SEBI (Alternative Investment Funds) Regulations, 2012

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Key terms in this chapter

Accreditation agencies

An accreditation agency means a subsidiary of a recognised stock exchange or of a depository, or any other entity specified by SEBI. Its responsibilities are verification of the documents submitted by applicants for accreditation, timely processing of applications and issuance of the accreditation certificate, maintaining data of accredited investors, verification of accreditation status, maintaining confidentiality of investor information at all times, and any other responsibilities specified by SEBI; and it must have the requisite infrastructure including systems and manpower. A subsidiary of a recognised stock exchange may carry out accreditation only where the exchange has a minimum of twenty years of presence in the Indian securities market, a minimum net worth of two hundred crore rupees, nation-wide terminals, investor grievance redressal mechanisms including arbitration, and investor service centres in at least twenty cities. The framework for accreditation agencies must be available on their websites.

Accredited investors

An accredited investor means any person granted a certificate of accreditation by an accreditation agency. In the case of an individual, Hindu undivided family, family trust or sole proprietorship the thresholds are annual income of at least Rs 2 crore; or net worth of at least Rs 7.5 crore of which financial assets exceed Rs 3.75 crore; or annual income of at least Rs 1 crore together with a minimum net worth of Rs 5 crore of which financial assets exceed Rs 2.5 crore. A body corporate must have a net worth of at least Rs 50 crore, as must a trust other than a family trust, and in a partnership firm set up under the Indian Partnership Act, 1932 each partner must independently meet the eligibility criteria. Deemed accredited investors are the Central and State Governments, developmental agencies set up under their aegis, funds set up by them, qualified institutional buyers as defined under the ICDR Regulations, 2018, Category I foreign portfolio investors, sovereign wealth funds and multilateral agencies.

Alternative Investment Fund

An alternative investment fund means any fund established or incorporated in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors. Alternative assets lie outside the traditional asset classes of stocks, bonds or cash, tend to be less liquid and typically require a longer holding period before returns are realised. Unlike mutual funds, where a systematic investment plan can be started with as little as Rs 500, the ticket size in an AIF is Rs 1 crore and it is therefore open only to sophisticated investors. A corpus is built with the money committed by investors and invested in different venues through schemes, each with its own objective, and the avenue is open to Indians, non-resident Indians and foreign persons for investment in unlisted and debt securities.

Angel funds and angel investors

Angel funds are a sub-category of venture capital fund under Category I AIF which raise funds from angel investors and invest in accordance with the AIF Regulations, and must register with SEBI. An angel investor is a person who proposes to invest in an angel fund and may be an individual, a body corporate, an AIF or a company having a family connection. An individual investor must have net tangible assets of at least two crore rupees excluding the value of his principal residence and must either have early-stage investment experience, meaning prior experience in investing in start-ups or emerging or early-stage ventures, or experience as a serial entrepreneur, meaning a person who has promoted or co-promoted more than one start-up venture, or be a senior management professional with at least ten years of experience. A body corporate must have a net worth of at least ten crore rupees, and an AIF registered under these regulations or a venture capital fund registered under the SEBI (Venture Capital Funds) Regulations also qualifies. A company with family connection means, where the angel investor is an individual, any company promoted by that individual or his relative, any company where he or his relative is a director, or any company where he or his relative has control or shares or voting rights entitling them to fifteen per cent or more; and where the investor is a body corporate, any company which is its subsidiary or holding company, any company part of the same group or under the same management, or any company where the body corporate or its directors or partners have control or fifteen per cent or more of the shares or voting rights. When launching schemes an angel fund must file a term sheet with SEBI containing material information regarding the scheme, and the number of investors in a scheme must not exceed two hundred.

Borrowing by Category I and Category II AIFs

Category I and Category II AIFs must not borrow funds directly or indirectly or engage in any leverage for the purpose of making investments or otherwise, except to meet temporary funding requirements and day-to-day operational requirements for not more than thirty days, on not more than four occasions in a year and not more than ten per cent of investable funds. To facilitate ease of doing business they may also borrow to meet a temporary shortfall in the amount called from investors for making investments in investee companies, subject to conditions: the intention must be disclosed in the private placement memorandum of the scheme; the borrowing may be done only in an emergency and as a last recourse where the investment opportunity is imminent and the drawdown amount has not been received despite the manager's best efforts; the amount borrowed must not exceed twenty per cent of the investment proposed to be made in the investee company, or ten per cent of the investable funds of the scheme, or the commitment pending to be drawn down from investors other than those who failed to provide the drawdown amount, whichever is lower; the cost of such borrowing must be charged only to the investors who failed to provide the drawdown amount; the flexibility must not be used to give different drawdown timelines to investors; and the manager must periodically disclose the amount borrowed and the terms of borrowing and repayment to all investors. A cooling off period of thirty days must be maintained between two periods of borrowing, calculated from the date of repayment of the previous borrowing.

