What is an AIF?

An AIF or an Alternate Investment Fund means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

In AIFs, one does not need to open a demat account this is a pooled vehicle; hence all clients investing at the same closure have similar returns experience. The tax implications are different for the different categories of AIF.

What funds do AIF not include?

AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Further, certain exemptions from registration are provided under the AIFRegulations to family trusts set up for the benefit of ‘relatives‘ as defined under Companies Act, 1956, employee welfare trusts or gratuity trusts set up for the benefit of employees, ‘holding companies‘ within the meaning of Section 4 of the Companies Act, 1956 etc.

What is the minimum investment amount for an AIF?

Rs 1 Crore.

Who should invest in an AIF?

These are specifically made for high-net-worth (HNI) or UHNIs investors with customized investment needs.

How are AIFs unique?

AIFs combines the operational ease of a mutual fund and the flexibility of a PMS making it a perfect blend geared for generating optimum performance for a stipulated investment objective. To enhance risk-adjusted performance, these products can use complex strategies like unlisted equity investments, long-short hedging style of investments etc.

How many categories of AIFs are there?

There are three categories of AIF: Category I (CAT-I), Category II (CAT-II), and Category III (CAT-III),

What is CAT-I AIF?

AIFs which invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.

What is CAT-II AIF?

AIFs which do not fall in Category I and III and which do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (Alternative Investment Funds) Regulations, 2012, fall under AIF CAT-II. Various types of funds such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.

What is CAT-III AIF?

AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Various types of funds such as hedge funds, PIPE Funds, etc. are registered as Category III AIFs.

Can an AIF opt to be close-ended or open-ended, as it desires?

No.

Category I and II AIFs are required to be close ended have a minimum tenure of three years. Category III AIFs may be open ended or close ended.

If a client has 1 Cr, he should invest in PMS or AIF? Why?

This is a very comprehensive decision which depends upon lots of other important facts and factors that differentiate PMS and AIF product structures, apart from ticket size. General answer to this question is AIF (assuming 1 cr is not less than 20-25% of one’s overall portfolio allocation), but, for a better, specific, and comprehensive discussion, pls book your appointment with our PMS & AIF specialists.

How are AIFs taxed in India?

Technically, AIFs are classified in 3 categories. Cat I and Cat II AIFs have been accorded a pass through status, which essentially means that income accruing from such funds is taxed at the investor level and not the fund level with a requirement to deduct 10% on income credited to the investor. The Cat III AIFs have still not been accorded a pass through status, and are taxed at the investment fund level and the tax obligation doesn’t pass through to the investor. In CAT 3 tax rate depends upon the investment strategy and asset allocation of the fund (where the income of the fund is characterized as income under the head Profits or gains from business or profession, the investment fund is taxed in respect to such income at the maximum marginal rate of tax).
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What are the fees / profit sharing structure in an AIF?

AIFs follow variety of share classes and so offer variety of fee structures. Generally, profit sharing is 12% to 15% above 8% to 10% huddle.

Till what % is the fees negotiable?

In AIFs, there is a pooled structure, and hence no negotiation on management fees is possible. But, set up fees can be waived off completely.

What is an Angel Fund & how can AIFs invest in it?

Angel Fund is a sub-category of Venture Capital Fund under Category I- Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of Chapter III-A of AIF Regulations.

In case of an angel fund, it shall only raise funds by way of issue of units to angel investors.

Who is an Angel Investor?

An Angel Investor is any person who proposes to invest in an angel fund and satisfies one of the following conditions, namely,

(a) an individual investor who has net tangible assets of at least two crore rupees excluding value of his principal residence, and who:

(i) has early stage investment experience, or

(ii) has experience as a serial entrepreneur, or

(iii) is a senior management professional with at least ten years of experience;

(‘Early stage investment experience’ shall mean prior experience in investing in start-up or emerging or early-stage ventures and ‘serial entrepreneur’ shall mean a person who has promoted or co-promoted more than one start-up venture.)

(b) a body corporate with a net worth of at least ten crore rupees; or

(c) an AIF registered under these regulations or a VCF registered under the SEBI (Venture Capital Funds) Regulations, 1996.Angel funds shall accept, up to a maximum period of 3 years, an investment of not less than Rs 25 lakh from an angel investor.

What is a Debt Fund?

A Debt Fund is an Alternative Investment Fund (AIF) which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund. These funds are registered under Category II.

