Alternative Investment Fund (AIF) is considered to be the fastest-growing industry in India. The regulations crafted by Securities and Exchange Board of India (SEBI), regulating the world of AIFs has further facilitated its growth and investors trust.1 The amendment was brought by SEBI vide Notification dated 15-11-2022. The SEBI (Alternative Investment Funds) Regulations, 20122 was amended by the SEBI (Alternative Investment Funds) (Fourth Amendment) Regulations, 2022.3 The objective and the timing of amendments are of importance from the point of view of investors and in the backdrop of the actions taken by SEBI probing several AIF funds in the month of September 2022.4 This article attempts to understand what an AIF fund is and the object of amendment.
Alternative investment fund means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. No scheme of an AIF (other than an angel fund) can have more than 1000 investors. In the case of angel investors, no scheme shall have more than 49 angel investors.
AIF fund/scheme (other than angel fund) is required to have corpus5 i.e. total amount of funds committed by the investors to the AIF, of at least Rupees 20 crores and in the case of an angel fund at least Rupees 10 crores. From the prospective of the sophisticated investor, the same can either be an Indian national, foreigner or non-resident Indian. The AIF (except angel fund) is required to accept an investment which is not less than 1 crore rupees. The exception to this is if the sophisticated investor is an employee or director of the AIF or employee or director or manager, in which case the acceptable investment is a minimum of Rs 25 lakhs.6
A necessary distinction is that an AIF does not include funds covered under the SEBI (Mutual Funds) Regulations, 19967, the SEBI (Collective Investment Schemes) Regulations, 19998 or any other regulations of the Board to regulate fund management activities.
Another caveat to the AIF fund is that AIF cannot make invitation to the public9 at large to subscribe its units and can raise funds from the sophisticated investors only through private placement and thus is a privately pooled investment vehicle.10
How does an AIF function
An AIF fund can be registered under any of the 3 categories,11 namely:
Category I — Venture capital fund (including angel funds), SME funds, social venture funds, infrastructure funds.
Category II — A fund which does not fall in either Category I or Category III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the SEBI (AIF) Regulations, 2012. Various fund types such as real estate funds, private equity funds (PE funds), funds for distressed assets, etc. are registered as Category II AIFs.
Category III—Funds are diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivates. Various types of funds such as hedge funds, PIPE funds, etc. are registered as Category III AIFs.
The AIF can be established or incorporated in the form of a trust or a company or a limited liability partnership or a body corporate. The trust or the company (as the case may be) appoints a manager/sponsor to manage the fund. The sponsor/manager is also required to have an interest of not less than 2.5% of the corpus or five crore rupees, whichever is lesser. For Category III AIF, the interest must not be less than 5% of the corpus or ten crore rupees, whichever is lesser. For angel funds, the interest shall not be less than 2.5% of the corpus or 50 lakhs rupees, whichever is lesser.12
AIFs of Categories I and II are required to be close-ended and have a minimum tenure of 3 years. Category III AIFs may be open-ended or close-ended.13
SEBI and AIF
The Securities and Exchange Board of India issued the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 to regulate the activities of the unregulated private pool of money by the alternative investment fund (AIF) route. The Regulations came into force on 21-5-2012. On and from the commencement of the Regulations, no entity or person shall act as an Alternative Investment Fund, unless it has obtained a certificate of registration from SEBI.14
SEBI has time and again issued various circulars to regulate AIFs, to protect the interests of the investors.15 The amendment brought in on 15-11-2022 attains importance, as its attempt to cure various mischiefs identified by SEBI and the corrective measures taken by SEBI by bringing in the amendment.
The Board Memorandum dated 30-9-202216, which proposed to amend the Regulations of 2012, with an intension to provide a safer environment to the investors.
SEBI recommended the following amendments to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012:
(a) timeline for declaration of first close of scheme of AIFs;
(b) calculation of tenure of close-ended scheme of AIFs;
(c) ring-fencing assets and liabilities of schemes of AIFs; and
(d) regulatory provisions with regards to change in control of manager/sponsor and change in manager/sponsor of AIFs.
The proposed amendments were introduced with the following objective:
Reason for prescribing timeline. — Prior to the amendment, there was no limit prescribed within which a fund was required to declare its scheme from the date of private placement memorandum (PPM). SEBI observed that there are nearly 213 schemes introduced nearly after a year of filing a PPM. SEBI, therefore, prescribed a timeline of 12 months from the date of SEBI communication for taking the PPM on record, for declaration of the first close of the scheme. Provided that in the case of open-ended schemes of Category III AIFs, the first close shall refer to the close of its initial offer period. The purpose of providing a uniform process of calculating the tenure of a closed scheme is propelled by the fact that since the tenure of the scheme is calculated from the final close, each extension in final close by the manager may result in the extension of overall tenure of the scheme, thus adversely affecting the investment horizon of the investors length of time that an investor has to remain invested in the AIF.
