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ALTERNATIVE INVESTMENT FUND

On May 21st 2012 SEBI notified the AIF regulations 2012. These are the Alternative Investment Fund Regulations  will replace the SEBI(Venture Capital fund) regulations 1999.

DEFINITIONS

1. Alternative  Investment  Fund (AIF) means any fund established or incorporated  in India in the form of a trust or a company or a limited liability partnership or a  body corporate which,-

i. is  a  privately  pooled  investment  vehicle  which  collects  funds  from investors, whether Indian or foreign, for investing it in accordance with a  defined investment policy for the benefit of its investors; and

ii. is not covered under the SEBI(Mutual Fund) Regulation or any other regulation.

2. AIF Cannot be formed by:

i. Family Trust.

ii. ESOP Trust.

iii. Employee Welfare Trust or Gratuity Trust.

iv. Other Special Purpose Vehicle (SPV) not established by fund managers, including securitization trusts, regulated under a specific regulatory framework.

v. holding companies‘ within  the meaning of Section  4 of the Companies Act, 1956;

vi. funds managed by securitisation company or reconstruction company which is registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of  Security Interest Act, 2002;

vii. any such pool of funds which is directly regulated by any other regulator in India.

3. Associate means a:

i. Company.

ii. Limited Liability Partnership. (LLP)

iii. Body corporate.

In which director or trustee or partner or sponsor or Manager of the AIF holds more than 15% of its Paid up Equity share Capital or Interest.

4. Corpus means  the  total  amount  of  funds  committed  by  investors  to  the Alternative Investment Fund by way of a written contract or any such document  as on a particular date

5. Sponsor means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case  of a limited liability partnership

6. Investee company means: 

i. any company

ii. special  purpose vehicle or 

iii. limited liability partnership or

iv. body corporate

in which an AIF makes an investment

7. Venture  capital  fund  means  an  AIF which  invests primarily  in  unlisted  securities  of  start-ups,  emerging  or  early-stage  venture  capital undertakings mainly involved in new products, new services, technology  or intellectual property right based activities or a new business model;

8. Venture Capital Undertaking means a domestic company:

(i) Which is not listed on a recognised stock exchange in India at the time of making investment; and 

(ii) Which is engaged in the business for providing services, production or manufacture of article or things and does not include following activities or sectors:

(1) non-banking financial companies;

(2) gold financing;

(3) activities not permitted under industrial policy of Government of India;

(4) any other activity which may be specified by the Board in consultation with Government of India from time to time;

9. Social venture means a trust, society or company or venture capital undertaking or limited  liability  partnership  formed  with  the  purpose  of  promoting  social welfare or solving social problems or providing social benefits and includes,-

(i) public charitable trusts registered with Charity Commissioner;

(ii) societies  registered  for  charitable  purposes  or  for  promotion  of  science, literature, or fine arts;

(iii) company registered under Section 25 of the Companies Act, 1956;

(iv) micro finance institutions;

And Social Venture Fund means a fund which invests in such Social Venture

REGULATIONS

1. No AIF will operate until it has got certificate from SEBI

2. Existing Fund not registered with SEBI can continue to operate till 6 months, after which it has to get registered with SEBI

3. SEBI may extend the period further 6 months

4. Venture Capital Funds under SEBI(Venture Capital funds) Regulations shall not increase their targeted corpus

5. AIF can get registration under 3 categories

Category I: These AIF invests in Early Stage Ventures, SME’S, Infrastructure, Other sectors or areas  which  the  government  or regulators  consider  as  socially  or  economically desirable  and  shall  include:

(i) Venture Capital Funds.

(ii) SME Funds.

(iii) Social Venture Funds.

(iv) Infrastructure Funds.

(v) Other AIF.

Category II: Category II AIFs are one  which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these regulations;

Category III: These AIFs employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

INVESTMENT CONDITIONS

1. All AIF shall  state  investment  strategy,  investment  purpose and its investment methodology in its placement memorandum to the investors.

