Introduction to AIF in India - CS Meenakshi Jayaraman - DVS Advisors
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Introduction to AIF in India CS Meenakshi Jayaraman
Research Credits Iswariya BS Subash
Legends Used
AIF Alternative Investment Fund
CA Contribution Agreement
ESOP Employee Stock Option Plan
HNWI High Net Worth Individuals
IMA Investment Management Agreement
PIPE Private Investment in Public Equity
PPM Private Placement Memorandum
SEBI Securities and Exchange Board of India
SME Small and Medium Scale Investors
SPV Special Purpose Vehicle
Presentation Schema
Advantages and
AIF in India Suitable Investors
Disadvantages of AIF
Parties to an AIF Typical AIF structure Registration with SEBI
Investment
Statistics Conclusion
restrictionsAIF in India
Alternative Investment Fund
Alternative Investment Fund
Meaning Excludes Not covered under
• Privately Pooled investment • Family trust set up for the • SEBI (Mutual Funds)
Vehicle benefit of relatives Reg.,1996
• Collects funds from Indian / • ESOP trust • SEBI (Collective Investment
foreign / Non-resident • Employee welfare trust / Scheme) Reg.,1999
investors gratuity trust • Any other regulations of the
• Holding company Board to regulate fund
• Other SPV, including management activities
securitization trusts
• Funds managed by
securitisation /
reconstruction Company
• Any pool of funds directly
regulated by any other
regulatorCategories of AIF
Venture Capital
fund
AIF
SME Fund Hedge Funds
Category- Category- Category-
I II III
Social Venture PIPE Funds
Fund
Funds for
Private Equity
distresses
Funds
assets
Infrastructure
Fund
Real Estate
FundsPoints to be considered in SEBI (AIF) Reg., 2012
Minimum contributors
Minimum Corpus of a Scheme
commitment
Rs.20 crore
Rs.1 crore
Appointment of Custodian Auditing the Books of accounts
If scheme corpus exceeds of AIF
Rs.500 crore for AIF I & II Annually within 180 days form
(mandatory for Cat III AIF) the year end
Maximum number of investors
Listing
1000 investors
Only after the final close of the
scheme with minimum (provisions of Companies Act,
tradable lot of Rs.1 crore 2013 to apply if AIF is set up as
a company)Suitable Investors Minimum contribution per scheme per investor being Rs. 1 crore – HNWIs are the suitable investors for AIF schemes AIFs would be an investment vehicle for HNWIs / sophisticated investors / individual family offices HNWIs prefer AIF to retail funds - due to its higher risk- reward ratio. Fund managers of an AIF adopt complex strategies to perform better than the market.
HNWIs in India and World
Source: Capgemini World Wealth Report 2020 (in thousands)
As per the above data, the number of HNWIs in India has increased from 2.56 lakhs in 2018 to 2.63 lakhs in 2019
with an annual growth rate of 3%Advantages & Disadvantages of AIF
Advantages
• Leveraging Fund manager’s experience
• Minimum volatility as a result of diversification of assets
• Tax Benefits
Disadvantages
• Fund manager cannot be held liable for losses
• Not feasible for small scale investors
• High Management Fees
• Cost not shared by many investors as is the case of Mutual FundsParties to an AIF
Fit and proper person as per
Trust established under Indian Trusts Schedule II of SEBI (Intermediaries)
Act, 1882 / an Act of Parliament / State Regulations, 2008
Legislation Sponsor
Person(s) involved in setting up an
Holding and administering on behalf of AIF
the contributors
Trustee AIF Manager
Fit and proper person as per
Registered intermediary under Schedule II of SEBI (Intermediaries)
SEBI (Custodian) Regulations, Custodian Regulations, 2008
1996 Any person appointed by AIF to
To keep safe custody of securities manage its investmentsFit and proper person
SEBI takes into consideration the following criteria for
deciding whether a person is fit and proper (inclusive
definition)
• Integrity, reputation • Absence of • Competence
and character convictions and including financial
restraint orders solvency and net
worth
Criteria 1 Criteria 2 Criteria 3Qualifications required for a Manager
The Key investment team of Manager of AIF must have adequate experience,
• with at least 1 key personnel having not less • at least 1 key personnel with professional
than 5 years of experience in advising / qualification in finance, accountancy,
managing pools of capital / in fund / asset / business management, commerce,
wealth / portfolio management / in the economics, capital market / banking from a
business of buying, selling and dealing of university / an institution recognized by the
securities / other financial assets and Central Government / any State Government
/ a foreign university / a CFA charter from
the CFA institute / any other qualification as
may be specified by the Board
Criteria 1 Criteria 2
Criteria 1 and 2 can either be satisfied by 2 separate Key personnel or
a single key personnel can satisfy both the criterionTypical AIF structure
Sponsor
Mgmt. Fees
Manager Other AIFs
Setting up AIF
Incorporation
Provides Mgmt.
