SEBI (Alternative Investment Funds) Regulations, 2012

The Securities and Exchange Board of India (‘‘SEBI’’) has issued the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012, for regulating the activities of the unregulated private pool of money by the Alternative Investment Fund (AIF) route.

The regulations came into force on 21^st May, 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 the SEBI.

What is Alternate Investment Fund ?

Alternative Investment Fund means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which

1. is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors
2. Is not covered under the SEBI (Mutual Funds) Regulations, 1996 or SEBI (Collective Investments Scheme) Regulations, 1999 or any other regulations of the board.

Note: The regulations exclude few persons from the application of the regulations. Such as, Specific Family Trusts, ESOP trusts (conditions), Employee welfare trusts, Gratuity Trusts, holding companies‘ within the meaning of Section 4 of the Companies Act, 1956,securitisation trusts, securitization company, reconstruction company registered with RBI, any such pool of funds which is directly regulated by any other regulator in India.

Why Registration:

No entity or person shall act as an Alternative Investment Fund unless it has obtained a certificate of registration from the SEBI.

An existing fund falling within the definition of Alternative Investment Fund which is not registered with the SEBI may continue to operate for a period of 6 months which may be extended to 12 months if it has made an application for registration under sub-regulation (5) of regulation 3 till the disposal of such application.

Existing schemes will be allowed to complete their agreed tenure, such funds shall not raise any fresh monies other than commitments already made till registration is granted under regulation 6.

What About Existing Venture Capital Funds:

The funds registered as venture capital fund under SEBI (Venture Capital Funds) Regulations, 1996 shall continue to be regulated by the said regulations till the existing fund or scheme managed by the fund is wound up and such funds shall not launch any new scheme after notification of these regulations.

However, the existing fund or scheme shall not increase the targeted corpus of the fund or scheme.

Venture capital funds may seek re-registration under these regulations subject to approval of two-thirds of their investors by value of their investment.

Categories of Funds and their Registration Aspects:

1. Alternative Investment Funds shall seek registration in one of the categories mentioned hereunder and in case of Category I Alternative Investment Funds, they need to apply in one of the sub-categories thereof
1. Category I Alternative Investment Fund: These are funds which 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 and shall include venture capital funds (including Angel Funds), SME Funds, social venture funds, infrastructure funds and such other Alternative Investment Funds as may be specified.
2. Category II Alternative Investment Fund :Funds which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these regulations; Explanation.- For the purpose of this clause, Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator shall be included.
3. Category III Alternative Investment Fund : Funds which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Explanation.- For the purpose of this clause, Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator shall be included.

 

Definitions:

The regulations also provide clarity by defining following important terms.

1. Manager means any person or entity who is appointed by the Alternative Investment Fund to manage its investments by whatever name called and may also be same as the sponsor of the Fund
2. Sponsor means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of a limited liability partnership
3. Associate means a company or a limited liability partnership or a body corporate in which a director or trustee or partner or Sponsor or Manager of the Alternative Investment Fund or a director or partner of the Manager or Sponsor holds, either individually or collectively, more than fifteen percent of its paid-up equity share capital or partnership interest, as the case may be.
4. Debt fund means an Alternative Investment Fund which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund
5. Hedge fund means an Alternative Investment Fund which employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives
6. Infrastructure fund Means an Alternative Investment Fund which invests primarily in unlisted securities or partnership interest or listed debt or securitized debt instruments of investee companies or special purpose vehicles engaged in or formed for the purpose of operating, developing or holding infrastructure projects; Explanation.- Infrastructure shall be as defined by the government of India from time to time
7. Private equity fund means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund
8. SME fund means an Alternative Investment Fund which invests primarily in unlisted securities of investee companies which are SMEs or securities of those SMEs which are listed or proposed to be listed on a SME exchange or SME segment of an exchange
9. Social venture fund means an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfies social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.
10. Venture capital fund means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early-stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model and shall include angel funds as defined under Chapter III-A of the AIF Regulations.
11. Angel Funds : Separate sub-category of Venture Capital funds that collects funds from angel investors and invests in accordance with the provisions of Chapter III-A of the regulations.
12. Investible Funds means corpus of the AIF net of estimated expenditure for administration and management of the fund.

Eligibility Criteria:

1. Constitution document need to specifically permit to carry on the activity of an Alternative Investment Fund.
2. Constitution document prohibits inviting application for subscription to its securities.
3. Constitution document is registered under relevant regulatory statute.
4. Applicant, sponsor and manager are fit and proper persons based on specified in schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008.