Categories of AIF

A Category I alternative investment fund invests in start-ups or early-stage ventures, social ventures, small and medium enterprises, infrastructure or other sectors or areas which the government or regulators consider socially or economically desirable, and includes venture capital funds, SME funds, social impact funds, social venture funds, infrastructure funds, special situation funds and such other funds as may be specified. A Category II alternative investment fund is one which does not fall in Category I or Category III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements as permitted, and includes private equity funds and debt funds for which no specific incentives or concessions are given by the Government or any regulator. A Category III alternative investment fund employs diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives, and such funds can carry out hedging activities. Funds specified under Regulation 19 form a recently introduced category and include the Corporate Debt Market Development Fund, which invests in liquid and low-risk debt instruments and undertakes activities related to the corporate debt market, and which during periods of market dislocation purchases corporate debt securities from specified debt-oriented schemes of mutual funds meeting the prescribed eligibility criteria.

Change of sponsor, manager or control, and change of category

Prior approval of SEBI is mandatory for a change of sponsor or manager or a change in control of the AIF, sponsor or manager. The same fee is payable to SEBI as at the time of registration, and the cost must not be passed on to the investors; exemption from the fee applies only where the manager is acquiring control in or replacing the sponsor, and where sponsors are exiting in an AIF having multiple sponsors. The fee must be paid within fifteen days of effecting the proposed change, and the approval is valid for six months from the date of SEBI's communication. Where the change in control involves a scheme of arrangement under the Companies Act, 2013, prior approval of SEBI is required before filing the petition with the National Company Law Tribunal, that approval being valid for three months from issuance, and final approval of SEBI is mandatory after the scheme is sanctioned by the Tribunal. Fresh approval of SEBI is required where documents are not submitted within the prescribed period. An AIF registered under a particular category cannot change its category except with SEBI's approval, and only AIFs which have not made any investments under the category in which they were registered may apply; the application carries a fee of one lakh rupees. If commitments have been received or funds raised before the application, the AIF must send letters or emails to all investors offering them the option to withdraw without any penalties or charges, any fees collected from withdrawing investors must be returned, and partial withdrawal may be allowed subject to compliance with the minimum investment amount. Until approval is granted the AIF may not make any investment other than in liquid funds or bank deposits, and it must send a copy of the revised placement memorandum and other relevant information to all its investors and to SEBI.

Code of conduct and general obligations

The alternative investment fund, its key management personnel, the trustee, trustee company, directors of the trustee company, designated partners and directors must abide by the code of conduct given under the AIF Regulations. Each AIF must have detailed policies and procedures which are periodically reviewed, must inform SEBI of any material change from what has been disclosed, and must obtain the prior approval of SEBI for a change of sponsor or manager or a change in control of the fund, sponsor or manager. All managers must organise, operate and manage the AIF and its schemes in the interest of unit holders; carry out all activities in accordance with the placement memorandum as amended from time to time; ensure that the placement memorandum is provided to investors before they give a commitment or make an investment, with an appropriate acknowledgement of receipt; ensure scheme-wise segregation of bank accounts and securities accounts; make no exaggerated statement, oral or written, about their qualifications or capability or achievements; and be responsible for compliance with SEBI circulars and guidelines. The AIF, manager, trustee and sponsor must act in the interest of unit holders, maintain high standards of integrity and fairness, exercise due diligence and independent professional judgment, not offer any assured returns to prospective investors or unit holders, and mandatorily follow the stewardship code in relation to their investments in listed equities. The manager must also ensure that decisions comply with the regulations, the placement memorandum, investor agreements, other fund documents, policies and applicable laws, and that an investment committee is constituted with all decisions taken as per the regulations.

