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Alternative Investment Fund Registration
Alternative Investment
Fund Registration
By - Himani Srivastava
What is an Alternative Investment?
An alternative investment is a financial asset that does not fall into one of the
conventional investment categories.
Conventional categories include stocks, bonds, and cash. Most alternative
investment assets are held by institutional investors or accredited, high-net-worth
individuals because of their complex nature, lack of regulation, and degree of risk.
Alternative investments include private equity or venture capital, hedge funds,
managed futures, art and antiques, commodities, and derivatives contracts. Real
estate is also often classified as an alternative investment.
What is an Alternative Investment Fund (AIF)?
Alternative Investment Fund comprises pooled investment funds which invest in venture
capital, private equity, hedge funds, managed futures, etc. In simpler terms, an AIF
refers to an investment which differs from conventional investment avenues such as
stocks, debt securities, etc.
Alternative Investment Fund is described under Regulation 2(1)(b) of the Regulation Act,
2012 of Securities and Exchange Board of India (SEBI). AIF can be established in the form
of a company or a corporate body or a trust or a Limited Liability Partnership (LLP).
Generally, high net worth individuals and institutions invest in Alternative Investment
Funds as it requires a high investment amount, unlike Mutual Funds.
How to get registered as an Alternative
Investment Fund
Step 1
The Applicant for grant of registration as an Alternative Investment Fund
under SEBI (Alternative Investment Funds) Regulations, 2012 should make an
application to SEBI in Form A as provided in the Regulations along with all the
necessary documents.
Step 2
Generally on receipt of Application, the applicant will receive a reply from
SEBI within 21 working days. The time taken for registration however, depends
on how fast the requirements are complied with by the applicant.
How to get registered as an Alternative
Investment Fund
Step 3
The applicant is advised to go through the SEBI (Alternative Investment Funds)
Regulations, 2012 for checking the eligibility criteria and such other details which
may help expedite the registration process
Step 4
The applicant must mention in the covering letter as to whether:
a) It is registered with SEBI as a Venture Capital Fund. If yes, provide details.
b) It has been undertaking the activities of an AIF prior to such application. If yes,
provide details.
c) It is applying for registration of a new fund.
How to get registered as an Alternative
Investment Fund
Step 5-
As an integral part of the registration process, the applicant will submit the
following a. Form A appropriately filled, numbered, duly signed and stamped. b.
Application fees of Rs.1,00,000/- by way of bank draft in favour of “The Securities
and Exchange Board of India”, payable at Mumbai.
Step 6-
The applicant shall also make an online application in terms of the
guidelines as prescribed by SEBI from time to time.
TYPES OF ALTERNATIVE INVESTMENT FUNDS
AIFs are classified into three broad categories:
Category I:
Funds which invest in StartUps, Small and Medium Enterprises (SMEs) and new businesses which
have high growth potential and are considered socially and economically viable, are part of this
category. These funds have been a lifeline to already thriving startups starving for capital.
Category II
Funds investing in various equity securities and debt securities come under this category. All those
funds that are not described under category I and III by SEBI, fall under category II. No incentive or
concession is given by the government on investment in these funds.
Category III
Funds which aim at short term returns fall under this category. They employ various complex and
diverse trading strategies to achieve their goal of short term capital appreciation. There is no
specific incentive or concession given by the government on investment on these funds as well.
AIF – Category 1
Venture Capital Fund (VCF)
Venture Capital Funds invests in StartUps which have high growth potential but facing
investment crunch in the initial phase and need funding to establish or expand their business.
Since it is difficult for new businesses and entrepreneurs to raise funding through the capital
markets Venture Capital Funds become the most sought after solution for their financing
needs.
VCFs pool in money from investors who want to make equity investments in ventures. They
invest in multiple startups, depending on their business profiles, assets’ size, and phase of
product development. Unlike mutual funds or hedge funds, venture capital funds focus on
early-stage investment.
AIF – Category 1
Infrastructure Fund(IF)
The fund invests for the development of public assets such as road and rail
infrastructure, airports, communication assets etc.
Investors who are bullish on the infra development in the coming times can invest in
the fund since the infrastructure sector has high barriers to entry and relatively low
competition.
Returns from investing in Infrastructure Fund can be a combination of capital growth
and dividend income. When an Infrastructure Fund invests in socially desirable/viable
projects, the government may also extend tax benefits on such investments.
AIF – Category 1
Angel Fund
This fund is a type of Venture Capital fund where fund managers pool money from
numerous “angel” investors and invest in budding startups for their development. As
and when the new businesses become lucrative, investors get the dividends.
In the case of Angel Funds, units are issued to the angel investors. An “angel investor”
refers to an individual who wants to invest in an angel fund and brings in business
management experience, thus guiding the startup in the right direction.
These investors typically invest in firms which are generally not funded by established
venture capital funds because of their growth uncertainty.
AIF – Category I
Social Venture Fund
Socially responsible investing has led to the emergence of Social Venture Fund
(SVF) that typically invests in companies that have a strong social conscience
and aim to bring a real change in the society.
These companies focus on making profits and solve environmental as well as
social issues simultaneously. Even though it is a kind of philanthropic
investment, one can still expect returns because the firms would still make
profits.
Social Venture Fund generally invests in projects based out of developing
countries as they have great potential for growth as well as social change.
Such investments also bring the best managerial practices, technology and
vast experience on the table which makes it a win-win deal for all
stakeholders including investors, enterprises and society
AIF – Category II
Private Equity (PE) Fund
PE funds basically invest in unlisted private companies and take a share of
their ownership. Since unlisted private companies can not tap capital through
the issuance of equity or debt instrument, they look out for PE funds.
Further, these companies present its investors a diversified portfolio of
equities which essentially, lowers the risk to the investor. A PE fund typically
has a fixed investment horizon ranging from 4 to 7 years. After 7 years, the
firm expects that it would be able to exit the investment with a good amount
of profit.
AIF – Category II
Debt Fund
This fund primarily invests in debt instruments of listed as well as unlisted companies.
Companies that have low credit score generally release high yield debt securities
accompanies with high risk. So companies with high growth potential, good corporate
practices but facing capital crunch can be a good investment option for debt
fund investors.
As per the SEBI regulations, the amount invested in Debt Fund cannot be utilised for
the purpose of giving loans, as Alternative Investment Fund is a privately pooled
investment vehicle.
AIF – Category II
Fund of Funds
As the name suggests, this fund is a combination of various Alternative
Investment Funds. The investment strategy of the fund is to invest in a
portfolio of other AIFs rather than making its own portfolio or deciding what
specific sector to invest in.
However, it should be kept in mind that Fund of Funds under AIFs cannot
issue units of fund publicly, unlike Fund of Funds under Mutual Funds.
AIF – Category III
Hedge Fund
A hedge fund pools capital from institutional and accredited investors and
invests in domestic as well as international markets to generate high returns.
They take up leverage to a great extent and have aggressive management of
their investment portfolio. Hedge funds are relatively less regulated as
compared to its counterparts such as mutual funds and other investment
vehicles.
However, they are expensive relative to other financial investment
instruments. Hedge Funds generally charge 2% as the asset management fee
and take up 20% of the profits earned as a fee.
AIF – Category III
Private Investment in Public Equity Fund (PIPE)
It is a privately managed pool of privately sourced funds earmarked for public
equity investments.
Private investment in public equity refers to buying shares of publicly traded
stock at a discounted price. This enables the investor to purchase a stake in
the company, while the company selling the stake receives capital infusion to
grow its business.
Thank You
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