Getting Registered and Getting Funded

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Key terms in this chapter

Accreditation Agency

A subsidiary of a recognised stock exchange or of a depository, or any other entity specified by SEBI, responsible for verifying documents, processing applications, issuing certificates, maintaining data and verifying accreditation status.

Accreditation validity

Two years where the applicant met all criteria for the preceding one year or is a newly incorporated entity meeting the net-worth criteria at application; three years where the criteria were consistently met in each of the two preceding financial years.

Accredited Investor

A person granted a certificate of accreditation by an accreditation agency, entitling him to flexibility in the minimum investment amount and concessions from specific regulatory requirements, subject to conditions.

Accredited Investors only (AI-only) Fund

An AIF or scheme in which each investor other than the Manager, Sponsor and employees or directors is an Accredited Investor, with no minimum ticket. AI-only Funds include LVFs, and the trustee's obligations are carried out by the Manager.

Angel fund investment limits

Not less than Rs 10 lakh and not more than Rs 25 crore in one investee company including follow-ons; only in start-ups not promoted by a corporate group with turnover above Rs 300 crore; with a one-year lock-in reduced to six months on a third-party sale.

Angel fund manager commitment

A continuing interest in each investment of not less than 0.5 per cent of the amount invested or Rs 50,000, whichever is higher, and not through waiver of management fees.

Angel investor

An accredited investor, or key management personnel of an angel fund or its manager, who invests in an angel fund. Angel funds raise money only by issuing units to accredited investors, with no minimum value of investment.

Associate (AIF definition)

A company, LLP or body corporate in which a director, trustee, partner, Sponsor or Manager of the AIF, or a director or partner of the Manager or Sponsor, holds individually or collectively more than fifteen per cent of its paid-up equity share capital or partnership interest.

Automatic and Approval Routes

The Automatic Route allows investment without prior approval from DPIIT, RBI or other government departments; where it is unavailable, prior permission must be obtained from sector-specific competent authorities, with DPIIT identifying the authority through its Foreign Investment Facilitation Portal.

Category I AIF

Invests in start-ups, early-stage ventures, social ventures, SMEs, infrastructure or other sectors the government and regulators consider socially or economically desirable - including Venture Capital, Social Impact, SME, Angel, Infrastructure and Special Situation Funds and the Corporate Debt Market Development Fund.

Category II AIF

A fund prohibited from taking leverage or borrowing except as prescribed by SEBI, and which falls in neither Category I nor Category III - typically private equity funds and debt funds.

CDS permissions by category

Category I AIFs may buy CDS on underlying debt investments only for hedging; Category II AIFs may buy or sell, selling only by earmarking unencumbered Government bonds or Treasury bills equal to the CDS exposure.

Commitment Period

The pre-defined period in a close-ended fund over which the investment manager draws committed capital through capital calls - usually the first three years of the fund tenure.

Compulsory registration

All existing and proposed AIFs domiciled in India by virtue of being incorporated in India must register with SEBI. Existing schemes may complete their agreed tenure but shall not raise fresh monies other than commitments already made until registration is granted.

Corporate Debt Market Development Fund (CDMDF)

A Category I AIF constituted as a trust with a fifteen-year close-ended tenure, acting as a backstop facility to purchase investment grade corporate debt securities during market dislocation, funded by asset management companies and specified debt-oriented mutual fund schemes.

Credit Default Swap

A credit derivative contract in which the protection seller commits to pay the protection buyer on a credit event with respect to a reference entity, in return for periodic premium payments until maturity or the credit event, whichever is earlier.

Deemed accredited investors

Central and State Governments, developmental agencies set up under their aegis, funds set up by them, qualified institutional buyers under the ICDR Regulations, Category I foreign portfolio investors, sovereign wealth funds and multilateral agencies - none of whom need a certificate.

Default FPI limit

From 1 April 2020, for an Indian company in a sector where FDI is not prohibited, the default aggregate FPI limit is the applicable sectoral cap. Where FDI is prohibited the aggregate FPI limit is 24 per cent, and an FPI breaching the ceiling has five trading days from settlement to divest.

Drawdown-shortfall borrowing

Borrowing permitted only in an emergency and as a last recourse, where an investment is imminent and a delaying investor has not paid despite the manager's best efforts. The cost is charged only to the delaying investor, and a 30-day cooling off period runs from repayment of the previous borrowing.

Evergreening of liabilities

The prohibited and unethical practice of an investee company using amounts invested by an AIF scheme, directly or indirectly, to repay obligations or liabilities towards the manager or sponsor of the AIF or their associates.

