Sep 4, 2020

FAQs on Alternative Investment Funds

Share on

1. In which legal forms can an AIF be set up?

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.

2. Whether an AIF can accept investments from joint investors?

An AIF may accept the following as joint investors for the purpose of investment of not less than INR 1 Cr. from the following:

    (i) an investor and his/her spouse

    (ii) an investor and his/her parent

    (iii) an investor and his/her daughter/son

With respect to the above investors, not more than 2 persons shall act as joint-investors in an AIF. In case of any other investors acting as joint investors, for every investor, the minimum investment amount of INR one crore shall apply. Joint investors shall mean where each of the investor contributes towards the AIF.

3. What is the validity of the certificate of registration of an AIF?

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

4. Is an AIF permitted to make an invitation to the public to subscribe to its securities?

No. AIFs are privately pooled investment vehicles. AIFs shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called. As an eligibility criterion for registration as an AIF, the applicant is required to be prohibited by its memorandum and articles of association/ trust deed/ partnership deed from making an invitation or solicitation to the public to subscribe to its securities.

5. Whether Alternative Investment Funds (AIF) registered with SEBI can invest in foreign securities?

Under SEBI (Alternative Investment Funds), 2012 , AIFs are permitted to invest in foreign securities subject to the conditions prescribed by the Reserve Bank of India (RBI). Currently, the limit for overseas investment for SEBI registered AIFs & Venture Capital Funds (VCF) is USD 750 million i.e. all investments made by AIF & VCFs . However, the investment by AIFs in foreign securities is subject to the following conditions :

    (a) Prior-approval of SEBI is required for investment;

    (b) Investments of up to 25% of the investible fund of the scheme of the AIF is allowed;

    (c) Investments are allowed only in an Offshore Venture-Capital Undertaking , which has an Indian Connection;

    (d) AIFs cannot invest in their Joint Ventures/Wholly-owned subsidiaries.

    (e) The permission to invest is granted out of the total available limit, on a first-come-first-serve basis;

    (f) The approval for investment has a validity period of 6 months;

    (g) Upon non-utilisation of the approved limit within the validity period, the same has to be reported to SEBI within 2 days from the end of the validity period .

6. Whether the Liberalised Remittance Scheme (LRS) limit is applicable to AIF?

The LRS Scheme is not available for corporates, partnership firms, HUF, Trusts etc . Further, in the case of individual investors investing in AIFs (which in turn invest in foreign securities), there is no involvement of foreign currency on part of the investor. The investor invests in the domestic fund, which invests in foreign securities and since, AIFs are usually corporates & trusts, therefore, they are not covered under LRS.

7. Whether AIF can obtain investments from Foreign Investors and NRIs?

Yes without any limit or restriction and under automatic route. More-so if the control and management of an AIF is in India, and all its investors are Foreign investors then also the Investment will be deemed as FDI and provisions of FDI like sectoral limits and pricing guidelines do not apply.

8. Whether a Foreign Investor would get treaty tax benefit if he invests in AIFs?

In case of Cat–I and Cat-II, AIF enjoys pass through status. That means, taxability will arise only in hand of Investor. In such case Investor can avail treaty benefit.

Cat-III is a grey area with no pass through, income is treated as business income. Although if Cat-III is registered as Trust, trust taxations should apply.

9. Can it be said that investment in AIF is more beneficial than Mutual Funds?

Investment objectives of AIF and Mutual Funds are very different. AIF is High risk high return. MF is for retail investors. AIF gives opportunity in all segment – start-ups/ unlisted etc. MF only in listed entities.

10. Whether it is mandatory to appoint a Custodian?

Yes for Cat-III and for others having fund size of more than INR 500 Crores

11. Whether Category-II is restricted from investing in Listed Companies?

No. but primarily its investment should be in unlisted hence 51% or more can be in unlisted and it can have anything less than majority in Listed.

12. Whether investments in Commodity Derivatives is allowed?

Yes but only by Category -III

13. I want investment for my real estate projects. Can I launch an AIF to raise funds?

AIFs can invest only in Securities and not directly in projects. Also, for Cat-I & II, only 25% of total corpus can be invested in one entity/project SPV.

14. Can I create an AIF for making investment in my own entities?

Yes, investment in associate entities can be done subject to approval of ¾ Investors

15. Whether an AIF launch can multiple schemes?

Yes, there is no limit on the number of schemes an AIF can launch.

16. Whether permission of all investors of an Angel Fund mandatory before making investments in an investee company?

Yes, as per Reg. 19G(3) of the AIF Regulations.

17. Can open-ended schemes be converted into close-ended scheme or vice-versa?

No, AIFs cannot convert existing schemes.

18. What is the investment threshold for Cat-II AIFs in unlisted securities?

The same has not been quantified by SEBI but it is said that primarily the investment must be in unlisted securities, therefore it can be inferred that majority i.e. 50.1% investment must be in unlisted securities.

19. What is the reason for introduction of stewardship code and why is it only mandatory for AIFs making investment in listed companies?

In order to shoulder greater responsibility towards their clients / beneficiaries by enhancing monitoring and engagement with their investee companies.

20. Whether distribution of proceeds in temporary investments be done prior to the deployment of proceeds of original investment?

Yes, in the interest of investors, it can be done.

21. How does an Angel Fund differ from a general Venture Capital Fund, if they both make investments in Start-ups?

Only Angel Investors can invest in Angel Funds and they invest in start-ups which comply with the criteria regarding the age of the venture capital undertaking/startup issued by the Department of Industrial Policy and Promotion under the Ministry of Commerce and Industry, Government of India vide notification no. G.S.R. 180(E) dated February 17, 2016

22. Whether the sponsor & investment management entity of an AIF be the same individual/entity?

Yes, they can be the same.

23. Can a foreign entity act as an investment manager of an Indian AIF?

Yes, but then all the investment my such an AIF would be treated as foreign investment and FDI limits will be applicable.

24. Whether an AIF can consist only of foreign investors?

Yes, there is no bar on that.

25. What is the criteria for being an Investment Manager in an AIF?

There must be one person in the key investment team of the IM who has 5 years of relevant experience. Also, it must be a fit & proper person and have necessary manpower & infrastructure.

26. Whether there are certain minimum qualifications to be the sponsor of an AIF?

Yes, the sponsor must be a fit and proper person as per SEBI Intermediaries Regulations, 2008 and it must have the necessary manpower & infrastructure to discharge its liability.

AUTHORED BY

Ms. Deepika Vijay Sawhney

Partner & Head - Securities Laws and Transaction Advisory

ACS, LLB

deepika@indiacp.com

+91 11 40622229

Request a Call
Scroll