Alternative Investment Funds (AIF)

In India alternative investment funds (AIFs) are a relatively new concept and they have been described in detail in Regulation 2 (1) (b) SEBI (Alternative Investment Funds) Regulation, 2012. As per the current definition, AIFs are a privately held and managed pool of investment fund of either domestic or foreign origin. AIFs, as per current regulations, are investments that are organised in the form of an LLP (limited liability partnership), corporate body, company or trust.

For all intents and purposes, SEBI currently recognizes AIFs as private investment funds which are not covered by the current jurisdiction of any regulatory body currently operating in India. Being a private investment fund, AIFs are not available through IPOs or other forms of public issue which are applicable to Collective Investment Schemes and Mutual Funds that are registered with SEBI. Thus AIF regulations are completely separate from other fund management regulations including but not limited to SEBI (Mutual Funds) Regulations, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999. As per existing AIF regulations, these private investment funds have been divided into 3 unique categories – Category I, Category II and Category III and the minimum qualifying amount for these schemes is Rs. 20 crores. The only exception to this rule is angel funds that have lower qualifying criteria in terms of fund corpus.

Types of alternative investment funds in India

Category I Alternative Investment Funds

Category I AIFs are specifically targeted at making investments in SMEs, early stage ventures, social ventures as well as start-up ventures in key sectors as they are considered to be economically or socially desirable according to the government. Being socially desirable initiatives, profit may or may not be a motive of Category I AIFs. Examples of Category I AIFs include angel funds, infrastructure funds, social venture funds, SME funds and venture capital funds.

Category II Alternative Investment Funds

According to the present form of the SEBI (Alternative Investment Funds) Regulation, 2012, any AIFs that are not covered under Category I and Category III definitions are classified as Category II AIFs. Unlike Category III AIFs, Category II AIFs are close ended in nature and not allowed to utilise leverage or borrowing mechanisms to generate capital for making investments capable of generating future returns/profits. However a Category II AIF is allowed to borrow or use leverage strategies to meet financial obligations for day to day operations.