government has been contributing in different phases and INR 25,000 crore fund was set up to complete almost 1600 housing projects in November 2019.

The current AIF is said to comprise of INR 10,000 crore straight from the government, while the remaining will be funded by the state insurer LIC and the country’s largest public sector bank, the SBI.

The Category-II AIFs which include the private equity and debt funds or fund of funds can be invested in any combination, but are not allowed to raise debts unless and until they have to meet their operational requirements.

‘Fund of funds’ is essentially an investment strategy to make a complete portfolio of other funds for investment rather than doing the investment only in bonds, stocks or other securities.

The category-III AIFs, consisting of hedge funds, are those funds which are involved in trading activities to reap short-term returns.

Is there a redressal unit to tackle the complaints against AIFs?

SEBI uses a web-based centralized grievance redressal system known as SEBI Complaint Redressal System (SCORES), a portal wherein the investors have been lodging their complaints against the AIFs.

SEBI released few guidelines for compulsory performance benchmarking of AIFs for the welfare of the entire industry.

It will enable the investors to analyse the additional value that this AIF will yield as compared to the traditional investment options.

Lack of a proper benchmark does not give a clear indication of the market statistics and the way forward for the fund to perform.

Also in accordance to the AIF Regulations, for dispute resolution, the investment fund either by itself or through the sponsor or manager, is entitled to specify the procedure for resolving the disputes between the investors, AIF, Manager or Sponsor through arbitration or a preferred means, as decided by the AIF and the investors.

Detailed research on the above parameters for the Alternative Investment Fund is essential for you to invest in it.

In the current market scenario, as Alternative Investment Funds gain better acceptance amongst investors, diversification of risk is the only solution to reap higher returns.

Hence, investment in Alternative Investment Funds (AIFs) is undoubtedly the best option.

 

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