Reason for prior approval in case of change in sponsor or manager. — SEBI introduced a requirement to seek prior approval of SEBI if there is a potential change in sponsor or manager and also a requirement to pay a prescribed fee, for the same. The amendment comes in light of the fact that as per Regulations 20(12) and 1317, prior approval of SEBI is required before changing a sponsor or manager. However, the same is more by way of informing SEBI and not seeking an “approval” in its purest sense. The necessity to seek approval has been prescribed, to ensure that the proposed sponsors or managers are fit and proper to manage the fund and in turn further protect the interests of the investors.
Reasons for ring-fencing. — As explained above, an AIF may be created by a trust, which under one name can have multiple schemes of the AIF. Unlike the SEBI (Mutual Funds) Regulations, 1996, there is no specific provision in the AIF Regulations for ring-fencing and segregation of assets between schemes of an AIF. This leads to uncertainty among investors of AIF, especially among foreign investors, with respect to protection of their assets in a scheme of an AIF from any liability which may arise from other schemes of the same AIF. Therefore, SEBI amended the regulations so that the assets and liabilities of each scheme of an AIF and bank accounts and securities accounts of each scheme are segregated and ring-fenced from other schemes of the AIF.
Vide Notification dated 15-11-202218, SEBI amended the Regulations in the following manner:
(a) The Regulations will now be called as “the Securities and Exchange Board of India (Alternative Investment Funds) (Fourth Amendment) Regulations, 2022.”
(b) In the Explanation to clause (p) of Regulation 2(1)(a) the words “day of its launch” shall be replaced with “date of first close”; and (b) the words “last day” shall be replaced with “last date”.
(c) In Regulation 1219, after sub-regulation (3), the following new sub-regulation shall be inserted, namely, “The first close of the scheme shall be declared by an alternative investment fund in the manner as may be specified by the Board from time to time. Notwithstanding the proviso to sub-regulation (2), if the alternative investment fund fails to declare the first close of the scheme in the specified manner, it shall be required to file a fresh application for the launch of the scheme by paying the requisite scheme fee under the Second Schedule.”
(d) In Regulation 13, after sub-regulation (3), the following new sub-regulation shall be inserted, namely, “(4) The manner of calculating the tenure of a close-ended scheme of an alternative investment fund, including the manner of modification of the tenure, may be specified by the Board from time to time”.
(e) The existing sub-regulations (4) and (5) shall be renumbered as (5) and (6) respectively.
(f) In Regulation 20, in sub-regulation (12), the words and symbols “any change in the sponsor, manager or designated partners or any other” shall be replaced with the word “any”.
(g) In sub-regulation (13), after the words “In case of”, the words and symbols “change of sponsor or manager, or” shall be inserted; and after the words “taken by the alternative investment fund”, the words and symbol, “subject to levy of fees and any other conditions as may be specified by the Board from time to time” shall be inserted.
(h) After sub-regulation (15), the following new sub-regulation shall be inserted, namely, ”(16) The Manager and either the trustee or the trustee company or the Board of Directors or designated partners of the alternative investment fund, as the case may be, shall ensure that the assets and liabilities of each scheme of an alternative investment fund are segregated and ring-fenced from other schemes of the alternative investment fund; and bank accounts and securities accounts of each scheme are segregated and ring-fenced.”
(i) The amendments shall be applicable prospectively i.e. from the date of the publication.
Considering the fact that AIFs ensure growth in domestic capital benefiting the Indian start-ups, the amendments brought in by SEBI make the world of AIFs more trusted and protect the investors of the same. The amendment, therefore, is a welcome from the point of view of investors.
† Advocate. Author can be reached at firstname.lastname@example.org.
4. “SEBI Probe Fund Managing”, Mint, <https://www.livemint.com/market/stock-market-news/sebi-probes-20-indian-aifs-over-suspected-violations-11663094801234.html>, see also “SEBI Probes Fund Manager Details from PEs, VCs: Report”, Inc42 <https://inc42.com/buzz/sebi-probes-fund-manager-details-from-pes-vcs-report/>.
10. Frequently Asked Questions (FAQs), SEBI (Alternative Investment Funds) Regulations, 2012, <https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf>.
12. SEBI (Alternative Investment Funds) Regulations, 2012, Regn. 10(d), see also Frequently Asked Questions (FAQs), SEBI (Alternative Investment Funds) Regulations, 2012, <https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf>.
14. Bombay Chartered Accountants' Society, SEBI (Alternative Investment Funds) Regulations, 2012,
16. SEBI Board Meeting, Press Release, <https://www.sebi.gov.in/media/press-releases/sep-2022/sebi-board-meeting_63565.html>.