It’s very exciting to learn that the concept of Alternative Investment Funds (AIFs) in India was introduced by the Securities and Exchange Board of India (SEBI) through the SEBI (Alternative Investment Funds) Regulations, 2012, effected from May 21, 2012, and established a regulatory framework for the registration and operation of AIFs in India.

Prior to the introduction of AIF regulations, private equity funds, venture capital funds, and other similar funds were regulated under the SEBI (Venture Capital Funds) Regulations, 1996. As, these regulations did not cover all types of alternative investment funds and lacked clarity on certain aspects of fund operation and management. The introduction of AIF regulations aimed to provide a more comprehensive regulatory framework for alternative investment funds, which include funds investing in start-ups, small and medium enterprises, real estate, and infrastructure. The AIF regulations sought to bring greater transparency and accountability to the sector, and ensure that investor interests were protected.

An AIF is a type of investment fund that is privately operated and based in India. It collects money from sophisticated investors, both Indian and foreign, and invests it according to a defined investment policy. AIFs are different from mutual funds or collective investment schemes, which are regulated differently by SEBI. Some types of AIFs may be exempt from registration, depending on their structure and purpose, such as family trusts, employee welfare trusts, or holding companies. More, AIFs offer investors access to alternative investments that may not be available through traditional investment vehicles. Through this article we could outline the key steps involved in the AIF registration process, such as filing the necessary documents, obtaining approvals from regulatory authorities, and complying with ongoing reporting and disclosure requirements.

Certain exemptions from registration are provided to some types of AIFs under the AIF Regulations, where allow to operate without needing to meet the same regulatory requirements as other types of AIFs Under proviso to sub-clause (b) of Regulation 2 of SEBI (Alternative Investment Funds) Regulations, 2012. The exclusive list of entities that are excluded from the definition of Alternative Investment Funds (AIFs) under the SEBI (Alternative Investment Funds) Regulations, 2012 are-

i. Family trusts set up for the benefit of "relatives" as defined under the Companies Act, 2013.

ii. Employee welfare trusts or gratuity trusts set up for the benefit of employees.

iii. ESOPs (Employee Stock Option Plans) that are regulated under the SEBI (Share Based Employee Benefits) Regulations, 2014 and the Companies Act, 2013.

iv. Special Purpose Vehicles including securitization trusts that are not established by fund managers and are regulated under a specific regulatory framework.

v. Funds managed by a securitization company or reconstruction company registered under the SARFAESI Act, 2002.

The above cited list exclusion from the definition of “AIF” does not necessarily mean that these entities are exempt from all regulatory requirements, as they may be subject to other regulations and reporting requirements under applicable laws.

Therefore, The SEBI (AIF) Regulation, 2012 is a set of regulations introduced by the Securities and Exchange Board of India (SEBI) to regulate and monitor the activities of pooled investment funds such as private equity, hedge funds, and real estate funds in India. These regulations help to ensure transparency and accountability in the functioning of AIFs and provide a framework for their registration, operation, and reporting requirements.

The regulations also cover the eligibility criteria, investment restrictions, disclosure norms, and compliance requirements for AIFs, and seek to bring unregistered funds under the ambit of the law.

If any person or entity planning to establish an AIF in India needs to register with SEBI under the SEBI (AIF) Regulations, 2012, as amended from time to time, and comply with the applicable rules and guidelines. Since the introduction of AIF regulations, the alternative investment fund industry in India has grown rapidly, with a large number of funds being registered with SEBI. The growth of the sector has been driven by the increasing demand for alternative investment options among investors, as well as the availability of attractive investment opportunities in various sectors of the Indian economy.

Limitation on AIF Registration

» No scheme of an AIF (other than an angel fund) is allowed to have more than 1000 investors. If an AIF is formed as a company, the provisions of the Companies Act, 2013 shall apply to it.

» In the case of an angel fund, the maximum number of angel investors in a scheme is limited to 49, to ensure that the angel fund remains a private placement and does not become a public offering.

» AIF cannot make an IPO at large to subscribe to its units. Instead, it can only raise funds from sophisticated investors through private placement. This means that the AIF can only solicit investments from individuals or institutions that meet certain criteria for sophistication or expertise in financial matters.

