The Securities and Exchange Board of India announced the ‘Regulation of Alternative Investment Funds’ in its Board meeting held on April 02, 2012. This is in follow-up of a concept paper and draft regulations that the regulator had issued on August 01, 2011. Among the major salient features of the AIF Regulations:
Categories of funds
The AIF Regulations will cover all types of funds broadly under the following 3 categories:
i. Category I AIF – These will be AIFs with positive spillover effects on the economy, and will include Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds. For these types of funds, certain incentives or concessions might be considered by SEBI or the central government or other regulators.
Funds in this category will be close ended, will not engage in leverage and will follow investment restrictions as prescribed for each category.
ii. Category II AIF – These will be AIFs for which no specific incentives or concessions are given by the government or any other Regulator; which will not undertake leverage other than to meet day-to-day operational requirements as permitted in the Regulation; 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 will be close ended, will not engage in leverage and will have no other investment restrictions.
iii. Category III AIF – These will be AIFs including hedge funds that are considered to have negative externalities such as exacerbating systemic risk through leverage or complex trading strategies. They funds can be open or close ended and may engage in leverage subject to limits as may be specified by the Board.
Funds in this category will be regulated ‘through issuance of directions regarding areas such as operational standards, conduct of business rules, prudential requirements, and restrictions on redemption, conflict of interest’ as specified by the SEBI Board.
Salient features of SEBI (Alternative Investment Funds) Regulations, 2012
- These Regulations will be applicable to all pooled investment vehicles other than Mutual Funds, CIS Schemes, Family Trusts, ESOP Trusts, Employee Welfare Trusts, holding companies, funds managed by Asset Reconstruction Companies, Securitisation Trust or any such pool of funds which is directly regulated by any other regulator in India.
- The AIF will not accept an investment of value less than Rs 1 crors from an investor and it will have a minimum corpus of Rs 20 crore. Further, any fund or its scheme will not have more than 1,000 investors.
- The manager or sponsor will need to have a continuing interest in the fund of not less than 2.5% of the initial corpus or Rs 5 crore whichever is lower and such interest will not be through the waiver of management fees.
- Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years while Category III AIFs may either be close or open-ended.
- Units of an AIF may be listed on a stock exchange subject to a minimum tradable lot of Rs 1 crore. But an AIF will not raise funds through the Stock Exchange mechanism.
- AIFs cannot invest more than 25% of the investible funds in one Investee Company; they also cannot invest in associate companies. Also, All AIFs shall have QIB status as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
- AIFs will need to provide investors with financial information of portfolio companies as also material risks and how these are managed on an annual basis.
- The SEBI will take up with government to extend the tax pass through status to AIFs.
Scope of the Regulations and applicability to existing funds
- Irrespective of the operations being conducted as Private Equity, Real Estate or Hedge Funds, etc, AIFs must register with SEBI under the AIF Regulations.
- SEBI (Venture Capital Funds) Regulations, 1996 shall be repealed but existing VCFs shall continue to be regulated by the VCF Regulations till the existing fund or scheme is wound up. It is to be noted that existing VCFs cannot raise any fresh funds after this notification except commitments already made by investors as on date of the notification.
- Existing funds not registered under the VCF Regulations cannot float any new scheme without registration under AIF Regulations. But schemes floated by such funds before coming into force of AIF Regulations can continue to be governed till maturity by the contractual terms, except that no rollover/ extension or raising of any fresh funds is allowed.
The AIF Regulations will become effective from the date of their notification in the Gazette of Government of India.