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1.       What is SEBI (AIF) Regulations, 2012?

Aiming to bring unregulated and lightly regulated investment funds like hedge funds and private equity-venture capital funds under its ambit, Security and Exchange Board of India (SEBI), on Monday 21st May 2012, has came out with a comprehensive framework called Alternative Investment Funds (AIFs) Regulations. These regulations should be called as ‘Security and Exchange Board of India (Alternative Investment Funds) Regulations, 2012’.

2.       What is the objective of AIF?

According to SEBI, AIFs Regulations endeavor to extend the perimeter of regulation to unregulated funds with a view to systemic stability, increasing market efficiency, encouraging formation of new capital and consumer protection. The regulation covers all AIFs, including PEs, real estate funds and hedge funds, and makes it mandatory for them to register with SEBI.

3.       Comment on the applicability of AIF Regulations.

AIF Regulations are applicable to any fund established or incorporated in India in the form of a trust or a company or a LLP or a body corporate, which collects funds from investors, whether Indian or foreigner for investing in accordance with a defined investment policy.

Mutual funds under the SEBI (Mutual Funds) Regulation, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999 are not covered under the AIF Regulations.

4.       Who are excluded from AIF Regulations, 2012?

Family trust, ESOP trusts, employee welfare trusts, gratuity trusts, collective investment schemes, holding companies, securitization trusts, and any such pool of funds which is directly regulated by any other regulator in India are expressly excluded.

The regulator has exempted existing PEs and VCs from the regulation till their mandates to run the fund come to and end. But these funds will not be able to raise any fresh funds from investors. VCs/PEs who operate through an offshore vehicle structure do not come under this regulation.

5.       What is the importance of certification of registration from SEBI?

According to the chapter II of AIF Regulations, 2012, ‘no entity or person shall act as an AIF unless it has obtained a certificate of registration from SEBI. Any entity, which fails to make an application for grant of, a certificate within the specified period, shall cease to carry on any activity as an AIF.’

In the same chapter, SEBI has also stated eligibility criteria and conditions to satisfy by the funds seeking registration as AIF.

An alternative investment fund which has been granted registration under a particular category cannot change its category subsequent to registration, except with the approval of SEBI.

6.       What are the investment conditions mentioned under AIF Regulations, 2012?

a)      AIF may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units.

b)      Each scheme of the AIF shall have corpus of atleast twenty crore rupees (20 Crore).

c)       AIF shall not accept from an investor, an investment of value less than one crore rupees (1 Crore).

d)      In case of investors who are employees or directors of the AIF or employees or directors of the Manager, the minimum value of investment shall be twenty five lakh rupees (25 lakh).

e)      The Manager or Sponsor of category I and II, shall have a continuing interest in the AIF of not less than two and half percent (2.5 %) of the corpus or five crore rupees (5 Crore), whichever is lower.

f)       The Manager or sponsor of category III, shall have a continuing interest in the AIF of not less than five percent (5 %) of the corpus or ten crore rupees (10 Crore), whichever is lower.

g)      The Manager or Sponsor shall disclose their investment in the Alternative Investment Fund to the investors of the AIF.

h)      No scheme of the AIF shall have more than 1000 investors.

i)        The AIF shall not solicit or collect funds except by way of private placement.

There are several other features mentioned in the AIF Regulations such as investment strategy, placement memorandum, schemes, and general investment conditions along with detailed category specific investment conditions for the three categories.

7.       How is AIF Regulations, 2012 helping to bring transparency in unregulated sectors?

In the chapter IV on General Obligations and Responsibility and Transparency, AIF has clearly mentioned the clauses which should be taken care of by all AIFs to ensure transparency. According to the regulations,

a)      Financial, risk management, operational, portfolio, and transactional information regarding fund investments shall be disclosed periodically to the investors.

b)      Any fees ascribed to the Manager or Sponsor; and any fees charged to the Alternative Investment Fund or any investee company by an associate of the Manager or Sponsor shall be disclosed periodically to the investors.

c)       Any inquiries/ legal actions by legal or regulatory bodies in any jurisdiction, as and when Occurred.

d)      Any material liability arising during the Alternative Investment Fund’s tenure shall be disclosed, as and when occurred.

e)      Any breach of a provision of the placement memorandum or agreement made with the investor or any other fund documents, if any, as and when occurred.

f)       Change in control of the Sponsor or Manager or Investee Company.

g)      Alternative Investment Fund shall provide at least on an annual basis, within 180 days from the year end, reports to investors including the following information, as may be applicable to the Alternative Investment Fund:-

Financial information of investee companies.