Services
Listed
Promoter securities
Custodial Fees
Providers
Investment
Service
Investee
Custodian AIF
Provides Unlisted
Custodial Investor
Services
securities
Investment
Returns
Provides
Trusteeship Foreign
Services
securities
Trustee Indian
Trusteeship
Fees
Foreign
NRIsAIF registration with SEBI
Application to be
made in Form A with
necessary
attachments in SEBI
Intermediary portal
(https://siportal.sebi.
Applicant has to
gov.in)
pay registration / Application fee of
re-registration fee Rs.1 lakh by way of
by way of bank bank draft
draft
SEBI will grant
certificate of
registration as an
AIF
On satisfaction of
And other online
all the eligibility
applications as
criterion, SEBI shall
prescribed by SEBI
inform its approval
from time to time
to the applicant
Generally, the
applicant will
receive reply from
SEBI within 21
working daysHow to float a scheme?
Private Placement Memorandum (PPM)
Trustee, Sponsor and Manager will jointly issue the PPM to the Investor
Investment Management Agreement (IMA)
IMA will be executed between Investment This will be shared with the Contributor once he
Manager and Trustee shows his interest in investment
Contribution Agreement (CA)
Trustee and Investment Manager will enter into a CA with the investor upon his acceptance to investInvestment restrictions
Category I Category II Category III Category I and II AIFs shall not invest more
than 25% of the investible funds* in 1 Investee
Company
Category I Category I Category I Category III AIF shall not invest more than 10%
of the investible funds* in 1 Investee Company
Category II Category II Category II
AIFs cannot invest in other fund of funds
Category III Category III Category III *Investible funds means corpus of the AIF net
of estimated expenditure for administration and
management of the fundStatistics
Assets managed by AIF
YoY AUM of AIF during the end of December (in crores)
400000
300000
200000
100000
0
2012 2013 2014 2015 2016 2017 2018 2019 2020
Category I Category II Category III
Source: SEBI website
2012 (in 2020 (in • Significant increase in the AUM under Category II AIF from nil to
Year crores) crores) 3.5 lakh crores during the period 2012-2020
Category I 337 42,352.95 • Gradual increase in the AUM of Category I and III AIFs.
• Chartered Alternative Investment Analyst Association (CAIA)
Category II 0 3,52,816.87 members expect that by 2025, the alternative investment fund
Category III 22.5 46,824.91 industry will grow to 18-24% of global investible market. India
has an important role to play in the coming years.No. of registered AIFs in India
AIFs registered with SEBI (as on 18th February, 2021)
Category I 179
Category II 407
Category III 143
Total AIFs 729
Source: SEBI websiteConclusion AIF is a lucrative product for HNIs planning to multiply their wealth. Experience of the fund manager is of paramount importance in the success of an AIF. AUM of AIFs in India have steadily increased without any downfall. Category-II AIF has shown maximum potential owing to minimum investment restrictions. Category III AIFs can make leveraged investments, they naturally gain systemic importance. Due to this, the compliance requirements of Cat-III AIF are higher than the other categories. Government has been consciously introducing various tax benefits for investors in an AIF. The regulatory framework is yet to be streamlined.
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