Compliance requirements for AIFs

As AIFs trade in listed securities they must comply with the SEBI (Prohibition of Insider Trading) Regulations, putting in place a policy for prevention of insider trading, informing employees of its impact and requiring them to seek pre-clearance approval from the compliance officer before trading in listed securities in which the scheme has a position. Under the PMLA and rules made under it, the AIF must have a KYC and anti-money laundering policy available on its website, must be registered with the Financial Intelligence Unit India as a registered intermediary, must intimate FIU-India of the appointment of and changes in the designated director and the principal officer, and the principal officer must identify suspicious transactions and file suspicious transaction reports with FIU-India. Other requirements include appointing SEBI registered intermediaries such as a custodian, stock brokers and depository participants for securities transactions and settlement; displaying a copy of the SEBI registration certificate at the registered office and any branch office; seeking prior approval from SEBI for a change in the control of the company acting as investment manager; and filing monthly and quarterly returns on the SEBI portal. Every AIF must have a compliance officer responsible for monitoring compliance.

Continuing interest of the manager or sponsor

The manager or sponsor must have a continuing interest in the alternative investment fund, intended so that they too remain focused on the quality and performance of the investments made. For Category I and Category II funds it is not less than two and a half per cent of the corpus or five crore rupees, whichever is lower, in the form of investment in the fund; for Category III funds it is five per cent of the corpus or ten crore rupees, whichever is lower. In no case may this interest be through a waiver of management fees.

Control, controlling interest and large value funds

Control in relation to a listed company means control as defined in Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; in any other case, control as defined in section 2(27) of the Companies Act, 2013; and other than for a body corporate, any change in its legal formation or ownership or change in controlling interest. Controlling interest means holding not less than fifty per cent of the voting rights or interest in a company, directly or indirectly. A large value fund for accredited investors means an alternative investment fund or a scheme of one in which each investor, other than the manager, sponsor, employees or directors of the fund or employees or directors of the manager, is an accredited investor and invests not less than twenty-five crore rupees.

Corporate Debt Market Development Fund

SEBI has notified Chapter III-C of the AIF Regulations for the Corporate Debt Market Development Fund, which is a backstop facility for the purchase of investment-grade corporate debt securities in times of stress or market dislocation and invests only in debt securities. It must be constituted as a trust whose instrument of trust is a deed duly registered under the Indian Registration Act, 1908; it is a closed-ended fund with a tenure of fifteen years from the date of its first closing, extendable with the prior approval of SEBI; it is wound up with SEBI's prior approval; and investment in it is made through units. The manager or sponsor must have a continuing interest of not less than five crore rupees in the form of investment in the fund, not through a waiver of management fees. The portfolio must be disclosed to unit holders fortnightly and the net asset value daily. It must appoint a trustee company whose board of directors and whose manager are appointed with SEBI's prior approval; the trustee company may not engage in any activity other than acting as trustee except with SEBI's prior written consent; two-thirds of the members of the board of the trustee company must be independent directors not associated with the sponsor or the manager; and an audit committee of the trustee company must be constituted to review compliance with the provisions of the placement memorandum. The fund is intended to boost confidence in the corporate bond market, support the purchase of investment-grade corporate debt securities, improve liquidity in the secondary market and ensure proper governance and regulatory oversight through registration as an AIF in the form of a trust.

Corpus, investable funds, investee company and unit

Corpus means the total amount of funds committed by investors to the alternative investment fund by way of a written contract or any such document as on a particular date; investors normally commit an amount which they contribute in tranches as and when the AIF makes a demand. Investable funds means the corpus of the scheme of the AIF net of expenditure for administration and management of the fund, estimated for the tenure of the fund. Investee company means any company, special purpose vehicle, limited liability partnership, body corporate, real estate investment trust or infrastructure investment trust in which an AIF makes an investment. A unit means the beneficial interest of the investors in the AIF or its scheme; units may be fully paid or partly paid up, a partly paid unit representing the portion of committed capital actually invested.

Custodian, compliance officer and audit

All AIFs are mandatorily required to appoint a custodian registered with SEBI, and may appoint a custodian who is an associate of the manager or sponsor provided the manager or sponsor has a minimum net worth of twenty thousand crore rupees and the custodian's independence from them is ensured. The manager must not provide advisory services to any investor other than the clients of the co-investment portfolio manager, must ring fence the assets and liabilities of each scheme, and must keep bank accounts segregated from those of other schemes. The AIF and the manager must appoint a compliance officer in addition to the chief executive officer, responsible for monitoring compliance with the Act, rules, regulations, notifications, circulars, guidelines, instructions and directives issued by SEBI, adhering to the eligibility criteria specified by SEBI, and reporting any non-compliance observed immediately and independently to SEBI as soon as possible and not later than seven working days from the date of observing it. The books of accounts of the AIF must be audited annually by a qualified auditor, and records must be maintained for five years even after the winding up of the fund.

