Alternate Investment Fund

Context: RBI has recently introduced changes for the investment by its regulated entities in Alternate Investment Funds.

About Alternate Investment Fund:

• Alternate Investment Funds are funds that pool capital from investors to invest in asset classes such as real estate, venture capital and private and public equity. 
• 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.

Under SEBI guidelines, AIFs operate in three categories: 

• Category I: AIFs invest in start-up or early-stage ventures or other areas which the government considers as economically desirable. Example: Startups, MSMEs, Infrastructure funds. 
• Category II: AIF includes real estate funds, private equity funds, and funds for distressed assets. Such funds are prohibited from raising debt except for meeting day-to-day requirements. 
• Category III: AIFs are those investing with a view to make short-term returns and include hedge funds. 

Minimum number of investors

No scheme of an AIF (other than angel fund) shall have more than 1000 investors. In case of an angel fund, no scheme shall have more than forty-nine angel investors. 

Raising of fund

• An AIF cannot make an invitation to the public at large to subscribe its units and can raise funds from the investors only through private placement. 
• An AIF may raise funds from an investor whether Indian, foreign or non-resident Indians. However, AIF (other than angel fund) shall not accept from an investor, an investment of value less than one crore rupees. 
• 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 twenty-five lakh rupees. 

Tenure of AIF:

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

Procedure of winding up of AIF:

• when the tenure of the Alternative Investment Fund or all schemes launched by the Alternative Investment Fund is over; or
• 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 
• 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 
• if the Board so directs in the interests of investors.

Note: 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. 

Open ended funds can be bought or sold anytime, the closed ended funds can be bought only during their launch and can be redeemed when the fund investment tenure is over.

Change in AIF category:

Only AIFs who have not made any investments under the category in which they were registered earlier shall be allowed to make an application for change in category. 

Report Submission:

Category I and II AIFs and the Category III AIFs which do not undertake leverage are required to submit reports to SEBI on a quarterly basis while Category III AIFs which undertake leverage are required to submit the reports on a monthly basis. 

Overseas investment:

Overseas investments by AIFs investments shall not exceed 25% of the investible funds of the scheme of the AIF subject to an overall limit of USD 500 million. 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. 

Latest change by RBI regarding investment by banks and other entities regulated by RBI in Alternate Investment Fund:

• Lenders cannot make investments in any scheme of AIFs that has downstream investments, such as hybrid instruments in a debtor company of the former. 
• However, lenders are allowed to make investments in any scheme of AIFs that has downstream equity investments in a debtor company of the former. 
• Provisioning will be required only to the extent of the investment by the lender in the AIF scheme, which is further invested by the fund in the debtor company. Earlier provisioning had to be made on the entire investment of the lender in the AIF scheme. 

For ex: earlier, if a lender invested ₹10 crore in a ₹100-crore AIF scheme, which in turn invested ₹1 crore in the debtor company of the lender, the provisioning would be on the entire ₹10 crore. But now the provisioning will be only on the ₹1 crore exposure.

Note: The RBI said investments by lenders in AIFs through intermediaries such as fund of funds or mutual funds are not included in the scope of its latest circular.