» The SEBI has set certain criteria for determining who qualifies as a sophisticated investor, including individuals with a certain level of net worth or income, institutional investors, and certain qualified entities such as banks and insurance companies. This is done to ensure that only investors who have the knowledge and experience necessary to understand the risks involved in investing in an AIF are able to invest in it.

In simple way, you will get to know that Alternative Investment Funds (AIFs) are privately pooled investment vehicles that are not publicly offered, and their regulations vary from country to country and most countries have laws and regulations that require AIFs to be registered or licensed with a regulatory body-

1. Category I AIF: This category includes funds that invest in start-ups, early-stage ventures, small and medium enterprises (SMEs), social ventures, or infrastructure projects and sub-categories of Category I AIF includes-

» Venture Capital Funds (VC’s Fund), are funds that invest in start-ups, early-stage ventures, and SMEs with innovative business ideas and high growth potential.

» Angel Funds (Angel Investor fund), are funds that invest in start-ups, early-stage ventures, and SMEs with high growth potential, and are registered under the SEBI (Alternative Investment Funds) Regulations, 2012.

» SME’s Funds, are funds that invest in SMEs to support their growth and expansion.

» Social Venture Funds, are funds that invest in social enterprises that have a social impact alongside financial returns.

» Infrastructure Funds, are funds that invest in infrastructure projects, such as roads, bridges, power plants, airports, and seaports.

2. Category II AIF: This category includes funds that do not fall under Category I or Category III AIF. These funds may include private equity funds, debt funds, or funds that invest in real estate or commodities.

3. Category III AIF: This category includes funds that use complex trading strategies and may employ leverage to generate returns. These funds are typically designed for sophisticated investors who have a high risk appetite and can withstand high volatility.

For AIF registration process in India, the applicant is required to submit information as specified in the First Schedule of SEBI (AIF) Regulations, 2012, as well as other information specified in later sections of the document including the required details in various fields on the SEBI site while submitting the FORM-A, and where specific fields are not provided, needs to upload the some relevant documents such as-

»Information Regarding Controlling Entities, Persons, Key Management Personnel And Key Investment Team with experience and qualification requirements in terms of Reg 4(g) of AIF Regulations

»Undertakings or Declaration under First Schedule of SEBI (AIF) Regulations, 2012

»Sponsor, Investment Manager or their shareholders / partners details with shareholding/ voting rights / partnership interest of 20% or more, are registered with RBI, IRDA, PFRDA or any other financial regulator

Procedure for obtaining Alternative Investment Funds (AIF) registration from SEBI

This article could provide a general introduction to the registration process for Alternative Investment Funds (AIFs), including the types of AIFs that are eligible for registration and the regulatory requirements that must be met-

The applicant needs to ensure that it meets the eligibility criteria as specified by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.

To get registered as an Alternative Investment Fund (AIF), the applicant must visit the SEBI portal at www.siportal.sebi.gov.in, Upon receipt of the application, the system generates a login ID for the applicant, which is automatically sent to the applicant through the system. Once the applicant receives the login ID and password

The applicant needs to submit an application in the prescribed Application format Form-A along with necessary supporting documents must be includes- Proof of Incorporation, Address of the Registered Office, details of shareholders and partners, details of Investment Manager, Sponsors, and Trustees of the AIF, financial information of the Investment Manager or Sponsor of the AIF, private placement memorandum, and any other relevant information.

»In addition to submitting the application online through the SEBI portal, the applicant is also required to make a physical submission of the application to SEBI. This physical submission should contain all the required documents and information in hard copy format, as specified in the SEBI (AIF) Regulations, 2012.

»The physical submission should be sent to the SEBI office at the address specified in the regulations, along with a covering letter that provides details of the online application submission and the applicant's contact information. The covering letter should also include a list of all the documents and information that have been submitted, to help ensure that nothing is overlooked or missed during the application review process.

