What are Alternative Investment Funds?

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What are Alternative Investment Funds?

In India, AIFs are regulated by SEBI as well as RBI and are structured as limited liability partnership, company, body corporate or trust.

As per SEBI, Alternative Investment Fund or AIF is a fund that is established or incorporated in India. It should be in the form of a trust or a company or a limited liability partnership or a body corporate which  

A) is a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, for investing it following a defined investment policy for the benefit of its investors;  

and  

B) is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. 

Simply put, AIF is like a mutual fund, with the difference being that funds are collected from sophisticated investors and invested in non-traditional asset classes such as private equity, venture capital, hedge funds, managed funds, etc.  

However, the following are not considered as AIFs: 

  • Family trusts 
  • ESOP trusts 
  • Employee welfare trusts 
  • Holding companies 
  • Securitization trusts 

 

AIFs can be classified into three categories: 

Category I AIF  

This category invests in venture capital funds, angel funds, SME funds, social venture capital funds, infrastructure funds or other sectors or areas which the government or regulators consider as socially or economically desirable.  

Category II AIF 

Investments that do not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day to day operational requirements are included in this category. 

Category III AIF 

This category employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.  

Rules and Regulations 

In India, AIFs are regulated by SEBI as well as RBI and are structured as limited liability partnership, company, body corporate or trust. Moreover, investments in AIF are subject to the following conditions -

  • The fundraising from investors, irrespective of whether they are Indian, foreign or non-resident Indians, shall be done by way of issue of units. 
  • The minimum corpus amount for all AIF schemes shall be Rs 20 crore and each investor should investment at least Rs 1 crore.