FATCA and CRS

FATCA is the US framework under which India signed an Inter-Government Agreement on 9 July 2015, effective 31 August 2015, for the CBDT to exchange financial information with the IRS. CRS is the OECD's parallel automatic exchange framework, to which India has been a signatory since 3 June 2015.

FDI route

Non-resident investment that is strategic or long-term in nature, of not less than 10 per cent of the post-investment fully diluted paid-up capital of the investee company, governed by DPIIT policy and operationalised by RBI under the NDI Rules and FEMA Master Directions.

Fifty per cent investor exclusion

An AIF shall not buy or sell investments to an investor who has committed to invest at least fifty per cent of the corpus of the scheme, and such investor must be excluded from the voting process for the 75 per cent related-party approval.

Final Close

The end of the fund-raising process, after which a close-ended AIF cannot accept more investors. Investors joining at final close have more information than first-close investors because they can analyse the scheme's performance in the interim.

First Close

The point at which the fund first closes a round of commitments. The corpus must be at least Rs 20 crore, the sponsor commitment may not thereafter be reduced, withdrawn or transferred, and first close must be declared within twelve months from the date the AIF becomes eligible to launch its scheme.

Fit and proper criteria

Under Schedule II of the SEBI (Intermediaries) Regulations, 2008 - integrity, reputation and character; no history of restraint orders and convictions; financial competence based on net worth and solvency; and no history of being a wilful defaulter.

FPI route

Non-resident investment of not more than 10 per cent of the post-investment fully diluted paid-up capital of a listed Indian company, requiring SEBI registration under the SEBI (Foreign Portfolio Investors) Regulations, 2019.

FVCI route

Available to offshore funds making venture capital investments in eligible unlisted Indian companies, requiring SEBI registration under the FVCI Regulations, 2000. FVCIs may invest only in stipulated priority sectors except start-ups, may acquire units of a Category I AIF, and their transaction pricing is not regulated.

Grandfathering on withdrawal of consent

Where an accredited investor withdraws consent after availing regulatory concessions but before expiry of the client agreement, existing investments continue to be treated as made by an accredited investor, while all further transactions follow the ordinary Regulations. Investors in an LVF or an exclusively accredited fund cannot withdraw consent at all.

Individual accreditation thresholds

Annual income of at least Rs 2 crore; or net worth of at least Rs 7.5 crore with not less than Rs 3.75 crore in financial assets; or annual income of at least Rs 1 crore together with net worth of at least Rs 5 crore of which Rs 2.5 crore is in financial assets - with the primary residence excluded from net worth.

In-principle approval

Approval SEBI may grant where the trust deed or partnership deed is not yet registered. The deed must be registered within six months, and the applicant may accept commitments but shall not call or accept money until the Registration Certificate is received.

Investable funds

The corpus of the scheme of an AIF net of expenditure for administration and management of the fund, estimated for the tenure of the fund.

Investment on repatriation basis

An investment the sale or maturity proceeds of which are, net of taxes, eligible to be remitted outside India to the foreign beneficiary's account in fully convertible foreign exchange.

Joint holder accreditation rules

Where joint holders are parent and child, at least one must independently meet the criteria; where they are spouses, their combined income or net worth may be used; and in a partnership firm each partner must independently meet the criteria.

Junior or subordinate class of units

Units accepting lesser returns or excess losses, which only the Manager or Sponsor, multilateral or bilateral development financial institutions, State Industrial Development Corporations, and government-owned or controlled entities including central banks and sovereign wealth funds may subscribe to.

Key investment team certification

At least one key personnel in the manager's key investment team must hold NISM-Series-XIX-C or NISM-Series-XIX-D for Category I and II managers (XIX-C or XIX-E for Category III), and at least one must hold a specified professional qualification or a CFA charter - both requirements may be met by the same person. Not applicable to AI-only Funds.

Large Value Fund for Accredited Investors (LVF)

An AIF or scheme in which each investor other than the Manager, Sponsor and employees or directors of the Fund or Manager is an accredited investor and invests not less than Rs 25 crore.

Listing of close-ended AIF units

Voluntary, permitted only after final close, with a minimum tradable lot of Rs 1 crore, following exchange in-principle approval, SEBI approval and then final exchange approval. Units of Angel Funds may not be listed.

Non-debt instruments under FEMA

Equity instruments of incorporated entities, capital participation in LLPs, FDI-recognised instruments, units of AIFs, REITs and InvITs, units of mutual funds and ETFs investing more than 50 per cent in equity, the equity tranche of a securitisation structure, immovable property dealings, contributions to trusts, and depository receipts against equity.

