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This article is written by Puneet Chabra, here he discusses different types of Alternative Investment Fund.

What is Alternative Investment Fund

As per the definition has given in Regulation 2(1)(b ) of Security and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. it is a private investment fund whether raised from or foreign sources, in the form of equity, trust or a company or a body corporate or a Limited liability Partnership.

What is the procedure of registering under AIF?

  • Alternative Investment Fund under SEBI (Alternative Investment Funds) Regulation, 2012 provides that an application should be made to Security and Exchange Board of India in  Form A attesting the all necessary documents required for the purpose ;
  • After submitting the application to the Board,  the Board within 21 Days will reply to the application ;
  • Before admitting and further carrying the registration process all the eligibility criteria of getting an application registered need to be accomplished;
  • If the person making application was already registered with SEBI as Venture Capital, then he must provide all necessary details to the Board.
  • As a mandatory part of the registration process, the applicant will submit the following documents i.e. Form A properly signed and stamped, Fees of Rs 1,00,000/ according to the provisions prescribed in the Regulation.
  • For registering, the person shall also make an online application as provided by the SEBI. After the prerequisite conditions got fulfiled and the application got approval the applicant will Grant a Certificate of Registration.

After the application gets approval, the applicant has to pay the registration fee of Rs 5,00,000 if the applicant is not registered with SEBI as Venture Capital and for re-registering with SEBI have to pay Rs 1,00,000 through the demand draft. When the registration process gets over the applicant will grant a certificate of registration to the applicant.

When does the certificate can be granted by the SEBI

Under Section 6 of the Alternative Investment Fund Mechanisms regulation following are the conditions for granting the certificate of registration of these funds

  1. Alternative Investment Funds shall have to satisfied all the conditions of the Regulation;
  2. Alternative Investment Funds shall not  perform operations other than which is regulated by the act;
  3. Alternative Investment Fund shall inform any activity  to the Board if any documents submitted are false or does not comply with the conditions of the act;
  4. An Alternative Investment Fund has been granted a particular category after the registration does not change its category with the prior approval of the Board.

Post registration process

Once the applicant gets approval and gets registered with AIF, it should be notified regularly with the requirements mentioned. If there is a need for updating, checking of circulars then the AIF can visit on SEBI website.

If there is a need for any necessary changes with the registration of AIF, then it should be notified to SEBI within a reasonable amount of time.

What are the different Categories of Funds included under the Alternative Investment Fund?

    CATEGORY 1(AIF)

  • Venture Capital Funds
  • SME Funds
  • Social Venture funds
  • Infrastructure Funds
  • And other Such other funds which may be prescribed under the regulation.
  • “Angel Investment Funds” introduced by SEBI  in 2013, under the head of Venture Capital.
      CATEGORY 2(AIF)

  • Funds which is not included under “Category 1 ”and “Category 3”
  • And other funds which are not used for borrowing and only for carrying day to day operation
  • Private Equity Funds and  Debt Funds.
    CATEGORY 3

  • Hedge Funds
  • Funds which trade for the intention of making short term returns.
  • Other open funds which are specified by the Regulation.
  • Other funds provided that no incentives or concessions were given by the Government and Regulations as mentioned.

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Category 1 of Alternative Investment Fund

Venture Capital

It is a Fund which specifically invests in securities which are unlisted or early stage capital undertakings which mainly deals in new products, new services, and technologies or intellectual rights.

Venture Capital undertakings mean a company in India which is

Which is unlisted in the stock exchange companies at the time of making investments.

Which is carrying business of production of the article and other services and does not include following categories of activities like not providing loans, finance of gold, activities which are not to be carried under an industrial policy of Government of India and any other activities as may be specified by the Board.

Conditions to be fulfilled while investing in Venture Capital

Before investing in Venture Capital, the following conditions shall apply –

  1. Total amounts should be invested in equity shares or equity instrument, which should be unlisted.
  2. Not more than two-thirds of the total amount should be invested in the event of a debt in a venture capital listed. The equity shares of the Sick industrial company who are  listed
  3. Preferential allocation, including through qualified institutional placement, of equity shares or equity-linked instruments of a listed company for a period of one year.;
  4. Special other companies and other authorities which are created by the regulators according to the provisions contained in the Act.

SME funds

SME funds are that Alternative Investment Fund which usually invests in unlisted securities of companies which are Micro, Small and Medium Enterprises incorporated under the Act of Small, Medium and enterprises development Act 2006.

Conditions for SME funds

The following conditions need to be satisfy with investing in SME funds

  1. At least 75% of the total amount should be invested in unlisted securities of small, medium and micro companies.
  2. Such funds need to enter a legally binding agreement to issue that portion which is not subscribed in the process mentioned under Chapter XB of SEBI regulations of 2009.
  • Those funds shall share all information and details of securities within a period of 2 days.
  • Such investment shall be for a period of at least 1 year from the date of investment.

Social venture

Social venture means those bodies, companies or limited liability partnerships formed for the purpose of promoting social welfare. It also includes charitable trusts, companies formed specifically for this purpose, companies registered under Section 25 of the Companies Act, 1956, etc.

