SEBI has allowed 12 entities to establish Alternative Investment Funds (AIFs) for real estate, private equity and hedge funds.
The 12 AIFs that have been registered with SEBI since October 10, 2012 include India Realty Fund, Dar Mentorcap Film Fund, Capaleph Indian Millennium Small & Medium Enterprises Fund and Capaleph Indian Millennium Private Equity Fund.
As per the SEBI guidelines, AIFs can operate broadly in 3 categories. The SEBI rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.
Mutual funds under the SEBI (Mutual Funds) Regulation, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999 are not covered under the AIF Regulations.
What are AIFs? Categories of AIFs, Objectives of SEBI for allowing more AIFs, -ves / +ves about AIFs, Who are excluded from AIF Regulations, 2012?
What are AIFs?
- An investment that is not one of the three traditional asset types (stocks, bonds and cash). Alternative investments include hedge funds, managed futures, real estate, commodities, PE (private equity) funds, derivatives contracts, etc.
Different categories under which fund can be registered under AIF Regulations, 2012:
Category-I AIFs: Those funds that get incentives from the government, SEBI or other regulators and include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds.
- Category-II AIFs: These can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. They include PE funds, debt funds or fund of funds, as also all others that are not classified as category I or III.
- Category-III AIFs: Those funds that trade with a view to making short-term returns and include hedge funds, etc. which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. These funds can be open ended or close ended.
Objective:
- SEBI aims to bring unregulated and lightly regulated investment funds like hedge funds and private equity-venture capital funds under its ambit with a view to systemic stability, increasing market efficiency, encouraging formation of new capital and consumer protection.
- AIFs are basically established or incorporated in India for the purpose of pooling in of capital from Indian and foreign investors for investing as per a pre-decided policy.
- The regulation covers all AIFs, including PEs, real estate funds and hedge funds, and makes it mandatory for them to register with SEBI.
-ves about AIFs
- Many alternative investments also have high minimum investments and fee structures compared to mutual funds and ETFs. While they are subject to less regulation, they also have less opportunity to publish verifiable performance data and advertise to potential investors.
+ves about AIFs
Alternative investments are favored mainly because their returns have a low correlation with those of standard asset classes.
Who are excluded from AIF Regulations, 2012?
Followings are excluded from the ambit of AIF Regulations:
- Family trust, ESOP trusts, employee welfare trusts, gratuity trusts, collective investment schemes, holding companies, securitization trusts, and any such pool of funds which is directly regulated by any other regulator in India are expressly excluded.