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Explained: Alternate Investment Funds

In this episode of Dhan ki Baat, Jayanth Ranganathan, Executive Vice President, IIFL Securities, explains the process of investing in Alternate Investment Funds.

All About Alternative Investment Funds

An Alternative Investment Fund (AIF) is a privately pooled investment vehicle that can take the form of a company, a trust, body corporate or a Limited Liability Partnership. In India, AIFs are defined under the Regulation 2(1)(b) of Securities Exchange Board of India (Alternative Investment Fund) Regulations 2012 and are not regulated by any regulators like IRDA, PFRDA or RBI.

Features of AIFs:

Except for Angel Funds, a minimum of Rs1cr per investor is required as an investment and a minimum of 1,000 sophisticated investors are required.

In Angel Fund AIFs, minimum 49 investors are required with an investment of Rs25 lakh each.

The members in an AIF are not legally allowed to invite people at large to subscribe to the fund.

Benefits of AIFs

Portfolio Diversification

Option to invest in non-traditional asset classes

Opportunity to invest in a particular strategy

Access to wider investment horizon

Taxation: Category I and II: Investor level

Taxation: Category III: Fund level

Categories of AIF

Alternative Investment Funds are broadly divided into three categories:

Category

The Category I funds invest in either/or:

Start-ups

SMEs (Small or medium enterprises)

Social Ventures

Infrastructure

Any other socially or economically desirable sector

These funds are not allowed to engage in any leverage except for meeting funding requirements up to 30 days, on not more than 4 times in a financial year with a corpus less than 10%. The tenure of these funds can be between 3 to 10 years. Some examples of funds, which come
under this category are Venture Capital Funds (Angel Funds), SME Funds, Social Venture Funds, Infrastructure Funds. Under the Category I AIF, the fund drawdown happens after every 4-5 years.

Category II

The AIFs that do not fall under Category I and Category III fall under this category. For category II AIFs, no specific incentives or concession is given by the government or any other regulator. The funds are prohibited from raising debt other than to meet day to day operational requirements. The tenure for funds of this category can be between 3 to 10 years. Examples of AIFs belonging to Category II are Real Estate Funds, Private Equity Funds and Funds for Distressed Assets. The fund drawdown happens in 4-5 years.

Category II

AIFs of Category III make use of diverse or complex trading strategies. This category is primarily for Hedge Funds and can employ leverage through an investment in listed/unlisted derivatives. The funds in this category are traded to make short-term returns with no concession or incentive provided by the government or regulator. The tenure for these funds is minimum 3 years.

Eligibility Criteria

Investors can be Indian, NRI or foreign nationals.

Minimum corpus should be Rs20cr for each scheme and Rs10cr for Angel Funds.

Minimum investment by each investor should be Rs1cr or Rs25 lakh (in case of employees/director/fund manager of AIF).

Maximum number of investors in each scheme can be 1,000, but 49 in case of Angel Funds.

Category I & II AIF can be close-ended only. With minimum 3 years, Category III can be either open or close-ended.

The sponsor shall have a continuing interest in the respective AIF, of not less than 2.5% of the corpus (AIF I & II) and 5% of corpus in AIF III or Rs5cr (for each scheme), whichever is lower.

Recent News related to Alternative Investment Funds

AIF registered in India with SEBI have increased to 366 from 92 in 2015-16.

Total investment record jumped to Rs43,500cr from Rs11,250cr in September 2015.

The landscape of Indian investors is changing fast with a huge spike in wealthy investors and family office.

Buoyancy in listed stocks and unlisted space are providing impetus to the AIF industry.

Buoyancy in listed stocks and unlisted space are providing impetus to the AIF industry.

While investing in AIFs, do understand that you will have to bear risks like Market Risk and Liquidity Risks.

Speaker's Profile

jayent-ranganathan

Jayanth Ranganathan

Mr. Jayanth Ranganathan has been working as Executive Vice President with IIFL Securities since December 2009. Prior to this, he was with Kotak Securities as the Senior Vice President (1997-2009). He has also worked with CITI Bank (1995 – 1997).

FAQs

What is an Alternative Investment Fund?

Alternative Investment Fund or AIF means any fund incorporated or established in India, which is a privately pooled investment vehicle and collects funds from sophisticated investors, whether Indian or otherwise, for investing it under a defined investment policy benefiting its investors.

Under what categories can an applicant register as an AIF?

An applicant can register as an AIF under the following categories:

1. Category I AIF
  • Venture capital funds (Angel Funds)
  • SME Funds
  • Social Venture Funds
  • Infrastructure Funds
2. Category II AIF
  • Real Estate Funds
  • Private Equity Funds
  • Funds of distressed funds
3. Category III AIF
  • Hedge Funds

How many investors and how much funds are required for an AIF?

In case of an Angel AIF, the minimum number of investors required is 49 with a minimum investment of Rs25 lakh. If the AIF is not an Angel fund, 1,000 sophisticated investors are required with a minimum investment of Rs1 crore each.

Are Alternative Investment Funds safe to invest?

Providing for a diversified portfolio, alternative investment funds are a great option to invest. You have the opportunity to invest in a particular strategy with access to wider investment horizon, it is one of the safest ways to invest in non-traditional investment asset classes.

Who is the ‘Sponsor’ in an AIF?

Sponsor is the inidividual who sets up the fund initially. The sponsor is the one who includes a designated partner for an LLC (Limited Liability Company) or a promoter in case of a company. The ‘Sponsor’ is defined in the Regulation 2(1)(w) of the SEBI (Alternative Investment Fund)Regulation, 2012.

What can be the corpus of an AIF?

The corpus of an AIF is the total of all the amount contributed by the members of the fund by way of a legal written document or any other document of the same manner on a particular date. The corpus of an AIF is defined in the Regulation 2(1)(h) of the SEBI (Alternative Investment Fund) Regulation, 2012.

Is there any registration fee to be paid by an AIF?

Yes, every AIF must pay a registration fee. The amount to be paid varies based on the nature and category of the fund:

  • Category I AIFs: Rs5,00,000
  • Category II AIFs: Rs10,00,000
  • Category III AIFs: Rs15,00,000
  • Angel Funds: Rs2,00,000

What is the size of fund/scheme which can be launched by an AIF?

If the AIF is not an angel fund, each scheme launched should have a corpus of a minimum Rs20cr. In case of an Angel fund, the scheme launched should have a corpus of a minimum of Rs10cr. Without adhering to these rules, no scheme or a fund can be launched by any category AIF.

Can an AIF invite the public to subscribe to its securities?

No, as an AIF is a privately pooled investment vehicle, it is prohibited to raise funds through public subscription. It is permitted to raise funds only through private placements by issuing information memorandum or a placement memorandum. As an AIF, the members must adhere to the rules defined by the deeds and memorandum specified for AIF in India.

How can one invest in Alternative Investment Funds?

Previously, it was believed that only affluent or high net worth individuals can invest in AIFs, but due to increased popularity and good returns in recent times, more and more people are investing in AIFs. If you want to invest, you can consult your financial advisor to determine the asset classes and the strategy you should adopt that can yield good returns.

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