Eligibility criteria and conditions of certificate

The AIF activity must be permissible under the charter documents of the entity — the memorandum of association for a company, the trust deed for a trust, and the partnership deed for a registered partnership firm or limited liability partnership. The regulations prohibit an invitation to the public to subscribe to the AIF's securities, so an AIF cannot make a public issue and money is always collected by private placement, which is why it is called a privately pooled vehicle. The applicant, sponsor and manager must be fit and proper persons based on the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008. The key investment team of the manager must have at least one key personnel with the relevant certification specified by SEBI, which does not apply to an accredited investors only fund, and at least one key personnel with a professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a recognised Indian or foreign university or a CFA charter from the CFA Institute; the same key personnel may satisfy both conditions. The manager or sponsor must have the necessary infrastructure and manpower. The AIF must not carry on any activity other than permitted activities, must forthwith inform SEBI of any material change in the information submitted, and cannot change its category after registration except with SEBI's approval. The certificate of registration is valid till the AIF is wound up.

Investment conditions and restrictions

AIFs may invest in unlisted securities, listed securities, and securities of companies incorporated outside India subject to the conditions or guidelines of the Reserve Bank of India and SEBI, and an AIF may act as a nominated investor and as a qualified institutional buyer as specified in the ICDR Regulations. Category I and Category II AIFs cannot invest more than twenty-five per cent of investable funds in one investee company directly or through units of other AIFs, though large value funds for accredited investors of those categories may invest up to fifty per cent. A Category III AIF may not invest more than ten per cent of investable funds in an investee company directly or through units of other AIFs, and for investment in listed companies the limit is ten per cent of either investable funds or the net asset value of the scheme, large value funds of Category III being permitted up to twenty per cent. AIFs must not invest in associates, or in schemes of AIFs managed or sponsored by their manager, sponsor or the associates of either. The uninvested portion of investable funds and divestment proceeds pending distribution may be invested in liquid mutual funds, bank deposits, or other liquid assets of higher quality such as treasury bills, triparty repo dealing and settlement, commercial papers and certificates of deposit, until deployment as per the investment objective or distribution to investors. Category II AIFs, originally required to invest primarily in unlisted investee companies, may now include listed debt securities including securitised debt instruments rated A or below by a SEBI-registered credit rating agency, so that the more than fifty per cent primary investment requirement may be met through a combination of unlisted securities and lower-rated listed debt.

Investment in an AIF — investors, corpus and ticket size

Any investor, whether Indian, foreign or a non-resident Indian, is eligible to invest in an AIF, and units are to be issued only in dematerialised form. Each scheme of an AIF must have a corpus of at least twenty crore rupees, and for social impact funds the minimum corpus is five crore rupees. The minimum investment is at least one crore rupees by each investor, except for accredited investors; it is twenty-five lakh rupees for investors who are employees or directors of the AIF or employees or directors of the manager, and two lakh rupees for a social impact fund which invests only in securities of not-for-profit organisations registered or listed on a social stock exchange. The maximum number of investors in a scheme is one thousand, accredited investors being excluded from that computation, and the provisions of the Companies Act, 2013 apply where the AIF is formed as a company. Solicitation may be only by way of private placement.

Investments and obligations of angel funds

Angel funds must invest in start-ups which are not promoted or sponsored by or related to an industrial group whose combined group turnover exceeds three hundred crore rupees, an industrial group including a group of body corporates with the same promoters or promoter group, a parent company and its subsidiaries, a group in which the same person or group of persons exercises control, and a group comprising associates, subsidiaries or holding companies. The minimum investment value in a venture capital undertaking by an angel fund is twenty-five lakh rupees and the maximum is ten crore rupees; the investment is locked in for one year; angel funds may not invest in associates; they may not invest more than twenty-five per cent of the total investments under all their schemes in one venture capital undertaking; and investment in securities of companies incorporated outside India is permitted subject to conditions or guidelines stipulated by the Reserve Bank of India and SEBI. Units of angel funds may not be listed on any recognised stock exchange. The manager or sponsor must have a continuing interest in the angel fund of not less than two and a half per cent of the corpus or fifty lakh rupees, whichever is lesser, not through a waiver of management fees, and must obtain an undertaking from the angel investors confirming their approval before making an investment.