Once an AI, always an AI

If an investor is an Accredited Investor at the time of on-boarding into an AIF scheme, he is considered an AI throughout the life of the scheme, even if he loses that status in the interim.

Overseas investment limits for AIFs

Equity and equity-linked instruments only, in unlisted offshore venture capital undertakings, within an overall USD 1,500 million limit for all AIFs on a first-come-first-served basis, with prior SEBI approval valid six months, capped at 25 per cent of the scheme's investable funds, only in companies with an Indian connection, and never in a joint venture or wholly owned subsidiary of the AIF itself.

Permissible legal structures

A company under the Companies Act, 2013; a trust under a 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 statute. A proprietorship is not permissible.

PMLA record-keeping thresholds

Cash transactions above Rs 10 lakh, integrally connected cash transactions aggregating above Rs 10 lakh within a month, receipts by a non-profit organisation above Rs 10 lakh, cross-border wire transfers above Rs 5 lakh, and all transactions using forged or counterfeit notes regardless of value.

Priority distribution model

A prohibited arrangement in which one class of investors shares more loss than its pro-rata holding because another class has priority in distribution. Schemes that adopted it may accept no fresh commitments and make no investments in a new investee company.

Private placement requirement

A fund shall not solicit or collect funds for corpus creation except by way of private placement of units - partnership interests in an LLP, or equity shares or other securities in a company.

Pro-rata rights of investors

Investors have rights pro-rata to their commitments in each investment and in distribution of its proceeds - except where an investor is excused or excluded, has defaulted, or to the extent of performance fees or carried interest shared with the manager.

Public invitation prohibition

AIFs are prohibited from making an invitation to the public to subscribe to their units, and this prohibition must be written into the memorandum and articles, trust deed or partnership deed of the applicant.

Regulatory sandbox

A live testing environment where new products, processes, services and business models may be deployed on a limited set of eligible customers for a specified period, for which SEBI may exempt an AIF or person from any or all provisions of the Regulations for not more than twelve months.

Request for Quote platform obligation

AIFs must undertake at least 10 per cent of their total monthly secondary market trades in corporate bonds by placing or seeking quotes on the RFQ platform, in one-to-one or one-to-many mode - with trades where the AIF is on both sides executed in one-to-one mode.

SEBI inspection

SEBI may appoint an Inspecting Authority to inspect an AIF's books, records and documents, on ten days' notice - waivable by written order in the interest of investors - and may thereafter bar new schemes, restrain disposal of assets, direct disposal or refund, or bar access to the capital market.

Social units

Units a social impact fund may issue to investors who have agreed to receive only social returns or benefits and no financial returns against their contribution.

Special Situation Fund conditions

Each scheme must have a minimum corpus of Rs 100 crore; minimum investment is Rs 10 crore, Rs 5 crore for an accredited investor and Rs 25 lakh for employees or directors; and an SSF may accept investment from no AIF other than another special situation fund.

Specific due diligence fronts

AIFs, managers and KMPs must conduct specific due diligence on investors availing QIB benefits, investors availing Qualified Buyer benefits, RBI-regulated lenders evergreening stressed loans through AIFs, and investment from countries sharing a land border with India.

Sponsor or Manager continuing interest

Not less than 2.5 per cent of the corpus or Rs 5 crore, whichever is lower, in each scheme of a Category I or II AIF - in the form of investment in the scheme, and not through the waiver of management fees.

Temporary leverage permission

Category I and II AIFs may not leverage at fund level except to meet temporary funding requirements for not more than 30 days, on not more than four occasions in a year, and not exceeding 10 per cent of investable funds.

Tenure computation

The tenure of a Category I or II AIF scheme is determined at application, subject to a minimum of three years, and is computed from the date of declaration of first close. Extension of up to two years needs two-thirds of unit holders by value; an AI-only Fund may extend up to five years.

Thousand-investor cap

No scheme of an AIF shall have more than 1,000 investors, with Accredited Investors excluded from the count. Where the AIF is a company, the Companies Act, 2013 limit of 200 investors in a private placement applies instead.

Twenty-five per cent concentration limit

Category I and II AIFs shall invest not more than 25 per cent of investable funds in one investee company, directly or through units of other AIFs - rising to 50 per cent for a large value fund for accredited investors.

Unhedged CDS limit

Gross unhedged CDS positions should be up to 25 per cent of the scheme's investable funds; a position taking them above that may be entered only after intimating all unit-holders.

Why Category I and II must be close-ended

Because such investments are primarily illiquid - the fund cannot sell its investments reasonably at proper exit valuations within its life cycle - so investors realise cash only when realisation events occur through sale of the underlying portfolio companies.