Alternative Investment Funds (AIFs)
- July 11, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Alternative Investment Funds (AIFs)
Section: Money Market
As many as 15 alternative investment funds (AIFs) are being probed by market regulator SEBI for various malpractices and the creation of hybrid structures.
- SEBI has recently tightened norms on IPO investments, which is creating difficulties for High Net Worth Investors to invest on the primary market issuances as they are placed at par with retail investors.
- HNI thus uses the AFI route to invest in IPOs as AIFs are allowed even pre-IPO placements and can even corner large a stake during the IPO in any company.
- Further, AIFs are being used as a substitute for Participatory Notes.
- Violation of the rule which states -AIFs cannot invest more than 10 per cent of their investible funds in any of their investee companies.
Alternate Investment Fund
- It is a vehicle which invests in non traditional assets- like real estate, infrastructure, venture capital etc..
- An alternative investment is a financial asset that does not fall into one of the conventional equity/income/cash categories.
- Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.
- It is regulated by the SEBI.
- It 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.
- It is defined in Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
- 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 which-
- is a privately pooled investment vehicle that gathers funds from investors, including Indian investors and foreign investors, to invest it as per a defined investment policy to benefit its investors.
- does not include funds covered under the SEBI (Collective Investment Schemes) Regulations, 1999, SEBI (Mutual Funds) Regulations, 1996 or any other regulations of SEBI regulating fund management activities. Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
As per SEBI (AIF) Regulations, 2012, AIFs shall seek registration in one of the three categories:
- Category I: 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.
- Example– Venture capitals funds, Social Venture Funds, angel funds, Infrastructure funds
- Category II: It does not fall in Category I and III and does not undertake leverage or borrowing other than to meet day-to-today operational requirements.
- Example– private equity funds, real estate funds, Funds of funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator.
- Category III: AIFs which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
- Example- Alternative Investment Funds such as hedge funds, private investment in Public Equity 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.
- Following are not considered a AIFs:
- Mutual funds
- Collective investment schemes
- Employee Stock Options Trusts
- Employee welfare trusts or gratuity trusts
- Family benefit trust
- Holding companies