Foundation — Registration, accreditation and the conditions for investing in the fund

Registration and the rules for coming into the fund

This is the largest chapter in the workbook — seventy-seven pages and fifteen per cent of the paper. It is also the most number-dense. Almost every mark here turns on a threshold, a percentage or a deadline.

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1. The SEBI (AIF) Regulations, 2012

⚠️ "SEBI has introduced the SEBI (Alternative Investment Funds) Regulations IN 2012 TO REGULATE POOLED INVESTMENT FUNDS IN INDIA, such as VENTURE CAPITAL FUNDS, ANGEL FUNDS, PRIVATE EQUITY FUNDS, INFRASTRUCTURE FUNDS, DEBT FUNDS, SOCIAL IMPACT FUNDS, SPECIAL SITUATION FUNDS AND HEDGE FUNDS".

⚠️ "SEBI (AIF) Regulations MANDATES ALL ALTERNATIVE INVESTMENT FUNDS TO REGISTER WITH SEBI AND OBTAIN A CERTIFICATE OF REGISTRATION... ANY UNREGISTERED AIF WILL NOT BE PERMITTED TO CARRY OUT ALTERNATIVE INVESTMENT ACTIVITIES".

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2. The four categories

⚠️ The application is made in FORM A, "accompanied by a NON-REFUNDABLE APPLICATION FEE".

2.1 Permissible legal structures

A proprietorship is not on this list — that is the workbook's own sample question.

2.2 The fees

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3. Eligibility criteria

⚠️ The formation documents — MoA for a company, Trust Deed for a trust, Partnership Deed for an LLP — "SHALL PERMIT THE APPLICANT TO CARRY ON THE ACTIVITY OF AN AIF".

3.1 The fit and proper test

⚠️ "The Applicant, INCLUDING ITS SPONSOR AND MANAGER, SHOULD BE 'FIT AND PROPER' AS DEFINED IN SCHEDULE II OF SEBI (INTERMEDIARIES) REGULATIONS, 2008", which specifies:

1. ⚠️ INTEGRITY, REPUTATION AND CHARACTER.
2. ⚠️ NO HISTORY OF RESTRAINT ORDERS AND CONVICTIONS.
3. ⚠️ FINANCIAL COMPETENCE BASED ON NET WORTH AND SOLVENCY.
4. ⚠️ NO HISTORY OF BEING A WILFUL DEFAULTER.

3.2 The key investment team

⚠️ Also required: "The Manager or Sponsor SHALL HAVE THE NECESSARY MANPOWER AND INFRASTRUCTURE", the applicant must state its investment objectives, targeted investors, proposed corpus, investment style and proposed tenure, and must mention any previous history of refusal of registration by SEBI.

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4. In-principle approval, conditions and refusal

4.1 In-principle approval

⚠️ Why it exists: registering a Trust Deed or a Partnership Deed "MAY BE TIME-CONSUMING. IN ORDER TO SPEED-UP THE REGISTRATION... SEBI MAY GRANT AN 'IN-PRINCIPLE' APPROVAL TO ELIGIBLE APPLICANTS", even if the deed "IS NOT REGISTERED UNDER THE APPLICABLE LAW".

⚠️ Two conditions after in-principle approval:

Commit yes, collect no. That is the whole of in-principle approval in four words.

4.2 Conditions attached to registration

⚠️ "The Registration Certificate is granted for THE SPECIFIC CATEGORY OF AIF APPLIED FOR... Such Registration IS VALID TILL THE AIF IS WOUND UP. The Registration MAY BE GRANTED WITH OR WITHOUT PRE-SPECIFIED CONDITIONS".

• ⚠️ "Shall COMPLY WITH ALL THE PROVISIONS of the SEBI (AIF) Regulations".
• ⚠️ "Shall CARRY OUT ONLY THE PERMITTED ACTIVITIES in alternative investments".
• ⚠️ "Shall INFORM SEBI in case of any previously submitted information IS FOUND TO BE FALSE OR MISLEADING IN A MATERIAL MANNER, OR IF THERE IS A MATERIAL CHANGE".
• ⚠️ "Registration granted to an AIF under a particular category CANNOT CHANGE ITS CATEGORY SUBSEQUENT TO REGISTRATION, WITHOUT THE APPROVAL OF SEBI".