 

1. Key investment team should have 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;
2. Manager or sponsor should have necessary infrastructure and manpower in place
3. The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy and proposed tenure of the fund or scheme;
4. Whether the applicant or any entity established by the manager or sponsor has earlier been refused registration by the board.        

Furnishing of Information : The board may require the applicant to furnish further information or clarification, the applicant, sponsor or manager shall appear before the Board for personal representation.

Procedure for grant of certificate and refusal of registration

1. The Board shall issue the certificate under specified category of AIF, once the applicant satisfies the requirements, prescribed fees are paid and the certificate maybe granted with such conditions as deemed appropriate.
2. The Board may also issue an in-principle approval to the applicant, if it is satisfied that the applicant has complied with provisions of regulation 4 except clause (c) & (d). The applicant shall comply with the clauses within 6 months of grant of in-principle certificate.
3. An AIF that has been granted such in-principle approval, may accept commitments from investors but shall not accept any monies till it is granted registration under sub-regulation (2) of regulation 6.
4. If the Board is of the opinion that a certificate should not be granted, it may reject the application after giving the applicant a reasonable opportunity of being heard. The decision shall be communicated within 30 days, thereafter the applicant shall not carry out any AIF activities.

Conditions of Certificate

1. AIF shall abide with provisions of SEBI Act and these regulations and  not carry on any other activity other than permitted activities.
2. They shall Intimate SEBI if any information found to be misleading or false, or if there is any material change in the information already submitted.
3. Approval of SEBI required for subsequent change in category.

Investment Strategy

All Alternative Investment Funds shall state investment strategy, investment purpose and its investment methodology in its placement memorandum to the investors and any material alteration to the fund strategy shall be made with the consent of at least two-thirds of unit holders by value of their investment in the Alternative Investment Fund.

Investment Conditions and Restrictions:

1. Funds can be raised only by issue of Units, from Investors, whether Indian, foreign or non-resident Indian investors.
2. Each scheme shall have minimum corpus of ₹ 20 crores.
3. Minimum investment by an investor shall be ₹ 1 crore (the minimum limit is ₹ 25 lakhs in case of Employees, Directors of the Investment fund or the manager).
4. The manager or sponsor shall have interest in the fund not less than lower of 2.5% of the corpus or ₹ 5 crores. (in case of Category III AIF, the same is 5% and ₹ 10 crore respectively).
5. A scheme can have 1000 maximum number of investors.
6. AIF cannot solicit or collect funds except by way of private placement by issue of information memorandum or placement memorandum, by whatever name called.
7. Manager and sponsor of AIF to disclose their interest in the AIF to the investors.

Placement Memorandum:

Alternative Investment Fund shall raise funds only through private placement by issue of information memorandum or placement memorandum to the investors. The regulations specify the mandatory contents of the information memorandum/placement memorandum. Such as -

1. It shall contain all material information about the AIF and the Manager, Background of key investment team of the Manager.
2. Information about targeted investors, fees and all other expenses proposed to be charged by way of an annexure, a detailed tabular example how the fees and expenses shall be applicable including the distribution waterfall, tenure of the Alternative Investment Fund or scheme, conditions or limits on redemption, investment strategy, risk management tools and parameters employed, key service providers, conflict of interest and procedures to identify and address them, disciplinary history of AIF, Sponsor, manager and their Directors/Partners/Promoters and Associates, If applicant is trust then trustees or trustee company and its directors, the terms and conditions on which the Manager offers investment services, its affiliations with other intermediaries, manner of winding up of the Alternative Investment Fund or the scheme and such other information as may be necessary for the investor to take an informed decision on whether to invest in the Alternative Investment Fund.
3. All Alternative Investment Funds shall state investment strategy, investment purpose and its investment methodology.

AIF need to file placement memorandum 30 days prior to launch of any scheme along with fees (For first scheme of AIF, no fees to be paid). Comments of SEBI, if any, shall be incorporated in placement memorandum prior to launch of scheme.

AIF shall intimate any change to the placement memorandum to all unit holders (including investors who have provided commitment to the AIF) within 7 days of making such change, specifically indicating the changes made. Such changes shall also be intimated to SEBI. In cases of material changes significantly influencing the decision of the investor to continue to be invested in the AIF, the process as mentioned in SEBI circular no. CIR/IMD/DF/14/2014 dated June 19, 2014 shall be complied with.