Material risks and how they are managed

h)      Category III AIF shall provide quarterly report to investors in respect of clause (g) within 60 days of end of the quarters.

i)        AIFs shall provide, when required by the SEBI, information for systemic risk purpose.

8.       What are the different categories under which fund can be registered under AIF Regulations, 2012?

An application can be made to SEBI for registration as an AIF under one of the following 3 categories:

Category I AIF – those AIFs for which certain incentives or concessions might be considered by SEBI or Government of India or other regulators in India; and which shall include Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds and such other Alternative Investment Funds as may be specified.

Category II AIF – those AIFs for which no specific incentives or concessions are given by the government or any other Regulator; and which shall include Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III. These funds shall be close ended, shall not engage in leverage and have no other investment restrictions.

Category III AIF – those AIFs including hedge funds, which trade with a view to make short, term returns; which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. These funds can be open ended or close ended.

9.       Comment on Tenure Specification under AIF.

1)      Category I Alternative Investment Fund and Category II Alternative Investment Fund shall be close ended and the tenure of fund or scheme shall be determined at the time of application subject to sub-regulation (2) of this regulation.

2)      Category I and II Alternative Investment Fund or schemes launched by such funds shall have a minimum tenure of three years.

3)      Category III Alternative Investment Fund may be open ended or close ended.

4)      Extension of the tenure of the close ended Alternative Investment Fund may be permitted up to two years subject to approval of two-thirds of the unit holders by value of their investment in the Alternative Investment Fund.

5)      In the absence of consent of unit holders, the Alternative Investment Fund shall fully liquidate within one year following expiration of the fund tenure or extended tenure.

10.   What type of record maintenance is required under AIF Regulations, 2012?

(1)    The Manager or Sponsor shall be required to maintain following records describing:

A.      the assets under the scheme/fund

B.      valuation policies and practices

C.      investment strategies

D.      particulars of investors and their contribution

E.       rationale for investments made

(2)    The records under sub-regulation (1) shall be maintained for a period of five years after the winding up of the fund.

11.   What are the provisions made under the AIF Regulations, 2012 to handle conflict of interest?

The Chapter IV on General Obligations and Responsibilities and Transparency has clearly stated the guidelines regarding handling of conflict of interest issue. The regulations state that,

1.       The Sponsor and Manager of the Alternative Investment Fund shall act in a fiduciary capacity towards its investors and shall disclose to the investors, all conflicts of interests as and when they arise or seem likely to arise.

2.       Manager shall establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business.

3.       Managers and sponsors of AIF shall abide by high level principles on avoidance of conflicts of interest with associated persons, as may be specified by SEBI from time to time.

12.   What are the key legislative and personnel requirement for registering as AIF under AIF regulations, 2012?

AIF regulations, 2012 are very verbose when it comes to registration certificate and the requirement for registration. SEBI has clearly stated following conditions for eligibility in Chapter II of AIF Regulations, 2012.

1.       (i) MOA for company, (ii) Trust deed for a trust or (iii) Partnership deed in case of a LLP should permit it to carry on activity of an AIF.

2.       SEBI has prohibited an applicant from making a public invitation to subscribe ti its securities by using above mentioned documents.

3.       When it comes to the applicant, sponsor and manager SEBI has stated that they should be fit and proper persons based on the criteria specified in schedule II of SEBI (intermediaries) Regulations, 2008.

4.       According to SEBI, in the key investment team, at least one key personnel should have minimum five years of 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.

5.       The applicant should clearly state the investment objective, the target investor, proposed corpus, investment style and proposed tenure of the fund at the time of registration.

6.       The applicant should also state whether the applicant or any entity established by the Sponsor or Manger has earlier been refused registration by SEBI.

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SEBI - Alternative Investment Funds (AIF) Regulations

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