Investment strategy and its alteration

Even before applying for registration all AIFs must have a well-defined investment strategy, investment purpose and investment methodology, which must be stated in the placement memorandum so that investors know where their contribution is being invested. Any material alteration to the strategy requires the consent of at least two-thirds of the unit holders by value of their investment in the alternative investment fund and the permission of SEBI.

Investor charter, complaints and stamp duty

The investor charter is a brief document containing details of the services provided to investors, the grievance redressal mechanism and the responsibilities of investors, in one place and in lucid language, and must be disclosed in the private placement memorandum. Data on investor complaints received against AIFs and each of their schemes and the redressal status must be disclosed by all AIFs as a separate chapter in the private placement memorandum, and AIFs must maintain data on investor complaints compiled at the latest within seven days from the end of the quarter. Stamp duty is collected on the issue, transfer and sale of units of AIFs; registrars to an issue and share transfer agents are responsible for collecting it for transactions done other than through a stock exchange, while for transactions done in demat mode the stock exchange, authorised clearing corporation or depository is empowered to collect it.

Legal forms of an AIF

An AIF may be set up as a trust established under the Indian Trusts Act, 1882 or under an Act of Parliament or State legislation; a company incorporated under the Companies Act, 2013; a limited liability partnership incorporated under the Limited Liability Partnership Act, 2008; or a body corporate.

Obligations of the manager, dispute resolution and records

The investment manager is obliged to address all investor complaints, provide SEBI with any information it seeks, maintain all records specified by SEBI, take all steps to address conflicts of interest as specified in the regulations, and ensure transparency and disclosure as specified. All claims, differences or disputes between investors and the alternative investment fund or the manager arising out of or in relation to the activities of the fund or manager in the securities market must be submitted to a dispute resolution mechanism that includes mediation, conciliation or arbitration in accordance with the procedure specified by SEBI. The manager or sponsor must keep, for a period of five years after the winding up of the fund, records describing the assets under the scheme or fund, valuation policies and practices, investment strategies, particulars of investors and their contribution, and the rationale for investments made.

Overseas investment by AIFs

Overseas investments by AIFs must not exceed twenty-five per cent of the investable funds of the scheme, subject to an overall limit of one thousand five hundred million US dollars, being a combined limit for AIFs and venture capital funds registered under the erstwhile SEBI (Venture Capital Funds) Regulations, 1996. The allocation must be utilised within six months from the date of SEBI approval, failing which SEBI may allocate the unutilised limit to other applicants.

Private placement memorandum

The offer document through which an AIF raises funds is called the private placement memorandum, the primary document in which all necessary information about the AIF is disclosed to prospective investors. It has two parts: Part A, the section for minimum disclosures, and Part B, a supplementary section allowing full flexibility to provide any additional information the fund thinks fit. It must contain all material information about the AIF and the investment manager, details of all key management personnel of the AIF and the manager, the background of the key investment team, the investment strategy, targeted investors, the tenure of the AIF or scheme, fees and all other expenses proposed to be charged, conditions or limits on redemption, risk management tools and parameters employed, key service providers, the terms of reference of the committee constituted for approving decisions, conflicts of interest and the procedures to identify and address them, disciplinary history, the terms and conditions on which the investment manager offers investment services, its affiliations with other intermediaries, the manner of winding up, litigation and disciplinary actions by any regulator, and penalties of more than five lakh rupees. Any change in key management personnel must be intimated to the investors and to SEBI, and the memorandum must be filed with SEBI at least thirty days prior to the launch of the scheme.