Tenure of the Funds:

1. Category I & II AIF shall be close ended and the tenure should be determined at the time of application, Category III Can be open ended or close ended.
2. Category I & II shall have Minimum tenure of three years.
3. Extension of the close ended AIF may be permitted up to 2 years subject to approval of 2/3^rdof the unit holders by value.
4. If not extended as per above, the fund should be liquidated within one year after the expiration of the fund tenure or extended tenure, as the case may be.
5. The tenure of any scheme of the AIF shall be calculated from the date of final closing of the scheme.

Listing:

1. Units of close ended AIFs can be listed subject to minimum tradable lot of one crore rupees.
2. Listing can be permitted only after final close of the fund or scheme.

General Investment Conditions:

1. Investments in companies incorporated outside India are subject to guidelines of SEBI and RBI from time to time. In this regard, SEBI has clarified how overseas investment can be done by Alternative Investment Funds.
2. Co-investment by sponsor or manager shall not be on terms more favorable than the fund.
3. Category I and II cannot invest more than 25% of the Investible Funds in one investee company (10% for category III).
4. AIF cannot invest in Associates except with the approval of 75% of the investors by value.
5. Un-invested portion of the investible fund can be kept in liquid assets (MF, Treasury Bills, CPs, CDs, CBLOs, Bank Deposits, etc) till deployment of funds as per investment objectives.
6. AIF may act as Nominated Investor.
7. Investments by Category I and II AIF in shares on companies listed on Institutional Trading Platform shall be deemed to  be investment in ‘unlisted shares’

Conditions for category I AIF

Conditions applicable to all Category I Investment funds,

1. It can invest in units of Cat I AIF of same sub category but cannot invest in funds of funds.
2. Category I Alternative Investment Funds shall not borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than thirty days, on not more than four occasions in a year and not more than ten percent of the investible funds.

Over and above the Conditions, there are other conditions applicable for sub categories of Funds such as Venture Capital Funds, SME Funds, Social Venture Funds, Angel Funds, and Infrastructure Funds.

Conditions for Category II Alternative Investment Funds.

The following investment conditions shall apply to Category II Alternative Investment Funds:-

(a) Category II Alternative Investment Funds shall invest primarily in unlisted investee companies or in units of other Alternative Investment Funds as may be specified in the placement memorandum.

(b) Fund of Category II Alternative Investment Funds may invest in units of Category I or Category II Alternative Investment Funds, Provided that they shall only invest in such units and shall not invest in units of other Fund of Funds.

(c) Category II Alternative Investment Funds cannot borrow funds directly or indirectly and shall not engage in leverage except for meeting temporary funding requirements for not more than thirty days, not more than four occasions in a year and not more than ten percent of the investible funds;

(d) Notwithstanding clause (c), Category II Alternative Investment Funds may engage in hedging, subject to guidelines as specified by the SEBI from time to time.

(e) Such funds may enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making of SME shares.

Conditions for Category III Alternative Investment Funds.

(a) Category III Alternative Investment Funds may invest in securities of listed or unlisted investee companies or derivatives or complex or structured products.

(b) Fund of Category III Alternative Investment Funds may invest in units of Category I or Category II Alternative Investment Funds, Provided that they invest solely in such units and shall not invest in units of other Fund of Funds.

(c) Such Fund may engage in leverage or borrow subject to consent from the investors in the fund and subject to a maximum limit. Provided that such funds shall disclose information regarding the overall level of leverage employed, the level of leverage arising from borrowing of cash, the level of leverage arising from position held in derivatives or in any complex product and the main source of leverage in their fund, to the investors and to the SEBI periodically. Maximum leverage shall not be in excess of 2 times of NAV of the fund.

(d) SEBI has issued directions in respect of operational, reporting and prudential norms for Category III AIFs.

1. Risk Management Framework and Independent Compliance Function : AIF shall have a comprehensive risk management framework supported by an independent risk management function, appropriate to the size, complexity and risk profile of the fund. AIF shall also have a strong and independent compliance function appropriate to the size, complexity and risk profile of the fund.
2. Reporting Requirements: The submission of the reports on a periodic basis to SEBI in specified format.
3. Redemption Norms: Liquidity Management Policy and processes to be implemented based on profile of the schemes under the fund

General Conditions and Responsibilities and Transparency requirements:

Following are general conditions and responsibilities of AIFs including requirements for the purpose of maintaining transparency in operations.