4.3 Refusal

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5. The Accredited Investor framework

⚠️ "SEBI introduced the framework for Accredited Investors (AIs)... the AIs MAY AVAIL (a) FLEXIBILITY IN MINIMUM INVESTMENT AMOUNT AND (b) CONCESSIONS FROM SPECIFIC REGULATORY REQUIREMENTS applicable to investment products".

5.1 Eligibility — Individual, HUF, Family Trust, Sole Proprietorship or Partnership

⚠️ "The value of THE PRIMARY RESIDENCE of the Individual, Karta of the HUF, or the Sole Proprietor SHALL NOT BE CONSIDERED FOR CALCULATION OF NET WORTH".

⚠️ Joint investors:

• ⚠️ "If joint holders are PARENT(S) AND CHILD(REN), AT LEAST 1 PERSON SHOULD INDEPENDENTLY FULFIL THE ELIGIBILITY CRITERIA".
• ⚠️ "If joint holders are SPOUSES, THEIR COMBINED INCOME/NET WORTH SHOULD FULFIL THE ELIGIBILITY CRITERIA".

⚠️ "In case of a PARTNERSHIP FIRM set up under the Indian Partnership Act, 1932, EACH PARTNER SHOULD INDEPENDENTLY MEET THE ELIGIBILITY CRITERIA".

5.2 Eligibility — Body Corporates and Trusts

Note that the two formulas are different. A body corporate's is a capital-and-reserves test; a trust's is an assets-minus-liabilities test.

5.3 Deemed Accredited Investors

⚠️ These "MAY NOT BE REQUIRED TO OBTAIN A CERTIFICATE OF ACCREDITATION": CENTRAL GOVERNMENT AND THE STATE GOVERNMENTS · DEVELOPMENTAL AGENCIES SET UP UNDER THE AEGIS OF THE CENTRAL OR STATE GOVERNMENTS · FUNDS SET UP BY THE CENTRAL OR STATE GOVERNMENTS · QUALIFIED INSTITUTIONAL BUYERS AS DEFINED UNDER THE SEBI (ICDR) REGULATIONS, 2018 · CATEGORY I FOREIGN PORTFOLIO INVESTORS · SOVEREIGN WEALTH FUNDS AND MULTILATERAL AGENCIES · ANY OTHER ENTITY AS MAY BE SPECIFIED BY SEBI.

5.4 The Accreditation Agency and the certificate

⚠️ "'ACCREDITATION AGENCY' MEANS A SUBSIDIARY OF A RECOGNIZED STOCK EXCHANGE OR A SUBSIDIARY OF A DEPOSITORY OR ANY OTHER ENTITY AS MAY BE SPECIFIED BY SEBI".

⚠️ The certificate bears "A UNIQUE ACCREDITATION NUMBER, NAME OF THE ACCREDITATION AGENCY, PAN OF THE APPLICANT AND VALIDITY OF THE ACCREDITATION WITH A START DATE AND END DATE. Accreditation SHALL BE GRANTED SOLELY BASED ON THE KYC AND THE FINANCIAL INFORMATION".

⚠️ Validity:

⚠️ The Agency is responsible for: VERIFICATION OF DOCUMENTS · TIMELY PROCESSING AND ISSUANCE · MAINTAINING DATA OF ACCREDITED INVESTORS · VERIFICATION OF ACCREDITATION STATUS · MAINTAINING CONFIDENTIALITY OF INVESTOR INFORMATION.

5.5 Withdrawal of consent

⚠️ "Accredited Investors SHALL HAVE THE FLEXIBILITY TO WITHDRAW THEIR CONSENT and discontinue availing benefits of accreditation", subject to:

• ⚠️ Those who withdraw after availing the LOWER TICKET SIZE "SHALL BE RESPONSIBLE TO INCREASE THEIR MINIMUM INVESTMENT AMOUNT... WITHIN THE TIME FRAME MENTIONED IN THE CLIENT AGREEMENT".
• ⚠️ Investments already made "SHALL BE 'GRANDFATHERED' AND SHALL CONTINUE TO BE TREATED AS INVESTMENTS MADE BY AN ACCREDITED INVESTOR. With effect from the date of withdrawal, ALL FURTHER TRANSACTIONS SHALL BE IN ACCORDANCE WITH THE SEBI (AIF) REGULATIONS".
• ⚠️ Investors in a LARGE VALUE FUND or any Category III AIF launched exclusively for the investor with concessions availed "SHALL NOT BE ELIGIBLE TO WITHDRAW THE CONSENT".

