Category I AIF

SEBI sorts alternative investment funds into three categories, and the sorting is not by size, not by who invests and not by how much money is at stake. It is by what the fund does for the economy.

Category I is the favoured bucket. A fund lands here because it puts money into start-ups, early-stage ventures, social ventures, SMEs or infrastructure — the places the government and the regulators have decided the country needs private capital to go. In return the category is the one that attracts official incentives and concessions.

The price of the concession is a tighter rule book. A Category I fund is told what proportion of its money must go where, is barred from borrowing at fund level, and must stay closed for a fixed term.

Category I is not one thing. It is a list of named sub-categories, each with its own deployment test:

The common conditions matter as much as the list. A Category I AIF may invest in investee companies, venture capital undertakings, special purpose vehicles, limited liability partnerships, units of other Category I AIFs of the same sub-category, or units of Category II AIFs. It may hedge, including by buying credit default swaps.

No leveraging at fund level is permitted, directly or indirectly — with one narrow carve-out: temporary funding requirements for not more than 30 days, on not more than 4 occasions in a year, and not more than 10 per cent of investible funds. Separately, a Category I AIF may borrow to cover a shortfall in a drawdown an investor has failed to pay, but only in an emergency and as a last resort, with the cost charged to the delaying investor and a 30-day cooling-off period between two borrowings. Funds domiciled in an IFSC are outside the leverage restriction, subject to disclosure in the placement memorandum, investor consent and a risk management framework.

Each scheme is close-ended with a minimum tenure of 3 years, counted from the declaration of first close. Extension is up to 2 years with the approval of two-thirds of unit holders by value; without that consent the fund must fully liquidate within one year of expiry.

Deployment floor (VCF / SME / Social Impact / Infrastructure)
        = 75% × Investible funds

Concentration cap per investee company
        = 25% × Investible funds of the scheme

Temporary borrowing cap
        = 10% × Investible funds,  for ≤ 30 days,  ≤ 4 occasions a year

An Infrastructure Fund registered as a Category I AIF closes with investible funds of Rs 500 crore.

The manager finds a single road SPV it likes and wants to commit Rs 140 crore. That is 28% of investible funds — a breach of Rs 15 crore. The deal has to be cut to Rs 125 crore, or the balance placed through a co-investment outside the scheme.

The manager also wants to bridge a Rs 60 crore drawdown that two investors have not wired. Rs 60 crore is 12% of investible funds, above the 10% cap, so the borrowing is not available at that size even for 30 days — and if it were taken under the separate drawdown-shortfall route, the interest would be charged to those two investors alone, not shared across the fund.

Note what the 75% floor does not stop: an Infrastructure Fund may also hold listed securitised debt instruments or listed debt securities of the same infrastructure SPVs, notwithstanding the unlisted requirement.

Chapter 3 (Alternative Investment Funds in India and its Suitability), section 3.2.1, defines the category and names every sub-category; Table 3.1 in section 3.3 sets Category I, II and III side by side. Chapter 14 (Regulatory Framework), section 14.9.2, carries the specific investment conditions — the 75% tests, the leverage prohibition and its carve-out.

Expect a "which of the following is not a sub-category of Category I AIF" question, a straight recall of the 30-day / 4-occasions / 10-per-cent leverage carve-out, and a numerical question applying the 75% floor or the 25% concentration cap to a stated investible-funds figure.

• Category I is defined by purpose, Category II by exclusion. Category II is simply everything that is neither I nor III. Do not try to find a positive definition for it.
• The 75% floor is a sub-category condition, not a Category I condition. An Angel Fund, a Special Situations Fund and a CDMDF have no 75% test.
• Investible funds, not corpus, not committed capital. Every percentage in this category is measured on investible funds — corpus net of estimated expenses — so a cap computed on the corpus will be too high.
• A Category I AIF may invest in units of other Category I AIFs only of the same sub-category; it may invest in units of Category II AIFs without that restriction.
• Buying a credit default swap is hedging and is allowed to Category I. Selling one is not — that permission belongs to Category II.
• Minimum tenure runs from the declaration of first close, not from registration and not from the trust deed. The trust itself may have a quite different term.
• The leverage carve-out and the drawdown-shortfall borrowing are two different permissions with two different sets of conditions. Only the second charges its cost to one investor.