Reporting by AIFs and the compliance test report

All AIFs must submit a quarterly report on their activity as an AIF to SEBI within ten calendar days from the end of each quarter, and Category III AIFs must also submit a quarterly report on leverage undertaken. At the end of each financial year the manager must prepare a compliance test report on compliance with the AIF Regulations and circulars issued under them; it must be submitted within thirty days from the end of the financial year to the trustee and sponsor where the AIF is a trust, or to the sponsor where the AIF is set up in another form. Observations, if any, must be intimated to the manager within thirty days of receipt of the report, the manager must respond within fifteen days of receiving those observations or comments, and any violation observed by the trustee or sponsor must be intimated to SEBI as soon as possible. The manager must also submit reports to SEBI, obtain a legal entity identifier for the AIF, report on stewardship activities on implementation of every principle, provide periodical reports — annually within one hundred and eighty days from the end of the financial year and quarterly within sixty days from the end of the respective quarter — together with tax certificates, statements of accounts and valuation reports to the AIF contributors, handle client grievances, obtain a SCORES identity from SEBI and monitor complaints on the SCORES platform.

Reports to investors

An AIF must provide reports to investors at least annually, within one hundred and eighty days from the year end, including the financial information of investee companies and the material risks and how they are managed, which may include concentration risk at fund level, foreign exchange risk at fund level, leverage risk at fund and investee company levels, realisation risk being change in the exit environment at fund and investee company levels, strategy risk being change in or divergence from business strategy at investee company level, reputation risk at investee company level, and extra-financial risks including environmental, social and corporate governance risks at fund and investee company level. A Category III AIF must provide quarterly reports to investors on the same matters within sixty days of the end of the quarter.

Role of the merchant banker

Appointment of a merchant banker is mandatory. Its functions include filing the private placement memorandum with SEBI; independently exercising due diligence of all the disclosures in the memorandum, satisfying itself as to the veracity and adequacy of the disclosures and providing a due diligence certificate; submitting that due diligence certificate at the time of registration or prior to the launch of a new scheme on the SEBI intermediary portal; and being disclosed in the memorandum. The merchant banker must not be an associate of the AIF, its sponsor, manager or trustee.

Social venture and startup

A social venture means a trust, society, company, venture capital undertaking or limited liability partnership formed with the purpose of promoting social welfare, solving social problems or providing social benefits, and includes public charitable trusts registered with the Charity Commissioner, societies registered for charitable purposes or for the promotion of science, literature or fine arts, companies registered under section 8 of the Companies Act, 2013, and micro finance institutions. A startup means a private limited company or a limited liability partnership which fulfils the criteria for a startup specified by the Department of Promotion of Industry and Internal Trade, Ministry of Commerce and Industry, by notification G.S.R. 127(E) dated 19 February 2019 or such other policy of the Central Government.

Special situation funds

A special situation fund means a Category I alternative investment fund that invests in special situation assets in accordance with its investment objectives, namely stressed loans, security receipts issued by an asset reconstruction company registered with the Reserve Bank of India, and securities of investee companies whose borrowings are subject to the corporate insolvency resolution process or whose credit rating has been downgraded to D. Registration with SEBI is mandatory. The minimum corpus is one hundred crore rupees, the minimum investment by an investor is ten crore rupees and five crore rupees in the case of an accredited investor, and the fund may not accept investments from any other AIF other than a special situation fund. Such funds are exempt from investment concentration norms in a single investee company and face no restriction on investing investable funds in unlisted or listed securities, but the initial and continuous due diligence requirements mandated by the Reserve Bank of India for asset reconstruction companies apply to them while acquiring stressed loans in terms of the RBI (Transfer of Loan Exposures) Directions, 2021.

Sponsor, manager, custodian and co-investment

Sponsor means any person or persons who set up the alternative investment fund and includes the promoter in the case of a company and the designated partner in the case of a limited liability partnership. Manager means any person or entity appointed by the alternative investment fund to manage its investments, by whatever name called, and may also be the same as the sponsor of the fund; in short the sponsor is the promoter of the fund and the manager administers it and is in charge of managing the investments. Custodian means a person who has been granted a certificate of registration to carry on the business of custodian under the SEBI (Custodian) Regulations, 1996. Co-investment means investment made by the managers, sponsor or investors of Category I or Category II alternative investment funds which are making the investment in investee companies.

Tenure, extension and listing

Category I and Category II AIFs must be close ended with a minimum tenure of three years; a Category III AIF may be either open ended or close ended. The tenure of a close-ended AIF is extendable by two years subject to the approval of two-thirds of the unit holders by value of their investment, and large value funds for accredited investors may extend beyond two years. Large value funds, being schemes where each investor commits at least twenty-five crore rupees, were previously permitted flexible or indefinite tenures, raising regulatory concerns about quasi-perpetual funds; SEBI has capped their extensions at a maximum of five years beyond the original term, any extension still requiring approval of at least two-thirds of the unit holders by value. The units of a close-ended AIF may be listed on a stock exchange, with a minimum tradable lot of one crore rupees, and listing is permitted only after the final close of the fund or scheme.