1. The Sponsor or Manager of Alternative Investment Fund shall appoint a custodian registered with the Board for safekeeping of securities if the corpus of the Alternative Investment Fund is more than five hundred crore rupees,
2. The Sponsor or Manager of Category III AIF needs to appoint custodian irrespective of the size of the corpus.
3. Prior approval of SEBI required in case of change in control of the Alternative Investment Fund, Sponsor or Manager.
4. Books of accounts of all AIFs to be audited by qualified auditors.
5. Sponsor and manager of the AIF shall act in a fiduciary capacity for its investors and shall disclose all conflicts of interest as and when they arise or seem likely to arise.
6. Managers shall establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business.
7. Conflict of interests to be disclosed and managed and mitigated as per laid down policies.
8. Ensure transparency and disclosure of information to investors on various matters such as financial, risk management, operational, portfolio, and transactional information regarding fund investments, any inquiries or legal actions against the fund, any material liability arising, any breach of provisions of placement memorandum or agreement with the investors, change in control of sponsor or manger or investee company.
9. AIF shall provide information on specified matters on annual basis within 180 days from the year end e.g. financial information, material risks and how they are managed.
10. Category III AIF provides quarterly reports to investors in respect of above clauses within 60 days of end of the quarter.
11. Significant change in key investment team to be intimated to all the investors.
12. AIF shall provide description of valuation methodologies and procedure for valuing assets.
13. Category I and II AIF shall undertake valuation of their investments, at least once in every six months, by an independent valuer appointed by the AIF. Period may be enhanced maximum upto 1 year subject to approval of at least 75% of investors by value.
14. Category III AIF shall ensure that calculation of NAV is independent from the fund management function and such NAV shall be disclosed to the investors at intervals not longer than a quarter for close ended funds and at intervals not longer than a month for open ended funds.

Obligations of Manager

Manager shall

1. Address all investor complaints.
2. Provide information to SEBI any information sought.
3. Maintain records as may be specified by SEBI.
4. Take all steps to address conflict of interest as specified in these regulations.
5. Ensure transparency and disclosure as specified in the regulations.
6. Organise, operate and manage the AIFs and its schemes in the interest of unit holders of the AIF/scheme.
7. Ensure placement memorandum provided to the investors prior to providing commitment or making the investment in AIF and acknowledgement obtained.
8. Carry out all the activities of AIF as per placement memorandum issued to all unit holders
9. Ensure scheme - wise segregation of bank accounts and securities accounts.
10. Not make any exaggerated statement, whether oral or written, either about their qualifications or capability to render investment management services or their achievements.

The AIF, manager, trustee and sponsor shall:

1. act in the interest of unit-holders of the AIF/scheme and not take any action which is prejudicial to the interest of the unit-holders and not place the interest of the sponsor / manager / trustee of the AIF or any of their associates above the interest of the unit-holders of the scheme/AIF.
2. maintain high standards of integrity and fairness in all their dealings and in the conduct of the business and render at all times high standards of service, exercise due diligence and exercise independent professional judgment.
3. not offer any assured returns to any prospective investors/unitholders

Dispute Resolution

AIF shall lay down procedure for resolution of disputes between the investors, Alternative Investment Fund, Manager or sponsor thorough arbitration or any such mechanism as mutually decided between the investors and the AIF.

Maintenance of Records

The manager or sponsor shall be required to maintain records regarding

1. The assets under the scheme/fund
2. Valuation policies and practices
3. Investment strategies
4. Particulars of investors and their contribution
5. Rationale for investments made
6. Trades/transactions performed

Compliance by AIF

All circulars/guidelines as may be issued by SEBI with respect to KYC requirements, Anti-Money Laundering and Outsourcing of activities shall be applicable to AIFs and the manager of the AIF shall be responsible for compliance with such circulars/guidelines.

At end of financial year, the manager of an AIF shall prepare a Compliance Test Report (CTR) on compliance with AIF Regulations and circulars issued thereunder in the format as specified in the Annexure to SEBI circular no. CIR/IMD/DF/14/2014 dated June 19, 2014. In case the AIF is a trust, the CTR shall be submitted to the trustee and sponsor within 30 days from the end of the financial year. In case of other AIFs, the CTR shall be submitted to the sponsor within 30 days from the end of the financial year.