A primer on Alternative Investment Funds (AIF)

The Indian Startup scene has had a crazy run in the recent past. News about million dollar funding were flashed out by the media and they never failed to get attention.

Seed funds driven by Angles Investors, VCs or Venture Capitalists and Private Equity (PE) – all various forms, meant to fund the startups at various stages.

Given the pace at which deals are being done and some wonderful exits, it will be safe to say that they are emerging as an alternative source of funding (apart from banks and financial institutions).

So far, so good. But what is still left to imagination is that is there any way such entities (Angles, VCs etc) are regulated. How do they raise money? From whom? What are the provisions of the law? What recourse do the funded companies have, if any?

These questions took me down to research and find out more truth behind all this. I share with you some of the details here.

The VCs and Angel Investors come under the category of Alternative Investment Funds (AIF) and yes, these are regulated by SEBI. The regulation governing the VCs and Angel investors is SEBI (Alternative Investments Funds) Regulations, 2012.

However, the regulations are not limited to governing just VCs and Angel Investors. There is much more.

In this post, I will take you through the basic concepts of Alternative Investments Funds in an easy-to-understand manner and in the form of FAQs.

Read on.

What is an AIF?

An AIF is a pool of capital collected from private investors, commonly known as private funds. The AIF has schemes through which the capital is invested for the benefit of investors. The scheme has a defined objective.

Since they are non-retail investment funds, AIFs do not invite public to pool in money.

AIFs raise funds through private placement by issue of information memorandum or placement memorandum. This placement memorandum has all the information about the scheme.

The investors pooling in money are sophisticated, well informed and experienced individuals who are willing to take high risk of investing. The investors can be Indians or NRIs or foreigners.

VCs, Angel Investors, private equity funds, etc. are examples of AIFs.

AIFs invest in start ups, unlisted companies, small and medium enterprises (SMEs), etc. Primarily, the AIFs invest in unlisted or illiquid securities. Some of the categories of AIFs also follow complex trading strategies and employ leverage including investments in derivatives.

What is the legal structure of AIFs?

AIFs can be incorporated in the form of a trust or a company or a limited liability partnership (LLP) or a body corporate. Most of the AIFs registered with SEBI are in the form of a trust. The reason being that there is more flexibility and lesser hassles of administration and compliance and more tax benefits.

What are not AIFs?

As AIFs are privately pooled investment vehicle, the following are not AIFs:

Mutual funds
Collective Investment schemes
Portfolio Management Schemes
Family trusts set up for benefit of relatives
Gratuity trusts set up for benefits of employees
ESOP trusts
Holding companies, holding shares of subsidiary companies.

Are there any types of AIFs?

Yes, it is called categories of AIF. There are three categories and the applicant who wants to get registered with SEBI as AIF has to apply in one of the categories.

Here are the details:

What do the investors get in return?

The investors get units of the fund or the scheme. Unit means beneficial interest in the AIF or a scheme of AIF. The funds are raised by issue of units. Units include shares or partnership interest.

Units of closed-ended AIFs can be listed on a stock exchange.

The AIF can launch various schemes. However, each scheme has to be registered with SEBI 30 days prior to its launch (10 days in case of angel funds) and fees paid.

What is the corpus? Is there any limit for number of investors or investment amount?

“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.

The following are the requirements for a scheme:

So, if you are planning to start an Angel Fund or VC you need a Category I AIFs and for Hedge funds you need Category III AIF.

We will cover more information about AIFs in the upcoming article.

If you have any queries or feedback you can add in comments section or write to me at kruti@cskruti.com