Transparency and conflict of interest

All AIFs must ensure transparency and disclosure of information to investors: financial, risk management, operational, portfolio and transactional information regarding fund investments must be disclosed periodically; any fees ascribed to the manager or sponsor and any fees charged to the AIF or an investee company by an associate of the manager or sponsor must be disclosed periodically; any inquiries or legal actions by legal or regulatory bodies in any jurisdiction must be disclosed as and when they occur, as must any material liability arising during the tenure of the AIF, any breach of a provision of the placement memorandum or of an agreement made with an investor or other fund document, and any change in control of the sponsor, manager or investee company.

Types of funds under the AIF Regulations

A debt fund invests primarily in debt or debt securities of listed or unlisted investee companies or in securitised debt instruments. Equity linked instruments include instruments convertible into equity shares or share warrants, preference shares and debentures compulsorily or optionally convertible into equity. A hedge fund employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products, including listed and unlisted derivatives. An infrastructure fund invests primarily in unlisted securities, partnership interest or listed debt or securitised debt instruments of investee companies or special purpose vehicles engaged in or formed for operating, developing or holding infrastructure projects. A private equity fund invests primarily in equity or equity linked instruments or partnership interests of investee companies. An SME fund invests primarily in unlisted securities of investee companies which are small and medium enterprises or in securities of such enterprises listed or proposed to be listed on an SME exchange or segment. A social impact fund invests primarily in securities, units or partnership interest of social ventures or securities of social enterprises and satisfies the social performance norms laid down by the fund. A venture capital fund invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, services, technology or intellectual property based activities or a new business model, and includes an angel fund; a venture capital undertaking is a domestic company not listed on a recognised stock exchange in India at the time of investment.

Valuation of AIF investments

Because investors receive only units and not the actual scrips in which investments have been made, it is essential that they know how the investments are valued, and the AIF must provide investors with a description of its valuation procedure and of the methodology for valuing assets. Category I and Category II AIFs must undertake valuation of their investments at least once in every six months by an independent valuer appointed by the AIF, and that period may be enhanced to one year on the approval of at least seventy-five per cent of the investors by value of their investment. A Category III AIF must ensure that the calculation of net asset value is independent of the fund management function, and the net asset value must be disclosed to investors quarterly for close-ended funds and every month for open-ended funds. The manager must ensure that the AIF appoints an independent valuer who satisfies the criteria specified by SEBI and who cannot be affiliated with the manager, sponsor or trustee of the AIF.

What is not an Alternative Investment Fund

The following are not considered alternative investment funds: a mutual fund established under the SEBI (Mutual Funds) Regulations, 1996; schemes covered under the SEBI (Collective Investment Schemes) Regulations, 1999; funds under other SEBI regulations that regulate fund management activities; holding companies as defined under section 2 of the Companies Act, 2013; ESOP trusts set up under the SEBI (Share Based Employee Benefits) Regulations, 2014 or as permitted under the Companies Act, 2013; family trusts set up for the benefit of relatives as defined under the Companies Act, 2013; employee welfare trusts or gratuity trusts set up for the benefit of employees; other special purpose vehicles not established by fund managers, including securitisation trusts, which are regulated under a specific regulatory framework; funds managed by a securitisation company or reconstruction company registered with the Reserve Bank of India under section 3 of the SARFAESI Act, 2002; and any pool of funds directly regulated by any other regulator in India.

Winding up, distribution and dissolution

An AIF set up as a trust is wound up after the tenure of the fund or its schemes as mentioned in the placement memorandum is over; or in the interests of the investors in the units, based on the opinion of the trustees or the trustee company; or if a winding up proposal is accepted at a meeting of the unit holders by seventy-five per cent of the investors by value of their investment; or if SEBI so directs in the interests of investors. The assets must be liquidated within the liquidation period and the proceeds accruing to investors distributed to them after satisfying all liabilities. The dissolution period is the timeframe beginning after the liquidation period of a scheme has ended, designated for winding down any remaining unliquidated investments; under Regulation 29(9) the AIF may either distribute those investments in specie to its investors or initiate the dissolution period, provided at least seventy-five per cent of the investors by value consent.