In this regard, it is clarified that, since Alternative Investment Fund is a privately pooled investment vehicle, the amount contributed by the investors shall not be utilised for purpose of giving loans.

What is a Fund of Funds (FoF) in the context of an AIF?

Fund of Funds, in general parlance as gathered from publicly available sources s an investment strategy of holding a portfolio of other investmentfundsrather than investing directly in stocks, bonds or other securities.

In the context of AIFs, a FoF is an AIF which invest in another AIF.

How can an AIF be set up, legally?

An AIF under the SEBI (Alternative Investment Funds) Regulations, 2012 can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate. Most of the AIFs registered with SEBI are in trust form.

Define the term ‘Corpus’ for an AIF.

“Corpus’’ is the total amount of funds committed by investors to the AIF by way of a written contract or any such document as on a particular date.

Is there a limit on the number of investors an AIF can have?

No scheme of an AIF (other than an angel fund) shall have more than 1000 investors. (Please note that the provisions of the Companies Act, 1956 shall apply to the AIF if it is formed as a company).

In case of an angel fund, no scheme shall have more than forty-nine angel investors.

Who is the “Sponsor” in an AIF?

Sponsor is any person(s) who set up the AIF and includes promoter in case of a company and designated partner in case of a limited liability partnership.

Is is necessary for the Sponsor/management to have skin in the game?

In order to ensure that the interest of the Manager/Sponsor is aligned with the interest of the investors in the AIF, the AIF Regulations require that the sponsor/manager shall have a certain continuing interest in the AIF which shall not be through the waiver of management fees.
For Category I and II AIFs, such interest must be not less than two and half percent of the corpus or five crore rupees, whichever is lesser and for Category III AIFs, the interest must be not less than five percent of the corpus or ten crore rupees, whichever is lesser. For angel funds, such interest shall be not less than two and half percent of the corpus or fifty lakh rupees, whichever is lesser.

Can AIFs launch schemes?

Yes, an AIF may launch schemes subject to filing of placement memorandum with SEBI.

Can the schemes be of any size?

No. Each scheme of the Alternative Investment Fund (other than angel fund) shall have corpus of at least Rs 20 crores. In case of an angel fund, it shall have a corpus of at least Rs 10 crores.

What is the validity of the certificate of registration of an AIF?

The certificate of registration of an AIF shall be valid till the AIF is wound up.

What is the status of the VC Funds registered under SEBI (Venture Capital Funds) Regulations, 1996 after notification of AIF Regulations?

Venture Capital (VC) Funds registered under SEBI (Venture Capital Funds) Regulations, 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up and such funds shall not launch any new scheme after notification of the AIF Regulations. Further, the existing fund or scheme shall not increase the targeted corpus of the fund or scheme after notification of AIF Regulations. However, VCFs may seek re-registration under these regulations subject to approval of two-thirds of their investors by value of their investment.

Can AIFs make an invitation to the public to subscribe to its securities?

No. AIFs are privately pooled investment vehicles. AIFs shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called. As an eligibility criterion for registration as an AIF, the applicant is required to be prohibited by its memorandum and articles of association/ trust deed/ partnership deed from making an invitation or solicitation to the public to subscribe to its securities.

What is the maximum limit prescribed for Overseas Investment by Alternative Investment Funds?

Overseas investments by AIFs investments shall not exceed 25% of the investible funds of the scheme of the AIF subject to overall limit of USD 500 million (combined limit for AIFs and Venture Capital Funds registered under the SEBI (Venture Capital Funds) Regulations, 1996).

What is the time limit available for AIFs to make overseas investments?

The AIF shall have a time limit of 6 months from the date of approval from SEBI for making allocated investments in offshore venture capital undertakings. In case the applicant does not utilize the limits allocated within the stipulated period, SEBI may allocate such unutilized limit to other applicants.

Can an AIF change its category pursuant to registration?

Yes. As per Circular No. CIR/IMD/DF/12/2013 dated 07th August, 2013, only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make application for change in category.

If the AIF has received commitments/ raised funds prior to application for change in category, the AIF shall be required to send letters/emails to all its investors providing them the option to withdraw their commitments/ funds raised without any penalties/charges. Any fees collected from investors seeking to withdraw commitments/ funds shall be returned to them. Partial withdrawal may be allowed subject to compliance with the minimum investment amount required under the AIF Regulations.

Can AIFs raise funds of any amounts from the investor?

