SEBI (Alternative Investment Fund) Regulations

October 30, 2011

Investment products other than the traditional investments in stocks, bonds, cash, or property are called Alternative Investments. There is no proper definition of AI but it includes commodities, private equity, hedge funds, venture capital, and financial derivatives as well as assets such as paintings, other arts, wines, antiques coins and stamps. 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.

Till now there has been no substantial regulatory framework in India for handling the Alternative Investments Funds. Recently SEBI has proposed the to create regulations for alternative investment funds under the title SEBI (Alternative Investment Fund) Regulations. Under the new regulatory frameowork, the following come:

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).

Here is the summary of the new regulations:

All types of private pools of capital or investment funds will need to seek registration with SEBI.
Funds could be formed as companies, trusts or body corporate including LLP (Limited Liability Partnership) structure.
The fund manager/ asset management company or trustees of the fund are required to be specified, and change of such entities be reported to the regulator.
At the time of application, the fund would specify the category under which it is seeking registration, the targeted size of the proposed fund and its life cycle and the target investor.
Funds would be close-ended. Close-ended is a type of investment company that has a fixed number of shares which are publicly traded. Closed ended funds are not required to redeem shares and have managed portfolios.
The Fund size can be revised upwardly with the approval of SEBI.
Minimum investment amount would be specified as 0.1 per cent of fund size subject to a minimum floor of Rs.1 crore.
If the company is constituted as company or LLP, the number of shareholders or partners shall not exceed 50.
The size of units issued will not be less than Rs.10 lakh.
Funds may be raised only through private placement through information memorandum.