01
INTRODUCTION
02
CATEGORIES
05
CHALLENGE
03
REGULATIONS
04
TAXATION
01 02 03 04
INTRODUCTION
ALTERNATIVE INVESTMENT FUNDS
• “Alternative Investment Fund” means any fund established or incorporated in India in the
form of a trust or a company or a limited liability partnership or a body corporate which,
• (i) is a privately pooled investment vehicle which collects funds from investors, whether
Indian or foreign, for investing it in accordance with a defined investment policy for the
benefit of its investors; and
• (ii) 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.
Exemptions:
• Family trusts
• ESOP trusts
• Employee welfare trusts
• Holding companies
• Securitization trusts
01 02 03 04
WHY AIFs
Why AIFs?
• Greater flexibility and scope in relation to traditional asset
class
• Greater returns (comes with higher risk)
• Greater diversification, hence, low correlation
• Mode to make investments in quality unlisted companies
and high-yielding real estate through VC and PE route
• Since the equity market is richly valued, HNIs are finding
structured products in AIF space more attractive with
capital protection along with appreciation
• Helps meet investors across planning spectrum, diversifying
portfolio and reducing volatility
Entry Of AIFs In The Investment
Domain
• AIFs began in the mid to late 20th century in the US, and have
since grown into $7 trillion-plus industry across the world. In
India, though venture capital has existed for two decades, AIFs
as a distinct asset class began only after SEBI passed its 2012
regulations.
• Edelweiss Alpha Fund was the country's first AIF, launched in
June 2013, followed by DSP BlackRock Enhanced Equity Fund in
May 2014.
• Edelweiss's distressed assets fund, currently, is raising nearly $1
billion globally, of which $200-250 million has been carved out
for domestic wealth clients.
01 02 03 04
CATEGORIES
Categories of AIFs
AIFs are divided into 3 different investment
structures and requirements:
AIFs
Category 1 Category II Category
AIF AIF III AIF
Category I AIF
• Category I AIFs are funds with strategies to invest in start-up or
early stage ventures or social ventures or SMEs or infrastructure or
other sectors or areas which the government or regulators consider
as socially or economically desirable.
Sub-categories :
Venture capital funds- In September 2013, SEBI introduced ‘angel
investment funds’ as a sub-class of the venture capital fund sub-
category
– SME funds
– Social ventures funds
– Infrastructure funds
• AIFs which are generally perceived to have positive spillover effects
on the economy and therefore, SEBI, the Government of India or
other regulators may consider providing incentives or concessions
shall be classified as Category I AIFs.
• A Category I AIF of a particular sub-category may invest in the
units of the same sub-category of Category I AIFs. However,
this investment condition is subject to the further restriction
that Category I AIFs are not allowed to invest in the units of
Fund of Funds.
• Category I AIFs shall not borrow funds directly or indirectly or
engage in leverage except for meeting temporary funding
requirements for more than thirty days, on not more than
four occasions in a year and not more than 10% of its
investible funds.
Category III AIF
• Category III AIFs are funds which employ complex
or diverse trading strategies and may employ
leverage including through investment in listed or
unlisted derivatives.
• AIFs such as hedge funds or funds which trade
with a view to make short-term returns or such
other funds which are open ended and for which
no specific incentives or concessions are given by
the Government of India or any other regulator
are included in the Category III classification.
• Category III AIFs may invest in the units of Category I,
Category II and Category III AIFs. This is subject to the
restriction that Category III AIFs cannot invest in the
units of Fund of Funds;
• Category III AIFs engage in leverage or borrow
subject to consent from investors in the fund and
subject to a maximum limit as may be specified by
SEBI; and
Category II AIF
• Category II AIFs are funds which cannot be
categorized as Category I AIFs or Category III AIFs.
These funds do not undertake leverage or
borrowing other than to meet day-to-day
operational requirements and as permitted in the
AIF Regulations.
• AIFs such as private equity funds or debt funds
for which no specific incentives or concessions
are given by the Government of India or any
other regulator are included in the Category II AIF
classification.
• Category II AIFs shall invest primarily in unlisted investee companies or in units of
other AIFs as may be specified in the placement memorandum;
• Category II AIFs may invest in the units of Category I and Category II AIFs. This is
subject to the restriction that Category II AIFs cannot invest in the units of Fund of
Funds;
• Category II AIFs shall not borrow funds directly or indirectly or engage in leverage
except for meeting temporary funding requirements for more than thirty days, on
not more than four occasions in a year and not more than 10% of its investible
funds;
• Category II AIFs may engage in hedging subject to such guidelines that may be
prescribed by SEBI;
• Category II AIFs shall be exempt from Regulations 3 and 3A of the Insider Trading
Regulations in respect of investments in companies listed on SME exchange or SME
segment of an exchange pursuant to due diligence of such companies. This is
subject to the further conditions that the AIF must disclose any acquisition /
dealing within 2 days to the stock exchanges where the investee company is listed
and such investment will be locked in for a period of 1 year from the date of
investment.