2. Any material alteration to the fund strategy shall be made with  the consent  of at least 2/3rd of  unit  holders  by  value  of  their investment

3. The AIF may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units

4. Minimum corpus of  atleast 20 crores

5. Individual investor must contribute upto a minimum of 1 crore & if the investor is employee or director or manager of AIF then the investor can contribute a minimum of 25 lakhs

6. Sponser or Manager must have a minimum continuing interest

i. 2.5% of Corpus or

ii. 5 Crore Rupees

Whichever is lower Of investment in AIF

7. AIF shall not have more than 1000 investors

8. AIF shall not invest in associates except with approval of 75% of investors

Below is the chart which shows the matrix which shows what are the investment options available for all the categories of AIF

DIFERENT FORMS OF CATEGORY I AIF’S ARE

INVESTMENT CONDITION

VENTURE CAPITAL FUND

2/3rd of Corpus to be invested in

1. Unlisted equity shares

2. Equity linked instruments of venture capital undertaking

3. Companies listed on SME exchange

1/3 rd of Corpus to be invested in

1. Subscription  to  IPO  of  a  venture  capital  undertaking  whose shares are proposed to be listed;

2. Debt or debt instrument of a venture capital undertaking in which the fund has already  made  an  investment  by  way  of  equity  or  contribution  towards  partnership interest; 

3. Preferential allotment, including through qualified institutional placement, of equity shares or equity linked instruments of a listed companvy subject to lock in period of one year;

SME FUND

1. Mimimum of 75% of Corpus shall be invested in unlisted securtities or partnership interest of venture capital undertakings or investee companies which are SMEs  or in  companies  listed or proposed to  be  listed on SME exchange or SME segment of an exchange

2.May enter into an agreement with merchant banker to subscribe to the unsubscribed portion of the issue or to receive or deliver securities in the process of market making of SEBI(ICDR) regulations

3. One of the important exemption these funds have is that these shall be exempt from SEBI (Prohibition of Insider Trading) Regulations in  respect  of investment in companies listed on SME Exchange or SME segment of an exchange subject to the following conditions:

(i)  the fund shall disclose any acquisition or dealing in securities pursuant to such due-diligence, within two working days of such acquisition or dealing, to the stock exchanges where the investee company is listed;

(ii)  such investment shall be locked in for a period of one year from the date of investment.

SOCIAL VENTURE FUND

1. Minimum of 75% of Corpus to be invested in unlisted securities or partnership interest of social ventures.

2. May accept grants, provided that such utilization of such grants shall be restricted to 1 above

3. May give grants to social ventures, provided that appropriate disclosure is made in the placement memorandum

4. May accept muted returns for their investors  i.e. they may accept returns on  their  investments  which  may  be  lower  than  prevailing  returns  for  similar investments.

INFRASTRUCTURE FUNDS

1. Minimum of 75% of the Corpus of shall be invested in unlisted Securties units or partnership interest of venture capital undertaking or investee companies or special  purpose  vehicles,  which  are  engaged  in  or  formed  for  the  purpose  of operating, developing or holding infrastructure projects;

2. May also invest in listed securitized debt instruments or listed debt securities of investee companies or special purpose  vehicles,  which  are  engaged  in  or  formed  for  the  purpose  of  operating, developing or holding infrastructure projects. This is in addition to condition 1 above

THE FOLLOWING IS THE MATRIX FOR THE INVESTMENT CONDITIONS FOR THE 3 CATEGORIES OF AIF’S

CATEGORY I

CATEGORY II

CATEGORY III

Other AIF

Listed Investee

Unlisted Investee

CATEGORY I

Y

N

N

Y

Y

Y

CATEGORY II

Y

Y

N

Y

N

Y

CATEGORY III

N

Y

Y

N

Y

Y

Other Features

CATEGORY I

CATEGORY II

CATEGORY III

1. Type of Fund Closed  ended or open ended

Closed ended

Closed ended

Closed ended or open ended

2.Minimum Tenure

3yrs*

3yrs*

No Minimum Tenure

* Extension upto 2 yrs if 2/3rd  approvalof unit holders

3. Investment in Investee company

25%

10%

25%

4. Valuation

Atleast once in 6 months*

Atleast once in 6 months*

Ensure that calculation of the NAV is  independent  from  the  fund  management  function  of  the  AIF & such NAV shall be disclosed to the investors

1. within 3 months in case of Close ended funds

2. within 1 month in cased of open ended fund

* can be enhanced upto 1 year if 75% approval




Category Corporate Law, Other Articles by - Rahul Chilal 



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