Alternative Investment Funds ("AIF") in
AIFs play a significant role in reducing the volatility that may be associated with other forms of investments as their performance is disassociated from the turbulence of the stock market. An AIF may seek to register itself in one of the three following categories:
- Category I: For investments in start-ups, early-stage ventures, small and medium-sized enterprises, or other projects which the Government deems to be socially and economically viable (e.g. venture capital funds, infrastructure funds, angel funds and social venture funds, etc.);
- Category II: For investments which do not fulfil the criteria for Category I or Category III, and which do not undertake leverage or borrowing for purposes other than meeting day-to-day operational requirements (i.e. investments in equity and debt securities for which no specific incentives or concessions are provided by the Government, including private equity funds, debt funds, etc.); and
- Category III: For investments aimed at generating short-term returns achieved by employing diverse or complex trading strategies (e.g. hedge funds, private investments in public equity funds, etc.)2.
The AIF Regulations were amended the SEBI (Alternative Investment Funds) (Second Amendment) Regulations, 2022, effective March 16, 20223. By way of this amendment, Regulation 15(1)(d) of the AIF Regulations was altered. Regulation 15(1)(d) laid down the conditions that AIFs under Category III would be subject to for investments in listed equity.
Position Prior to the Amendment
A. Investments by Category III AIFs were not permitted to exceed 10% of the:
(
(ii) Corpus of the scheme of the AIF (net of expenditure for administration and management of the fund estimated for the duration of the scheme from the day of its launch to the last day of the specified term) ("Investable Funds")5 in securities other than listed equity of an
B. Investments by the large value funds for accredited investors of Category III AIFs were not permitted to exceed 20% of the:
(
(ii) Investable Funds in securities other than listed equity of an investee company, directly or through investment in units of other AIFs.
Position After the Amendment
A. Investments by Category III AIFs are now disallowed from investing more than 10% of the:
(i) Investible Funds or the net asset value of the scheme, as calculated by the fund managers (for investments in the listed equity of an
(ii) Investable Funds in an
B. Investments by the large value funds for accredited investors of Category III AIFs are now disallowed from exceeding 20% of the:
(i) Investable Funds or the net asset value of the scheme, subject to the conditions specified by the SEBI from time to time; and
(ii) Investable Funds in an
The Covid-19 pandemic has caused investors to incline towards investment options which are more bolstered from the ups and downs of the stock market. This has led to alternative investments becoming more mainstream for high net-worth individuals, and entities seeking high risk-adjusted returns and diversifications from other, more traditional, asset classes. This increase in demand led the total assets of AIF, on a yearly basis to move up by 38% to
Leading up to this most recent amendment to the AIF Regulations, the SEBI has continued to streamline the way AIFs function-seeking to make the route more attractive to potential investors while simultaneously ensuring that the interests of all the stakeholders remain watertight and protected.
Foot notes
1 Regulation 2(1)(b) of the AIF Regulations.
2 Regulation 3(4) of the AIF Regulations.
3 SEBI Circular No. SEBI/LAD-NRO/GN/2022/75 dated
4 Regulation 2(1)(o) of the AIF Regulations.
5 Regulation 2(1)(p) of the AIF Regulations.
6 'Assets of alternative investment funds grow 38 per cent in 2021, cross ?6 lakh crore', The Hindu Business Line, accessed at https://www.thehindubusinessline.com/data-stories/data-focus/assets-of-alternative-investment-funds-grow-38-per-cent-in-2021-cross-6-lakh-crore/article65183095.ece
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