There are a large variety of investment institutions making investment in several types of assets. New varieties like angel funds emerges with time. existing regulations may not cover them. Hence these institutions that are different from the traditional investment institutions are categorized as Alternative Investment Funds. The necessity for classifying these institutions is from the view point of regulation. Every financial entity should be well regulated for the overall safety of the financial system as well as growth of the economy.
The name Alternative is vital as it shows the entities specified as AIFs are not like the traditional institutions – mutual funds, pension funds, insurance companies etc. Anything alternate to traditional form of investments can be categorized as alternative investments.
What are Alternative Investment Funds?
Alternative Investment Funds are a class of investment entities that are not covered under the usual SEBI regulatory framework for investment institutions. AIFs refers to any privately pooled investment fund – a trust or a company or a body corporate or an LLP (Limited Liability Partnership) which are not presently covered by any Regulation of RBI, SEBI, IRDA and PFRDA. They may be foreign or Indian.
A notable general feature of AIFs is that they are tailor made investment arrangements like Private Equities that aims to utilize investment opportunities. AIFs are thus private investment entities.
Thus, AIFs includes Private Equities, Venture Capital Fund, Hedge funds, Commodity funds, Debt Funds, infrastructure funds, etc. Most of these investment entities are owned by big corporate houses or wealthy individuals. Private Equities like Blackstone and KKR (Kohlberg Kravis Roberts) are examples for AIFs. Several multinational banks have also AIFs. Venture Capital Funds and Angel Investors are also categorized as AIFs.
Regulation of AIFs
SEBI in May 2012 had notified the guidelines for AIFs as funds established or incorporated in India for pooling in of capital from Indian and foreign investors for investing as per a pre-decided policy.
In 2014, SEBI decided that the promoters of listed companies can offload 10 per cent of equity to AIFs such as such as SME Funds, Infrastructure Funds, PE funds and Venture Capital Funds registered with the market regulator to attain minimum 25 per cent public holding.
Under SEBI guidelines, AIFs are classified into three categories. The SEBI rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.
The Category-I AIFs are the ones who can produce positive spillovers in the economy and for that they get incentives from the government, SEBI or other regulators. They include Social Venture Funds, Infrastructure Funds, Venture Capital Funds including Angel Investors, SME Funds etc.
The Category-II For these funds, no specific incentives and concessions are given by the government or any regulator. The institutions under this category are: Private Equity Funds, Debt Funds, Fund of Funds and such other funds that are not classified as category I or III. These funds shall be close ended and shall not engage in leverage.
The Category-III AIFs are institutions like Hedge Funds that trade with a view to make short term returns. They employ diverse or complex trading strategies and do leverage including investment in listed or unlisted derivatives.
Government in budget 2015 has allowed foreign investment in AIFs. Now, foreign investments would be allowed in AIFs that are established as registered trust, structured as incorporated company or limited liability partnership. The decision would enable foreign investment in AIFs established as trust or incorporated firms or LLPs or body corporate and registered with SEBI under the SEBI (AIFs) Regulations 2012.
The same would be enabled in the FDI policy and FEMA regulations including foreign investment by way of units of AIFs set up as trust in terms of SEBI regulations.