Comparative study (1/2)
Comparative study (2/2)
Certain thresholds under AIF regulations
• Each AIF Scheme should have a corpus of at least Rs. 20 crores (Rs. 5 crores for Angel
Fund)
• Each investor in AIF should commit to invest at least Rs. 1 crore (Rs. 25 lakhs for Angel
Fund)
• An employee or director of the Manager of AIF can invest Rs. 25 lakhs or more
• An employee of the Manager participating in the profits/carry of the AIF need not
make any investment
• No AIF Scheme can have more than 1,000 investors (200 investors for Angel Fund)
• Category I and II are close-ended funds, while category III is open-ended
• Cat-I AIF & Cat-II AIF shall have minimum tenue of 3 years (maximum 5 years for
Angel Fund). the tenure of any AIF can be extended only with the approval of 2/3rd of
the unit-holders by value of their investment in the AIF
• While, Category III AIFs are short termed funds, as they long-short strategies
• The AIF Regulations prohibit solicitation or collection of funds except by way of
private placement. While the AIF Regulations do not prescribe any thresholds or rules
for private placement, guidance is taken from the Companies Act, 2013.
• Listing-Units of close ended Alternative Investment Fund may be listed on stock
exchange subject to a minimum tradable lot of one crore rupees. Such Listing of
Alternative Investment Fund units shall be permitted only after final close of the fund
or scheme
Registration of an AIF
Eligibility Criteria for AIF Registration:
• MOA/Trust Deed/Partnership Deed permits carrying on the activity of AIF
• Trust Deed/Partnership Deed to be registered under respective governing laws
• MOA/Trust Deed/Partnership Deed to prohibit making an invitation to the public to subscribe its securities
• The Applicant, Sponsor and Manager are “fit and proper” based on the criteria specified in Schedule II of
the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
• The key investment team of the investment manager of the AIF should have adequate experience with at
least 1 (one) key personnel having not less than 5 years of relevant experience
• Manager & Sponsor has the necessary infrastructure and manpower to discharge its activities
• The Applicant to clearly describe investment objective, investment strategy, proposed corpus, tenure and
target investors
Process of registration:
• Self-registration on SEBI online portal and online payment of Rs. 1 lakh application fee
• On receipt of login and password, uploading of Form A on SEBI portal along with final PPM and copy of
executed Trust Deed and requisite declarations/undertakings
• The entire registration process generally takes 2 to 3 months
01 02 03 04
TAXATION
Pass through status to AIFs (1/2)
• The Finance Act, 2015, extended tax pass through
status to AIFs that are registered with SEBI as Category
I AIFs or Category II AIFs under the AIF Regulations.
• They are governed by a special tax regime as provided
under Section 115UB of the Income tax Act, 1961 (the
Act)
• Any income (other than business income) earned by a
SEBI registered Category I and II AIF, is exempt from tax
in the hands of the AIF under Section 10(23FBA) of the
Act. Such income shall be taxable directly in the hands
of the investors of the AIF under Section 115UB of the
Act.
• Any income distributed by investment fund is not liable
for DDT u/s 115-0
• Any income distributed by investment fund (except
business income), TDS of 10% has to be deducted by
inv fund u/s 194 LBB
Pass through status to AIFs (2/2)
• The investors shall be chargeable to tax in the same manner as if it
were the income accruing or arising to, or received by, such
investor had the investments, made by the AIF, been made directly
by such investor. Income taxable in investors’ hands shall be
deemed to be of the same nature and proportion as in the hands
of the AIF.
• Further, in terms of Section 115UB(2) of the Act, in case there is a
loss at the fund level (i.e. current loss or loss which remained to be
set off), such loss shall not be allowed to be passed through to the
investors but would be carried forward at AIF level to be set off
against income of future years in accordance with the provisions of
Chapter VI of the Act.
• Investment fund compulsorily required to file return u/s 139(4F)
Tax status of Category III AIFs
• Category III AIFs has not yet been accorded a
Pass through status, which means that income
from such funds will be taxed at the
investment fund level and the tax obligation
will not pass through to unit holders. Income
under the head, “Profits or gains from
business or profession”, the fund would be
taxed in respect to such income at marginal
rate of tax
05 06 07 08
PERFORMANCE
Performance of AIFs in India
• AIFs have witnessed humongous growth in
the last few years. It has moved from
nothing to raising Rs 1.17 trillion in the FY
2019, which is 70% higher than the
investments made in the FY 2017-18
• AIFs sensed strong opportunity: As banks
took a step back, NBFCs and HFCs strived
to fill the gap. But currently as they are
facing liquidity crunch, AIFs have taken
over by grabbing more market share in the
real estate financing.
Factors important to the growth of AIFs
One of the important factors of investing in AIFs is
the investment approach. The goal of AIFs is to
optimise returns and not necessarily to maximise
them
AIFs invest in start-ups, real estate, private equity
and more, some of them using strategies which
mutual funds are not allowed to - such as taking a
combination of 'long' and 'short' positions on
stocks.
Increasing awareness and educated sound investors
are the crucial factors leading to its growth.
• The true test of AIFs will be to show positive
returns when markets are down. There is every
likelihood of such a test in the near future.
• Avendus Enhanced Return Fund (AERF),
launched by global financial services company
Avendus in India in December 2017, provided
overall returns of 11.71 per cent till end-June
this year.
• Ambit Alpha Fund (AAF), run by domestic
financial services heavyweight Edelweiss Asset
Management - which it acquired from Ambit
Investment Advisors in September 2016 - has
delivered 12-15 per cent returns every month,
without once going negative, even after
witnessing constant fall in Nifty in the given
duration
05 06 07 08
CHALLENGE
Challenge faced by AIFs in India
One of the major challenge faced by AIFs in india is the
paucity of talent. While investing in an AIF, the track
record and credibility of the people managing it is
crucial. But it is expected that soon, there will be niche
and boutique competition from skilled fund managers
who prefer to start independent practices rather than
join institutional offerings.
THANK YOU FOR BEING PATIENT
