Specified Alternative Investment Fund
Also written Specified AIF · Fourth category of AIF · Specified Alternative Investment Funds
The fourth registration category SEBI inserted in 2023 for AIFs that fit none of Categories I, II and III, and for which SEBI may specify separate regulations.
In plain language
Ask a candidate how many categories of AIF there are and the answer comes back fast: three. That answer is now out of date.
SEBI added a fourth in 2023. It is called a Specified AIF.
It is not a new kind of strategy. It is a residual box. Categories I, II and III each have a definition. A fund that fits none of them used to have nowhere to go. Now it can be registered as a Specified AIF, and SEBI may write rules for such funds separately.
That is genuinely all the workbook says about what it is. There is no list of sub-categories, no investment condition, no separate minimum.
But there is one hard fact worth carrying. When the workbook lists the registration outcomes for an AIF, it lists four: Category I, Category II, Category III, or a Specified AIF. So a question that offers only three is offering an incomplete answer.
How it works
Section 17.1.1 sets out the registration categories, and the fourth one is stated in a single line: Specified Alternative Investment Fund — SEBI may specify regulations for such type of funds that do not fall under any of the 3 categories mentioned above.
When it arrived. It was inserted by the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2023, with effect from 15 June 2023. Chapter 6 records the same insertion in one sentence at the end of section 6.2.12: Specified AIF is a fourth category of AIF inserted by SEBI.
The four categories side by side.
| Category | Definition in section 17.1.1 |
|---|---|
| I | Invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors the government and regulators consider socially or economically desirable. Examples: venture capital funds, social impact funds, SME funds, infrastructure funds, special situation funds, the Corporate Debt Market Development Fund |
| II | Prohibited from taking leverage or borrowing except as prescribed by SEBI, and falls in neither Category I nor Category III. Examples: private equity funds, debt funds |
| III | Uses diverse or complex trading strategies and may employ leverage, including through listed and unlisted derivatives, to make short-term profits. Examples: hedge funds |
| Specified | SEBI may specify regulations for funds that do not fall under any of the three above |
Where the fourth category appears again. Chapter 9, in the risk factors an AIF discloses in its PPM, states that all AIFs require SEBI approval and get registered as a Category I AIF, Category II AIF, Category III AIF, or a Specified AIF. So the four-way list is not confined to the registration chapter.
What is unchanged for a Specified AIF. The permissible legal structures and the registration criteria in section 17.1.1 and 17.1.2 are set out for AIFs generally, not per category. An AIF may be a company under the Companies Act, 2013, a trust under a trust deed registered under the Registration Act, 1908, a limited liability partnership under the LLP Act, 2008, or a body corporate established under a Central or State law. Its constitution document must permit the activity of an AIF, must prohibit inviting the public to subscribe, and the applicant, sponsor and manager must be fit and proper under Schedule II of the SEBI (Intermediaries) Regulations, 2008 — integrity and reputation, no history of restraint orders and convictions, financial competence on net worth and solvency, and no history of being a wilful defaulter.
The workbook attaches no figure to the Specified category itself — no minimum corpus, no concentration limit, no leverage cap of its own. That is because SEBI may specify them; until it does, there is nothing to learn beyond the definition and the date.
A worked example
Work through the categorisation the way a registration application would.
| Proposed fund | Fits which definition? | Category |
|---|---|---|
| Invests in seed-stage start-ups only | Early-stage ventures, socially or economically desirable | I (venture capital fund) |
| Invests in unlisted debt of mid-market companies, no fund-level borrowing | Neither I nor III, no leverage | II (debt fund) |
| Long-short equity with derivatives, 1.8 times NAV of leverage | Complex strategies with leverage | III (hedge fund) |
| A fund that fits none of the three definitions | — | Specified AIF |
The fourth row is the whole point of the category. Before 15 June 2023 an application of that shape had no box. It now has one.
A worked contrast on the boundary. Sahyadri Debt Opportunities proposes to invest Rs 800 crore in unlisted corporate debt and to borrow Rs 200 crore at fund level to enhance returns. The manager asks whether it can register as a Category II AIF.
It cannot. Category II is prohibited from taking leverage or borrowing except as prescribed — and the prescribed allowance is only for temporary funding needs, for not more than 30 days, on not more than 4 occasions in a year and up to 10% of investable funds. Rs 200 crore of permanent gearing on Rs 800 crore is 25% of investable funds, held indefinitely. It clears none of the three limbs.
