Category I AIF
Also written Category I Alternative Investment Fund · Cat I AIF
The AIF category for funds the government or a regulator treats as socially or economically desirable — venture capital, angel, SME, social impact, infrastructure, special situation and CDMDF funds.
In plain language
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.
How it works
Category I is not one thing. It is a list of named sub-categories, each with its own deployment test:
| Sub-category | What it must invest in | Floor |
|---|---|---|
| Venture Capital Fund | Unlisted equity or equity-linked instruments of a venture capital undertaking, or SME-exchange companies | 75% of investible funds |
| SME Fund | Unlisted securities or partnership interest of SME investee companies, or SME-exchange companies | 75% |
| Social Impact Fund | Unlisted securities, units or partnership interest of social ventures, or securities of social enterprises | 75% |
| Infrastructure Fund | Unlisted securities, units or partnership interest of infrastructure VCUs, investee companies or SPVs | 75% |
| Angel Fund | Raises from accredited investors; invests per the AIF Regulations | — |
| Special Situations Fund | Stressed debt and equity, IBC resolutions, loans in default 90 days or more, security receipts | — |
| Corporate Debt Market Development Fund | Investment-grade corporate bonds bought from debt mutual fund schemes in a dislocation | — |
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.
The formula
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
A worked example
An Infrastructure Fund registered as a Category I AIF closes with investible funds of Rs 500 crore.
| Test | Calculation | Limit |
|---|---|---|
| 75% deployment floor | 75% × 500 | Rs 375 crore must reach unlisted securities, units or partnership interest of infrastructure VCUs, investee companies or SPVs |
| Concentration cap | 25% × 500 | Rs 125 crore is the most that may go into any one investee company |
| Temporary borrowing | 10% × 500 | Rs 50 crore, for no more than 30 days at a time, no more than 4 times in the year |
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.
Why NISM asks about it
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.
Common exam traps
- 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.
Where this is taught
- Series XIX-B · Chapter 2: Growth of Alternative Investment Funds in India and Suitability of Category III AIFsintroduced here
- Series XIX-A · Chapter 2: Alternative Investment Funds in Indiaintroduced here
- Series XIX-C · Chapter 6: Alternative Investment Funds in India and its Suitabilityintroduced here
- Series X-A · Chapter 13: Overview of Alternative Investment Funds (AIFs)introduced here
- Series XXI-A · Chapter 6: Collective Investment Vehiclesintroduced here
- Series XIX-E · Chapter 4: Alternative Investment Funds in India and its Suitabilityintroduced here
- Series XIX-D · Chapter 3: Alternative Investment Funds in India and its Suitabilityintroduced here
- Series XIX-D · Chapter 14: Regulatory Framework
Related terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Alternative Investment FundA privately pooled investment vehicle registered with SEBI that raises money from select Indian or foreign investors under a defined investment policy — never from the public at large.
- Angel FundA sub-category of Category I AIF, registered with SEBI specifically as an angel fund, which raises money from angel investors and invests it in start-ups deal by deal rather than through schemes.
- Corporate Debt Market Development FundA close-ended Category I AIF, formed as a trust with a 15-year tenure, that buys investment-grade corporate bonds from debt mutual fund schemes when SEBI declares a market dislocation.
- Category II AIFThe residual AIF category: anything that is neither Category I nor Category III and takes no fund-level leverage beyond a narrow temporary carve-out — private equity, private debt and fund-of-funds.
- Infrastructure FundA Category I AIF investing primarily in the unlisted securities, partnership interest or listed and securitised debt of companies and SPVs that operate, develop or hold infrastructure projects.
- SME FundA Category I AIF that invests primarily in unlisted securities of Small and Medium Enterprises, or in securities of SMEs that are listed or proposed to be listed on an SME exchange or SME segment.
- Social Impact FundA Category I AIF investing primarily in social ventures and social enterprises, which satisfies the social performance norms laid down by the fund and may both take and give grants.
- Venture Capital FundA Category I AIF that invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings, and includes migrated venture capital funds.
- Special Situation FundA sub-category of Category I AIF that invests only in special situation assets — stressed loans, security receipts and the securities of defaulting companies — and may act as a resolution applicant under the IBC.
- Investment FundUnder Section 115UB, a Category I or Category II AIF (or an IFSCA-regulated fund) established in India — the only AIFs given tax pass-through. Category III AIFs are outside the definition.
- Economic Internal Rate of ReturnThe IRR of a project widened to include the direct and indirect economic benefits it creates, whether or not they reach the fund — as distinct from the financial IRR the fund actually earns.
- Alternate Minimum TaxA floor tax on non-corporate assessees — 18.5% of adjusted total income, 15% for a co-operative society — payable when it exceeds their normal tax, with the excess carried forward as credit for 15 years.
- Lead InvestorThe investor who sources a deal, does the diligence, commits their own capital and then assembles a syndicate of accredited investors to fund the rest — usually for a fee or a share of carry.
- Distressed debt financingLending to a company that is stretched for cash but still a going concern — refinancing to clear dues and cut leverage, at a higher cost than a performing borrower would pay.
- Thematic investingInvesting behind a significant opportunity or structural trend — such as electric vehicles — across its value chain, without starting from research on individual stocks, and spreading risk across uncorrelated themes.
- Accredited Investors only (AI-only) FundAn AIF or scheme in which every investor apart from the manager, sponsor and their employees or directors is an accredited investor — a class SEBI lets launch on intimation, with lighter investor-protection rules.
- Accreditation agenciesThe subsidiaries of stock exchanges or depositories, or other SEBI-specified entities, that verify an applicant's income and net worth and issue the certificate that makes them an accredited investor.
- Private Equity FundAn AIF investing primarily in equity or equity-linked instruments or partnership interests of investee companies — a Category II fund, and the later-stage counterpart to a venture capital fund.
- Closed-ended AIFAn AIF scheme offered for a limited period, funded by commitments drawn down through capital calls, with no redemption before the fund winds up — compulsory for Categories I and II.
- Temporary borrowingThe only fund-level borrowing Category I and II AIFs may do: for temporary funding needs, for no more than 30 days, on no more than 4 occasions a year, and up to 10% of investable funds.
- Migrated Venture Capital FundA fund once registered under the SEBI (Venture Capital Funds) Regulations, 1996 that re-registered under the AIF Regulations as a Category I venture capital fund. It may not launch new schemes.
- FVCI RouteThe route for SEBI-registered off-shore funds to make venture capital investments in eligible unlisted Indian companies — in stipulated priority sectors, or start-ups in any sector — at freely agreed prices.
- Special Situation AssetAn asset a special situation fund may invest in: stressed loans, ARC security receipts, and securities of companies whose loans are stressed, under IBC resolution or in continuing default.
- Indirect Transfer ProvisionsSection 9 of the Income Tax Act, taxing the transfer of shares or interest in an offshore company or entity that derives its value substantially from assets located in India.