Alternative Investment Funds
Alternative Investment Funds are the investments which do not happen via the traditional modes of investment such as stocks, bonds, cash, property etc. The other avenues have been put into the Alternative Investments, though there is no proper definition of AI. Some of the alternative investments include the commodities, private equity, hedge funds, venture capital, and financial derivatives as well as assets such as paintings, other arts, wines, antiques coins and stamps. The gains in these assets would be called capital gains and provisions accordingly would apply to them. Most of the alternative investment funds raise capital from High Net Worth Investors (HNIs) with a view to investing in accordance with a defined investment policy for the benefit of those investors.
Regulation of Alternative Investments in India
Alternative Investments Funds come under the SEBI (Alternative Investment Fund) Regulations 2012. Under this regulatory regime, the funds which come under AIF are as follows:
- Venture Capital Funds
- PIPE (Private Investment in Public Equity ) Funds
- Private Equity Fund
- Debt Funds
- Infrastructure Equity Fund
- Real Estate Fund
- SME Fund
- Social Venture Funds
- Strategy Fund (Residual Category, including all varieties of funds such as hedge funds, if any).
Types of Alternative Investment Funds
These funds are established in India in various formats like trust, company, limited liability partnership etc. SEBI has allowed AFIs to be operated under only three categories. These are:
- Category I: These will get incentive from the ruling government. This includes Social venture funds, Infrastructure funds, Venture Capital funds, SME funds etc.
- Category II: These are not given any special incentives or concessions and can invest anywhere without raising any debt. They can however consider the latter route for meeting their daily requirements. Private Equity funds, Debt funds etc. are included in this category.
- Category III: They operate to make short-term gains and come without any concessions. Hedge Funds are included here.
Investment into the Alternative Investment Funds is open to both Indian and foreign investors. It has been announced in Budget 2016 that the foreign investments will be allowed in alternative investment funds (AIFs). While presenting the budget, the Finance Minister also announced that for the purpose of AIFs, the government will do away with the categorization of foreign portfolio investors (FPI) and foreign direct investments (FDI). This can further boost the AIF industry in India, which is still in nascent stage.
Who invests in Alterative Investment Funds?
Most of the alternative investment funds raise capital from high net worth investors (HNIs) with a view to investing in accordance with a defined investment policy for the benefit of those investors.
The AIFs usually have a high limit of minimum investment to the tune of INR 1 Crore as per Security and Exchange Board of India Regulations, 2012. It is basically directed at high net worth individuals. The total amount which is to be committed by investors in the investee company or trust by written contract or agreement should be a minimum of INR 20 Crores. The fund manager should also contribute 2.5% or at least INR 5 Crores in the initial capital investment. The dilution of FPI and FDI will ensure procedural convenience and thus an ease-of-flow of investment for global investors. These funds ensure greater returns to domestic and global investors and promote India as a great investment definition-a vision the new government has taken on seriously.
Private Equity Fund
This AFI primarily deals with equity-linked instruments or partnership interests of investee companies.
SME or Small and Medium Enterprise Fund are those AFIs where investments are done in unlisted (or to be listed on SME Exchange)securities of investee SME companies.
Social Venture Funds
A social venture is any trust, company, limited liability partnership done to for general social welfare or solving some social problems, providing social benefits etc. These can include charitable institutions, societies, trusts, companies (registered under Section 25 of Companies Act, 1956); micro finance institutions etc. Any AFIs which invest in securities of the social ventures satisfying the performance norms as laid down by the funds as called Social Venture funds.
Venture Capital Funds
These are those AFIs which invest in securities of start-ups usually involved in making new products, services, technology, IPR etc. These companies are not listed and do not include-NBFCs, Financing etc.