Conditions for a Social Venture

Following conditions shall apply to social venture funds

  1. At least 75 per cent of the total amount to be invested in unlisted securities should be granted, but only up to 75 per cent should be permissive.
  2. Social venture funds can be granted to societies or body established for the purpose but it should be mentioned in its placement memorandum
  3. Social venture funds can accept returns from the investors who invested in these funds.

Infrastructure funds

Infrastructure funds are the Alternative Investment Fund, which specifically invests in unlisted securities of debt companies or companies formed specifically for operations, for the development of infrastructure projects.

Conditions For an Infrastructure Funds

  1. There shall be at least 75% of the total amount to be invested in unlisted securities or in a special company constituted for this purpose.
  2. Infrastructure Funds shall be invested in those listed companies specifically formed for the development and operation of infrastructure projects.

Category 2 of Alternative Investment Fund

Category 2 of the Alternative Investment Fund includes those funds which are not in the first and third categories of Alternative Investment Funds and which also include private equity funds and debt funds.

  1. Funds falling under 2 categories of alternative investment funds, specifically in non-listed investor companies and by another mechanism as specified in the investment memorandum.
  2. These not be engaged for borrowing capital for an investment expecting the profits made to be greater than the interest payable except for the temporary funding, not more than 30 days and also not more than 4 occasions in a single year and not more than 10% of the total amount invested.
  3. The Category 2 funds may be hedged in accordance with the guidelines provided by the SEBI.
  4. These funds may also enter into an agreement to subscribe to the unsubscribed parts under Chapter XB of the SEBI Regulations.

Private Equity Funds and its types

Private Equity Fund refers to an Alternative Investment Fund which specifically deals in Equity or also according to the interest of companies of which these funds are created.

Different types of Private Equity Funds

There are mainly two types of Private Equity Funds

  • Venture Capital
  • Leverage Buyout

Category 3 of Alternative Investment Fund

Category 3 funds include hedge Funds and Debt Funds.Alternative Investment Fund Category 3 shall not be included in regulation 3 and 3A of SEBI regulation 1992 in case of investment rules need to satisfy certain conditions

  • If any question relating to the acquisition or transaction is involved, it should be disclosed within 2 working days where the investor company is listed.
  • Such investment shall be made and fixed for a period of one year from the date of the investment.

Hedge Funds

Hedge funds which are used to make an investment in order to make short term returns and for which no concession has been specified by the government or other law as specified.

Features of Hedge Funds

The hedge is a new concept in India which gets in the market of Funds in 2012 by the Securities and Exchange Board of India (SEBI).

  1. Investors
  2. Investment Latitude Fee Structure
  3. Risks
  4. Taxation
  5. Regulations

How hedge funds work

Basically, the returns from the Hedge Funds  depends upon the skill and the investor invests in the hedge funds, Funds depends and theon.Asset Regulators also play an important role in controlling the risk.

  1. Sell short: The investor waits for the price to drop so that he can buy shares at a lower value.
  2. Use arbitrage: The manager seeks to buy the shares due to ineffective prices at the point.
  3. Invest towards an upcoming event: For example, some major market events, such as acquisitions, mergers and spin-offs, can influence the investment decisions of managers.
  4. Invest in securities with high discounts: Sometimes even insolvency companies can sell the funds at lower prices. At that time, the manager can buy the shares at lower prices.

Debt Funds

Debt Fund is an Alternative Investment Fund that specifically invests in debt securities of listed or unlisted companies in accordance with the regulation specified by the Board.

Types of Debt Funds

Conditions for Category III Alternative Investment Funds.

The following conditions must be satisfied for investing in Category 3 Funds.

  1. The Funds included under Category 3 should be investing in securities of listed or unlisted companies.
  2. Category 3 funds should be borrowed only with the consent of investors and if borrowed for maximum limit it should be done with the consent of the SEBI.
  3. These Funds should be regulated, conducted, provides operational standards and other rules as directed by the SEBI.

Hedge Funds or Mutual Funds: A Comparative Study

                 Hedge  Funds

  • Hedge funds companies Charged management fee normally up to 2% and plus the performance fees up to 10-30%.
  • Investors having high worth can only invest in these funds.
  • Can make high-risk Investment.
  • Hedge Funds often goes through private placement memorandum.
  • In Hedge Funds usually, there is an investment period of one year and therefore it cannot be withdrawn at any time.
                  Mutual Funds

  • Mutual Funds charged a nominal management Fee generally 1 to 2%.
  • In Mutual Funds does not create any profit share from the invested money
  • General Public can invest in Mutual Fund
  • Performance is worse than Hedge Funds.
  • Can’t make investments.
  • On the other hand, Mutual Funds are given through prospectus of the company.
  • In Mutual Funds, there can easy to withdraw of  Funds at any time.

Conclusion

The Alternative Investment Fund(AIF) is a new, emerging concept in India and does not have strict rules related to the working of the Funds.  However, The Security and Exchange Board of India(SEBI) has laid down rules and regulations to protect investors ‘ interests, but there is some risk involved in investing in the Alternative Investment Fund( AIF). Investors need to keep a proper check on the documents involved while investing in all kinds of funds.

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