⚠️ "Any new scheme proposed to be launched as an AI ONLY SCHEME OR LVF SHALL HAVE THE WORDS 'AI ONLY FUND' OR 'LVF' ADDED TO THE SCHEME NAME AT THE END, RESPECTIVELY".

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6. Conditions for investment IN a Category III AIF

6.1 The investment strategy

6.2 Screening foreign investors

⚠️ At on-boarding, the manager must ensure foreign investors are resident in a country:

• ⚠️ "whose securities market regulator IS A SIGNATORY TO THE IOSCO'S MULTILATERAL MEMORANDUM OF UNDERSTANDING (APPENDIX A SIGNATORY), OR".
• ⚠️ "which is A SIGNATORY TO THE BILATERAL MEMORANDUM OF UNDERSTANDING BETWEEN SEBI AND ANY AUTHORITY OUTSIDE INDIA that provides for information sharing".

⚠️ "Any foreign investment fund, ALONG WITH ITS UNDERLYING INVESTORS CONTRIBUTING MINIMUM 25 PERCENT OF THE FUND CORPUS OR HAVING 'CONTROL' IN THE FUND, SHALL NOT BE MENTIONED IN THE SANCTIONS LIST NOTIFIED BY THE UNITED NATIONS SECURITY COUNCIL", nor be resident in a FATF-listed high-risk jurisdiction.

6.3 The investment conditions

6.4 Excusing or excluding an investor

⚠️ A Category III AIF may excuse or exclude an investor from a particular investment:

1. ⚠️ "BASED ON LEGAL OPINION, if the investor confirms that participation WOULD BE IN VIOLATION OF AN APPLICABLE LAW OR REGULATION".
2. ⚠️ "If the investor HAS DISCLOSED IN THE CONTRIBUTION AGREEMENT that participation would be IN CONTRAVENTION TO THE INTERNAL POLICY OF THE INVESTOR" — with any change in that policy to be reported to the manager WITHIN 15 DAYS.
3. ⚠️ "If the Manager IS SATISFIED THAT THE PARTICIPATION... WOULD LEAD TO THE AIF SCHEME BEING IN VIOLATION OF ANY APPLICABLE LAW OR WOULD ADVERSELY AFFECT THE AIF SCHEME" — recording the rationale with supporting documents.
4. ⚠️ "If such investor is AN INVESTMENT VEHICLE LIKE A FUND, such fund MAY BE PARTIALLY EXCUSED... TO THE EXTENT OF THE CAPITAL CONTRIBUTION OF SUCH FUND'S INVESTORS WHO ARE TO BE EXCUSED".

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7. The fund-raising process — eight steps

Note the two form numbers — the application is Form A, the registration certificate is Form B.

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8. The PPM — filing route and timelines

⚠️ "THE APPLICATION FEE WILL NOT BE APPLICABLE IN CASE OF A LAUNCH OF THE FIRST SCHEME by the Category III AIF".

⚠️ "Category III AIFs are required to INTIMATE SEBI REGARDING ANY CHANGES IN TERMS OF THE PPM ON A CONSOLIDATED BASIS, WITHIN 1 MONTH OF THE END OF EACH FINANCIAL YEAR. Such intimation SHALL ALSO BE SUBMITTED THROUGH A MERCHANT BANKER, along with the due diligence certificate. However, INTIMATION WITH RESPECT TO SPECIFIC CHANGE IN THE TERMS OF PPM... MAY BE FILED DIRECTLY WITH SEBI".

8.1 The Large Value Fund exemptions

8.2 SEBI does not approve the PPM

⚠️ The standard text: "SUBMISSION OF THE PPM TO SEBI SHOULD NOT IN ANY WAY BE DEEMED OR CONSTRUED THAT THE SAME HAS BEEN CLEARED OR APPROVED BY SEBI. SEBI DOES NOT TAKE ANY RESPONSIBILITY FOR THE ACCURACY AND CORRECTNESS OF DISCLOSURES, FACTS AND CLAIMS MADE IN THE PPM AND THE CAPABILITY AND PERFORMANCE OF THE MANAGER. IT IS MANAGER'S RESPONSIBILITY TO TAKE ALL REASONABLE CARE TO ENSURE THAT THE INFORMATION IN THE PPM IS TRUE AND ACCURATE".