An AIF may raise funds from any sophisticated investor whether Indian, foreign or non-resident Indians, who inter alia undertake risk of investing in primarily unlisted or illiquid securities. However, AIF (other than angel fund) shall not accept from an investor, an investment of value less than Rs 1 Crore. In case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be Rs 25 lakhs.

Is there a cap on the amount of leverage that can be undertaken by a Category III AIF?

Yes. As per circular No. CIR/IMD/DF/10/2013 dated 29th July, 2013, the leverage of a Category III AIF shall not exceed 2 times the NAV of the fund.

How is the tenure of an AIF calculated?

The tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme.

Where are fees and charges disclosed?

Every AIF shall, in its placement memorandum, add by way of an annexure, a detailed tabular example of how the fees and charges shall be applicable to the investor including the distribution waterfall.

What is the information to be disclosed in placement memorandum in respect of information about litigations/cases?

All AIFs shall include in their placement memorandum, disciplinary history of:

(1) AIF, sponsor, manager and their Directors/partners/promoters and associates

(2) If applicant is a trust, Trustees or trustee company and its directorsSuch disciplinary history shall, inter alia, include:

(1) Details of outstanding/pending and past cases (where the person has been found guilty) of litigations, criminal or civil prosecution, disputes, non payment of statutory dues, overdues to/ defaults against banks or financial institutions, contingent liabilities not provided for, proceedings initiated for economic offences or civil offences, adverse findings with respect to compliance with securities laws, penalties levied, disputed tax liabilities, etc.

(2) any disciplinary action taken by SEBI or any other regulatory authority.

In case of operational actions such as administrative warnings/deficiency letters, the same may be grouped together and summarized. However, if the investor seeks details of the summarized portion, the same shall be provided by the AIF to the investor.

Any further litigations/cases, etc. as may arise in the course of the activities of the AIF shall be appropriately incorporated in the placement memorandum and intimated to the investors.

Can a person open a joint account in an AIF...if yes, then how many people together can do it?

An AIF may accept the following as joint investors for the purpose of investment of not less than one crore rupees:

i. an investor and his/her spouse

ii. an investor and his/her parent

iii. an investor and his/her daughter/son

With respect to the above investors, not more than 2 persons shall act as joint-investors in an AIF. In case of any other investors acting as joint investors, for every investor, the minimum investment amount of one crore rupees shall apply.

Joint investors shall mean where each of the investor contributes towards the AIF

What is the procedure for winding up an AIF?

In terms of Regulation 11(2), information memorandum or placement memorandum issued by an AIF shall inter alia include information on manner of winding up of the Alternative Investment Fund or the scheme.In terms of Regulation 29 of AIF Regulations, an Alternative Investment Fund shall be wound up:

1. when the tenure of the Alternative Investment Fund or all schemes launched by the Alternative Investment Fund, as mentioned in the placement memorandum is over; or
2. if seventy five percent of the investors by value of their investment in the Alternative Investment Fund pass a resolution at a meeting of unitholders that the Alternative Investment Fund be wound up; or
3. In case of a trust, if it is the opinion of the trustees or the trustee company, as the case may be, that the Alternative Investment Fund be wound up in the interests of investors in the units; or
4. if the Board so directs in the interests of investors.

The trustees or trustee company or the Board of Directors or designated partners of the Alternative Investment Fund, as the case maybe, shall intimate the Board and investors of the circumstances leading to the winding up of the Alternative Investment Fund. On and from the date of such intimation, no further investments shall be made on behalf of the Alternative Investment Fund so wound up.

The assets shall be liquidated, and the proceeds accruing to investors in the Alternative Investment Fund shall be distributed to them after satisfying all liabilities, within one year from the date of aforesaid intimation.

How can the investors redress their complaints against AIFs?

SEBI has a web based centralized grievance redress system called SEBI Complaint Redress System (SCORES) at where investors can lodge their complaints against AIFs.

Further, in terms of the AIF Regulations, for dispute resolution, the AIF by itself or through the Manager or Sponsor, is required to lay down procedure for resolution of disputes between the investors, AIF, Manager or Sponsor through arbitration or any such mechanism as mutually decided between the investors and the AIF.

How can an investor choose the best or the right suited AIF for his / her investment?

This is a very subjective matter. Each investor has his/her own set of risk appetite, time horizon, investment objective, and so on. Depending on such parameters, one can select the most suitable AIF for himself/herself. The best route in such a scenario would be to take professional advice & help. For a better, specific, and comprehensive discussion, pls book your appointment with our PMS & AIF specialists

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