So the fund is pushed towards Category III, where leverage is permitted up to 2 times NAV with prior investor consent — even though its strategy is not a trading strategy at all. That mismatch, between a fund's strategy and the category its leverage forces it into, is exactly the gap a residual Specified AIF category exists to hold.
One caution for the exam. The workbook does not say that this fund would be registered as a Specified AIF. It says only that SEBI may specify regulations for funds fitting none of the three. The example shows why the box was needed, not how SEBI has filled it.
Why NISM asks about it
Chapter 17 (Regulatory Framework), section 17.1.1, lists all four registration categories, and Chapter 6, section 6.2.12, records the insertion of the fourth one. Chapter 9 repeats the four-way list in the regulatory-approval risk factor for a PPM.
The question this supports is a counting question: how many categories of AIF may an AIF be registered under, or which of these is not a category of AIF. A candidate who learned the three-category structure before June 2023 answers wrongly. The other recall point is the date and instrument — the SEBI (AIF) (Second Amendment) Regulations, 2023, with effect from 15 June 2023. Note the same amendment date also brought in the Corporate Debt Market Development Fund under Category I, so 15 June 2023 carries two examinable changes.
Common exam traps
- There are four registration categories, not three. Category I, Category II, Category III and Specified AIF.
- A Specified AIF is defined by exclusion. It is for funds that fit none of the other three definitions, not for a particular strategy.
- SEBI may specify regulations for it. The workbook does not say it has. Do not invent conditions, minimums or caps for this category.
- Specified AIF is not the same as a Specialized Investment Fund. A Specialized Investment Fund is a separate SEBI product with a Rs 10 lakh minimum investment and a public issue route; a Specified AIF is a residual AIF registration category. The names are close and the products are not.
- Nor is it a Special Situations Fund. That is a sub-category of Category I, defined as a Category I AIF investing in special situation assets and able to act as a resolution applicant under the IBC, 2016.
- 15 June 2023 also created the Corporate Debt Market Development Fund under Category I. One amendment, two insertions.
- The registration criteria do not change. Fit and proper under Schedule II, a constitution document permitting AIF activity, and a prohibition on inviting the public apply to a Specified AIF as to any other.
Check yourself
1.How does the AIF Regulations define Category II AIFs?
- a)Funds investing in socially or economically desirable sectors
- b)Funds prohibited from taking leverage or borrowing except as prescribed by SEBI, which do not fall in either Category I or Category III
- c)Funds employing diverse or complex trading strategies including leverage
- d)Funds registered outside India investing into Indian companies
Show the answer
Answer: (b) Funds prohibited from taking leverage or borrowing except as prescribed by SEBI, which do not fall in either Category I or Category III
Category II Alternative Investment Fund — such type of funds is prohibited from taking leverage or borrowing, except as prescribed by SEBI. SUCH FUNDS DO NOT FALL IN EITHER CATEGORY I OR CATEGORY III of AIFs. Examples of Category II AIFs are Private Equity Funds, Debt Funds. It is a residual category, defined by exclusion. Option (a) describes Category I — funds investing in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors, areas which the government and regulators consider as socially or economically desirable. Option (c) describes Category III — funds using diverse or complex trading strategies... to make short-term profits. And where a fund fits none of the three, SEBI may specify regulations for a Specified Alternative Investment Fund.
Where this is taught
Free preparation for NISM Series XIX-CRelated terms
- 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.
- Specialized Investment FundA mutual fund product line introduced by SEBI in 2024 for sophisticated strategies, with a minimum investment of Rs 10 lakh across all of an AMC's strategies — sitting between mutual funds and PMS.
- 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.
- Debt FundA Category II AIF that invests primarily in debt securities of listed or unlisted investee companies, or in securitised debt instruments, as per its stated objectives.
- 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.
- 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.
- Fund-level leverageBorrowing or gearing taken by the AIF itself rather than inside a portfolio company — permitted for investment purposes only to Category III AIFs, and capped at 2 times NAV.
- Open-ended AIFAn AIF scheme that offers units continuously with no fixed maturity and lets investors redeem at set intervals — permitted only for Category III AIFs, with a variable corpus.