8.3 The priority distribution ban

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9. First close, final close and tenure

⚠️ "In case of OPEN-ENDED schemes, the FIRST CLOSE SHALL REFER TO THE CLOSE OF THEIR INITIAL OFFER PERIOD".

⚠️ "At the date of declaration of First Close, THE CORPUS SHALL NOT BE LESS THAN Rs 20 CRORE. Sponsor commitment at the date of declaration of First Close SHALL NOT BE REDUCED, WITHDRAWN OR TRANSFERRED, AFTER DECLARATION OF FIRST CLOSE".

⚠️ "A CLOSE-ENDED Category III AIF CANNOT ACCEPT MORE INVESTORS AFTER THE FINAL CLOSE. However, AN OPEN-ENDED Category III AIF CAN ACCEPT MONEY FROM THE INVESTORS AT ANY TIME AFTER THE INITIAL OFFER PERIOD".

9.1 Tenure

⚠️ "Existing schemes which have DECLARED THEIR FIRST CLOSE BEFORE NOVEMBER 17, 2022, MAY CONTINUE TO CALCULATE THEIR TENURE FROM THE DATE OF FINAL CLOSE".

9.2 The Fund LMN worked example

⚠️ Fund LMN, a close-ended Category III AIF with a 5-year tenure, filed its PPM on 1 June 2023 and received SEBI approval on 15 September 2023 for "LMN Growth Fund I" with commitments of Rs 300 crore.

• ⚠️ "Fund LMN will need to DECLARE FIRST CLOSE ON OR BEFORE 31ST MAY 2024".
• ⚠️ **If first close is declared on 15 November 2023, the 5-year tenure runs to 14 November 2028.
• ⚠️ With net assets of Rs 600 crore on 14 November 2028, "the scheme is ELIGIBLE FOR EXTENSION FOR TWO MORE YEARS TILL NOVEMBER 14, 2030... The approval CAN BE SOUGHT FOR ONE YEAR AT A TIME AND MAXIMUM OF TWO SUCH EXTENSIONS ARE ALLOWED".
• ⚠️ "Approval must be sought from investors having units WORTH AT LEAST Rs 400 CRORE (i.e. TWO-THIRDS OF THE INVESTORS BY VALUE)".

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10. Dematerialisation

⚠️ "Units already issued to existing investors WHO HAVE NOT PROVIDED THEIR DEMAT ACCOUNT DETAILS SHALL BE CREDITED TO A SEPARATE DEMAT ACCOUNT NAMED 'AGGREGATE ESCROW DEMAT ACCOUNT'... As and when investors provide their demat account details, units held in the Aggregate Escrow Demat Account SHALL BE TRANSFERRED TO THE RESPECTIVE INVESTORS' DEMAT ACCOUNTS WITHIN 5 WORKING DAYS. NO OTHER TRANSFER OF UNITS FROM/WITHIN THE AGGREGATE ESCROW DEMAT ACCOUNT IS PERMISSIBLE".

⚠️ Investments too: "ANY INVESTMENT MADE BY CATEGORY III AIFs ON OR AFTER JULY 01, 2025 SHALL BE HELD IN DEMATERIALIZED FORM ONLY, IRRESPECTIVE OF WHETHER THE INVESTMENT IS MADE DIRECTLY IN THE INVESTEE COMPANY OR IS ACQUIRED FROM ANOTHER ENTITY".

⚠️ Exceptions: instruments NOT ELIGIBLE FOR DEMATERIALISATION · investments held by a LIQUIDATION SCHEME not available in demat form · such others as SEBI may specify.

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11. Open-ended versus close-ended

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12. Listing and Direct Plans

12.1 Listing

⚠️ The four steps: application to the exchange with documents and fees → EXCHANGE GRANTS IN-PRINCIPLE APPROVAL → the AIF SEEKS SEBI APPROVAL → after SEBI approval, THE EXCHANGE GRANTS FINAL APPROVAL AND LISTS THE UNITS.

12.2 Direct Plan

⚠️ "Schemes of Category III AIFs SHALL HAVE AN OPTION OF 'DIRECT PLAN' FOR INVESTORS. Similar to Mutual Funds, such direct plan SHOULD NOT ENTAIL ANY DISTRIBUTION FEE OR PLACEMENT FEE".

Three rules in one paragraph, and all three are examinable: a direct plan must exist; anyone already paying a separate fee to an intermediary goes direct only; and distribution fee is trail only, never upfront, and paid out of the management fee.