May 23, 2012

SEBI notifies Alternative Investment Funds Regulations 2012

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SEBI notifies Alternative Investment Funds Regulations 2012

The Securities and Exchange Board of India vide Notification LAD-NRO/GN/2012-13/04/11262 dated 21.05.2012, have formulated and notified the much awaited SEBI (Alternative Investment Funds) Regulations 2012 (AIF Regulations) with an intent to regulate the unregulated fund market including the Private Equity Funds, Real Estate Funds, Hedge Funds etc. and to have better stability and efficiency of the capital market. The new regulations also propose to encourage formation of new capital and ensure consumer protection.

The SEBI (Venture Capital Funds) Regulations, 1996 have been repealed though the Venture Capital funds registered thereunder, shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up.

The Key highlights of the new Regulations are as following:

1 Scope & Registrations:
  1. All pooled investment vehicles, established or incorporated in India in the form of either a trust or a company or a limited liability partnership or a body corporate to be registered as Alternative Investment Fund (AIF).
  2. Followings are excluded from the ambit of AIF Regulations:
    • Mutual Funds
    • Collective Investment Schemes
    • Family trusts
    • ESOP Trusts ,
    • Employee welfare trusts or gratuity trusts
    • Holding companies within the meaning of Section 4 of the Companies Act, 1956
    • Securitization trusts & other special purpose vehicles regulated under a specific regulatory framework
    • Funds managed by securitization company or reconstruction company registered with the Reserve Bank of India
    • Other pool of funds which is directly regulated by any other regulator in India.
  3. The existing funds registered as Venture Capital funds, shall not launch any new scheme or increase the targeted corpus of the fund or scheme after notification of these regulations and to do so, would require re-registration under AIF regulations subject to the approval of 2/3rd of their investors by value of their investments.
2 Categories under which AIFs can be registered:

  1. Category I Alternative Investment Fund: The funds intending to invests 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 shall be registered under Category I and broadly includes Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds, etc.
  2. Category II Alternative Investment Fund: This category would include registration of funds which does not fall in either Category I and III and does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the AIF regulations and broadly includes Private Equity Funds, Debt Funds, etc.
  3. Category III Alternative Investment Fund: This category would include registration of funds employing diverse or complex trading strategies and leverage including through investment in listed or unlisted derivatives and would include Hedge funds, Open ended funds, etc.
3. Eligibility Criteria

  1. The Charter of the Fund (whether, MOA, Trust Deed or Partnership deed )must permits it to carry on the activity of an Alternative Investment Fund.
  2. The Fund must be prohibited by its MOA/AOA or trust deed or partnership deed from making an invitation to the public to subscribe to its securities.
  3. The Trust Deed or the Partnership Deed as the case may be, must be duly registered under the provisions of the Registration Act, 1908 or with the Registrar under the provisions of the Limited Liability Partnership Act, 2008 respectively.
  4. The Fund, as well as its Sponsor and Manager must be fit and proper persons as per Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
  5. The Manager or Sponsor has the necessary infrastructure and manpower and the key investment team of the Manager of AIF has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualification;
  6. The investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme should be disclosed properly at the time of application for registration.
  7. Whether the Fund or any entity established by the Sponsor or Manager has earlier been refused registration by SEBI shall also be one of the considertation before granting registration.
4 Other Important Provisions of Investments etc.:

  1. AIFs may raise funds through issue of units from any investor be it Indian, Foreign or NRI.
  2. Each AIF scheme shall have minimum corpus of Rs. 20 Crores and investment from an investor shall be minimum Rs. 1 Crore, minimum value for employees & directors of Fund and Fund manager shall be Rs. 25 Lakhs and there can be maximum of 1000 investor in one scheme.
  3. Minimum contribution or interest of the Manager or Sponsor is required to be lower of 2.5% of the Corpus or Rs. 5 Crore. For Category III AIF, the same should be lower of 5% of the Corpus or Rs. 10 Crore.
  4. Funds can only be raised by way of private placement of Information Memorandum (IM) and the IM would be required to be placed before SEBI atleast 30 days prior to launch.
  5. Category I & II AIFs shall be close ended and the schemes so launched by these funds shall be for a minimum period of 3 years.
  6. Category III AIFs may be open ended or close ended.
  7. Units of close ended AIFs can be listed on Stock Exchanges with minimum tradable lot of Rs. 1 Crore.
  8. Conditions for investments by different Categories of AIFs are prescribed separately in the Regulations. Broadly Category I and II AIFs shall not invest more than 25% of the investible funds in one Investee Company and Category III AIFs shall not invest more than 10% of the corpus in one Investee Company. Further AIF shall not invest in associates except with the approval of 75% of investors by value of their investment in the AIF.
  9. The Regulations provide for transparency and disclosures mechanism for investor protection and avoidance of conflict of interest.
The Existing funds falling within the definition of AIF may continue to operate as such for a period of 6 month for getting the registration. SEBI may, in special cases extend the period to maximum 12 months.
Pursuant to the notification of these Regulations, minor Amendments have been made in SEBI (Issue of Capital & Disclosure) Regulations, 2009; SEBI (Foreign Venture Capital Investors) Regulations, 2000 and SEBI (Substantial Acquisition of Shares & Takeover) Regulations, 2011; amending the term Venture Capital Fund to Alternative Investment Funds and Venture Capital Regulations to Alternative Investment Regulations.

CP Comments:
SEBI notifies the much talked about Alternative Investment Fund Regulations with object to regulate the widespread unregulated fund houses in the Capital Market. The objective of SEBI is clearly to increase transparency in the operations of various fund houses, proper disclosures to the investors and to ensure appropriate channelization of the funds collected. As per the Regulations, funds have to choose one out of three categories prescribed for Registration broadly distinguished on the basis of exposure to risk as against earlier proposed nine classes. SEBI has also allowed the fund houses to raise funds from any group of investors whether Indian, Foreign or NRI. Wherein these measures have been appreciated by the Industry at large, the requirement of minimum investor contribution of Rs. 1 Crore remains a major concern to the Industry more importantly for fund houses focusing on retail segment investor and also because of lesser risk diversion for the investor. It would not be wrong to say that the intent of SEBI is clearly to keep retail investor out from the fund market. On the whole the Regulations would provide a regulated platform for fund market and with promising lucidity and better governance would encourage the definite flow of domestic & international capital in the market.

Attached are the SEBI (Alternative Investment Fund) Regulations 2012, for download.

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