»By providing both an online submission and a physical submission, the applicant can help to streamline the application review process and ensure that all the necessary information is available to SEBI for review and consideration. This can help to expedite the AIF registration process and ensure that the applicant is able to obtain the necessary regulatory approvals in a timely manner.

The applicant seeking registration as an Alternative Investment Fund (AIF) in India is required to pay an application fee of Rs. 1,00,000/- along with 18% Goods & Services Tax (GST). The payment of this fee can be made through the online mode available on the SEBI portal or through a bank draft drawn in favor of "The Securities and Exchange Board of India" and payable at Mumbai. It is recommended that the applicant make the payment through the online mode for ease and convenience. Upon receipt of the application fee, the applicant's login ID and password will be generated, and they can proceed with filling up the registration form on the SEBI portal.

SEBI will verify the application and if any deficiency is found, the applicant will be given an opportunity to rectify the same. SEBI may take up to 21 working days to process an application for registration as an AIF.

SEBI, may also conduct an inspection of the applicant's books of accounts, records, and documents as part of the registration process and requires any clarifications or additional information, it will communicate the same to the applicant.

If the application is found to be complete and satisfies all the eligibility criteria, SEBI may grant registration to the applicant subject to compliance with certain conditions as specified by SEBI.

SEBI (Payment of Fees) (Amendment) Regulations, 2014, the registration fee to be paid by an AIF is as follows:

Q. What are the tenure for Alternate Investment Fund registration is granted?

As per SEBI (Alternative Investment Funds) Regulations, 2012, the tenure for Alternate Investment Fund (AIF) registration will be –

» Category III AIF: Minimum 3 years + 2 years extension (in case of closed-ended AIFs)

However, there is an exception available for Close-ended AIFs with large value funds for accredited investors. These AIFs may be allowed to extend their tenure beyond 10 years, subject to the terms and conditions specified by SEBI from time to time. It is important to note that such extensions are not automatic and need to be approved by SEBI based on the facts and circumstances of the case.

SEBI may cancel the registration of an AIF before its tenure, if it fails to comply with the regulations or any other conditions set by SEBI. AIFs are required to maintain ongoing compliance with the regulations and any other applicable laws, including regular reporting and disclosures to SEBI and investors. Failure to comply with these requirements could lead to the cancellation of registration and other penalties.

Under SEBI regulations, all Alternate Investment Funds (AIFs) are required to include disciplinary history in their Private Placement Memorandum

» Must include details of outstanding, pending and past cases, including any litigations, criminal or civil prosecutions, disputes, non-payment of statutory dues, overdoes or defaults against banks or financial institutions, contingent liabilities not provided for, proceedings initiated for economic offences or civil offences, adverse findings with respect to compliance with securities laws, penalties levied, disputed tax liabilities, and any disciplinary action taken by SEBI or any other regulatory authority.

» If the applicant is a trust, the trustees or trustee company and its directors must also provide this information.

» The AIF is required to disclose any operational actions such as administrative warnings or deficiency letters. These actions can be grouped together and summarized, but if an investor requests more details, the AIF must provide them. This is to ensure transparency and proper communication between the AIF and its investors.

» Any further cases or litigations that arise during the course of AIF activities must be appropriately incorporated in the placement memorandum and communicated to the investors.

» The disclosure of disciplinary history applies to the last 5 years and where monetary penalty is involved, in cases where such penalty is greater than Rs. 5 lakhs. Disputed tax liabilities shall not apply to liabilities in the personal capacity of an individual, and contingent liabilities shall be as disclosed in the books of accounts of the entity.

Further, under SEBI regulations, any changes made to the placement memorandum after submitting the draft to SEBI must be clearly listed in the covering letter at the time of submission of the final placement memorandum. Once the changes have been made in the placement memorandum, it is important to highlight those changes to investors. This can be done through the use of footnotes, text formatting such as underlining or bolding, or a separate document summarizing the changes. It is important to ensure that investors are fully aware of any changes that have been made to the offering documents, as this can impact their investment decisions.

AIFs are required to inform all unit holders, including investors who have committed to the AIF, and SEBI about any changes made in the placement memorandum on a consolidated basis every six months. These changes may include but are not limited to a change in sponsor or manager (excluding internal restructuring within the group), a change in the control of the sponsor or manager, and a change in the fee structure or hurdle rate that may result in higher fees being charged to the unit holders.

