Last Updated on May 24, 2022 by Aradhana Gotur

Alternative Investment Fund (AIF) is a type of fund of funds that invests in asset classes other than bonds, stocks, and cash. It pools funds from investors and invests them under different categories of investments as specified by SEBI for the benefit of investors.

AIF consists of privately pooled investment funds that invest in private equity, venture capital, hedge funds, and managed funds. AIF differs from conventional investments such as debt securities and stocks, and is an option for high net worth individuals, including domestic investors and institutions. In this article, we dive deeper into the meaning of AIF and its various categories.

AIF consists of privately pooled investment funds that invest in private equity, venture capital, hedge funds, and managed funds. Click To Tweet

Meaning of Alternative Investment Fund

AIF is defined under Regulation 2(1)(b) of the SEBI (Alternative Investment Funds) Regulations, 2012 (“Regulations”). The regulations explain AIF as a fund established or incorporated in India in the form of a Limited Liability Partnership (LLP) or company or trust or body corporate.

It is a privately pooled investment vehicle that gathers funds from investors, including Indian and foreign investors, to invest as per a defined investment policy to benefit investors. It does not include funds covered under the SEBI (Collective Investment Schemes) list of close-ended funds in India. 

The following is not considered as AIF:

  • Family trust for benefitting ‘relatives’ as defined under the Companies Act, 2013. 
  • ESOP (Employee Stock Ownership Plan) trust under the SEBI (Share Based Employee Benefits) Regulations, 2014 or permitted under Companies Act, 2013. 
  • Employee welfare trust or gratuity trust set up for the benefit of employees. 
  • Holding companies as defined under Section 46(2) of the Companies Act, 2013.
  • Other special purpose vehicles not established by fund managers, including securitization trusts, are regulated under a specific regulatory framework.
  • Funds managed by a securitization company or reconstruction company registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 
  • Any such pool of funds that are directly regulated by any other regulator in India.

Categories of Alternative Investment Fund

Applicants can seek registration as an AIF in the following categories as may be applicable.

Category I AIF

AIFs that invest in early-stage ventures, startups, social ventures, Small and Medium Enterprises (SMEs), infrastructure, or other sectors/areas considered by the government or regulators as socially or economically desirable constitute Category I AIF. This category includes SME funds, venture capital funds, infrastructure funds, social venture funds, and other such specified AIFs. 

Under this category, AIFs are generally anticipated to have positive spillover effects on the economy. The funds for which the SEBI or Government of India (GOI) or other regulators in India might consider providing incentives or concessions are included under this category.

Category II AIF

AIFs that do not fall under Category I and III and do not undertake borrowing or leverage other than to meet the day-to-day operational requirements and are permitted in the SEBI (Alternative Investment Funds) Regulations, 2012 fall under Category II AIF. 

AIF under this category includes debt funds or private equity funds, which receive no specific incentives or concessions from the GOI or any other regulator. The various types of funds, such as real estate funds, private equity funds (PE funds), and funds created around distressed assets are registered as Category II AIF.

Category III AIF 

AIFs that employ complex or diverse trading strategies and leverage, including investment in listed or unlisted derivatives, fall under Category III AIF. Schemes of hedge funds or funds that trade for making short-term returns or other such funds that are open-ended and for which no specific concessions or incentives are received from the GOI or any other regulator are included under this category.

Eligibility criteria for alternative investment fund registration

The eligibility criteria for applying for registration as Alternative Investment Fund are:

  • The applicant, manager, and sponsor are fit and proper persons as per the criteria specified in Schedule II of the SEBI (Intermediaries) Regulations, 2008.
  • The manager of the key investment team of AIF has: 
    1. Adequate experience and at least 1 key personnel having 5 yrs of experience in managing pools of capital or advising, in the fund, wealth, asset, portfolio management or in the business of selling, buying, and dealing of securities or other financial assets 
    2. At least 1 key personnel having professional qualification in accountancy, finance, commerce, business management, capital market, economics, or banking from an institution or university recognized by the Central Government or any State Government. 
  • The applicant at the time of registration has specifically stated the targeted investors, investment objective, investment style, proposed corpus, strategy, and proposed tenure of the fund or scheme.
  • The Memorandum of Association (MoA) of a company or the Trust Deed of a Trust or the Partnership deed of an LLP permits to carry on the activity of AIF.
  • The applicant should be prohibited by its MoA and Articles of Association (AoA) or Partnership Deed or Trust Deed to make an invitation to the public for subscribing to its securities. 
  • If the applicant is a Trust, the Trust Deed is duly registered under the Registration Act, 1908.
  • If the applicant is an LLP, it is duly incorporated, and the partnership deed is filed with the Registrar of Firms as per the provisions of the Limited Liability Partnership Act, 2008. 
  • In case an applicant is a body corporate, it is established or set up under the laws of the Central or State Legislature, and it has permission to carry on the activities of AIF.

Registration of Alternate Investment Fund

  • The application for grant of AIF Registration Certificate can be made to the SEBI for Categories I, II, and III AIF in Form A as stated in the First Schedule of the Regulations along with the necessary documents. 
  • The registration application should be accompanied by a non-refundable application fee as stated in Part A and paid in the manner stated in Part B of the Second Schedule of the Regulations. 
  • The SEBI will take into account the requirements specified in the Regulations before considering the grant of Registration Certificate to the applicant. 
  • Generally, after receipt of the registration application, the applicant receives a reply from the SEBI within 21 working days. However, the time taken for granting registration depends on how quickly the requirements are adhered to by the applicant. 
  • The applicant must state in the covering letter of the application whether:
    1. It is registered with the SEBI as a Venture Capital Fund. If the answer is yes, the details must be provided. 
    2. The applicant has been undertaking the activities of AIF before applying for registration. If the answer is yes, the details must be provided. 
    3. The applicant is applying for the registration of a new fund. 
  • The applicant should also file an online application in terms of the SEBI guidelines from time to time.

To summarize, Alternative Investment Funds provide greater returns with the customized options which it enables through its different categories. However, high net worth investors should make an informed decision taking into consideration the eligibility, the process of registering for AIF, and more importantly, the fact that although it gives good returns, AIF comes with significant risks as it is subject to lesser regulatory control.

Therefore, institutional investors and the wealthy whose risk appetite matches the sort of expectation they have with AIF can consider making this investment decision.

Aradhana Gotur