Private Equity Fund

A private equity fund is the regulated vehicle through which private equity is actually done in India.

The SEBI (AIF) Regulations define it in one line: a PE Fund means an AIF which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund.

Two words in that sentence carry the weight. "Primarily" equity is what separates it from a debt fund. And "according to the stated objective of the fund" means the description is not a label the manager chooses afterwards — the fund is a PE fund because its own stated objective says it invests this way.

Where it sits is the other half. A private equity fund is a Category II AIF, not Category I. Its close relative, the venture capital fund, is Category I — and that difference of one category is the single most examined fact about it.

"Equity linked instruments" is wider than shares. The workbook's own footnote to the definition lists what counts:

• instruments convertible into equity shares
• share warrants
• preference shares
• debentures compulsorily or optionally convertible into equity

So a fund holding compulsorily convertible debentures is still investing in "equity linked instruments" and is still a PE fund. It is the convertibility that matters, not the label on the instrument today.

Private equity against venture capital. The workbook draws the line by stage, not by instrument:

Both are primarily equity investors. The PE fund is the one that arrives after the model is proven.

Why Category II, and what that costs. Category II is the residual category — AIFs that meet the requirements of neither Category I nor Category III, and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements. The workbook states plainly that such Category II AIFs include private equity funds or debt funds. Registration is applied for in Form A under the SEBI (AIF) Regulations, with a non-refundable application fee.

The practical consequence of the category is the borrowing bar: a PE fund cannot gear itself at fund level. Leverage in a private equity deal sits in the target company, in a leveraged buy-out, not in the fund.

No concessions come with it. Category I is the category SEBI gives incentives to, for funds with positive spillover effects. Private equity funds and debt funds are named in the workbook as the kind for which no specific incentives or concessions are given.

A Category II AIF with a corpus of Rs 750 crore states its objective as growth capital for profitable mid-market manufacturers.

It deploys into four investee companies:

Equity and equity linked   = 220 + 180 + 200 + 120 = Rs 720 crore
As a share of the corpus   = 720 / 750           = 96%

Every one of those four is an equity or equity-linked instrument, even though only the first is an ordinary share. The fund is a private equity fund.

Now change one fact. Suppose the same fund had instead put Rs 600 crore into non-convertible debentures and Rs 150 crore into equity. It is no longer investing primarily in equity or equity-linked instruments, and its stated objective would have to say so — it would be a debt fund, still a Category II AIF, but not a PE fund.

And note what the fund cannot do in either version: it cannot borrow at fund level to lift its Rs 750 crore to Rs 1,000 crore of deployment. Category II permits borrowing only for day-to-day operational requirements.

Chapter 2, section 2.3.4 carries the definition and the venture-capital contrast; Chapter 4 places PE funds inside Category II and gives the Form A registration route.

This is one of the few headwords the workbook tests directly in its own sample questions, twice, and both are traps:

• "Which of the following is CAT I AIF?" with private equity funds among the options — they are Category II, and the answer is angel funds.
• "A private equity fund primarily provides unsecured working capital financing to a start-up company. True or False?" — False on two counts: a PE fund invests primarily in equity or equity-linked instruments, not unsecured debt, and it finances later-stage businesses, not start-ups.

Expect also the definition itself, and what "equity linked instruments" includes.

• Private equity funds are Category II; venture capital funds are Category I. The workbook asks this as a direct multiple-choice question. Both invest primarily in equity, and the category still differs.
• Later stage, not start-ups. A fund financing start-ups is a venture capital fund. The workbook's own True/False question turns on exactly this.
• Not unsecured working capital debt. "Primarily equity or equity linked" is the definitional test.
• "Equity linked" includes convertible debentures, preference shares and warrants. A fund holding CCDs has not stopped being a PE fund.
• No fund-level leverage. Category II permits borrowing only for day-to-day operational requirements; the leverage in a leveraged buy-out sits in the target, not in the fund.
• No incentives attach. Concessions are a Category I feature; the workbook names private equity and debt funds as getting none.
• The fund, not the asset class. Private equity is the activity — including buyouts, listed-company stakes and mezzanine instruments. This page is the SEBI-defined vehicle.