Q. What are the Compliance/Reporting Require for the Registered AIF Post Registration?

After registration is granted, the AIF must comply with a number of ongoing regulatory requirements, such as filing periodic reports with SEBI, maintaining proper books and records, and complying with investment restrictions and disclosure requirements under circular No.CIR/IMD/DF/10/2013 dated 29th July, 2013-

» Category I and II AIFs, as well as Category III AIFs that do not undertake leverage, are required to submit reports to SEBI on a quarterly basis;

Category III AIFs that use leverage are required to submit monthly reports to SEBI (Securities and Exchange Board of India) in a specified format

» To ensure compliance with regulatory requirements, all AIFs are required to submit periodic reports to SEBI, even if they have not started any activity. These reports must be submitted via email to the designated email address aifreporting@sebi.gov.in.

» AIFs are required to submit the reports within 7 calendar days from the end of the quarter or end of the month, as the case may be. These reports are intended to help SEBI monitor the operations and performance of AIFs and ensure compliance with applicable regulations.

At the end of each financial year, an AIF is required to prepare and submit a Compliance Test Report (CTR) to SEBI within six months from the end of the financial year-

» A Compliance Test Report (CTR) is a report prepared by a practicing Chartered Accountant, Company Secretary or Cost Accountant (as applicable) as per the requirements of the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012. The CTR must show that the AIF has complied with the AIF Regulations and circulars issued by SEBI.

»The format of the CTR is specified by SEBI and If the AIF is a trust, the CTR must be submitted to the trustee and sponsor within 30 days from the end of the financial year.

»The purpose of the CTR is to ensure that the fund manager maintains proper systems and processes to comply with the SEBI regulations and that the fund is managed in the best interests of investors. The CTR helps to identify areas where the fund may be non-compliant, and corrective action can be taken by the fund manager to rectify any issues.

» If there are any observations or comments on the CTR, the trustee or sponsor must inform the manager within 30 days of receiving the report. The manager must make the necessary changes within 15 days and submit a reply to the trustee or sponsor.

» If the trustee or sponsor observes any violation of the AIF Regulations or circulars issued by SEBI, they must inform SEBI as soon as possible.

The corpus of an AIF refers to the total amount of funds that the AIF collects from its investors. The corpus is the pool of money that the AIF uses to make investments according to its investment policy. The size of the corpus of an AIF can vary depending on the type of AIF and its investment objectives. A Category I AIF, for example, may have a smaller corpus if it focuses on investing in start-ups or early-stage ventures, while a Category III AIF may have a larger corpus if it employs complex trading strategies and can accommodate sophisticated investors with a high risk appetite.

The corpus of an AIF is typically established at the time of its launch and is based on the amount of money that the AIF expects to collect from its investors. The AIF's investment manager is responsible for managing the corpus and making investments on behalf of the investors in accordance with the AIF's investment policy.

Q. As part of the AIF registration process, what documents required to furnish by applicant in support to proof of incorporation and address?

An applicant is required to provide self-attested copies of several documents, including:-

» In case of Limited Liability Partnership (LLP), Registered LLP Deed along with certificate of Registration,

» Copy OF Memorandum and Articles Association along with certificate of incorporation, in case of a Company;

These documents help to establish the legal entity and structure of the applicant, as well as provide important information about its operations and management. Self-attested copies of these documents can be submitted online through the SEBI portal as part of the application process, and physical copies can also be submitted to SEBI as required.

Q. What are the requirements for providing Financial Information of Investment Manager or Sponsor of an AIF?

SEBI requires the submission of financial information from the Sponsor and Investment Manager of the AIF. The following documents are typically required:

» Latest CA certified Net-worth certificate, should be provided by the Sponsor or Investment Manager, or their promoters or partners, as applicable. It is used to demonstrate that they have sufficient net worth for maintaining continuing interest in the AIF. The net-worth certificate should be recent and accurately reflect the financial position of the entity.

» Financial statements, for the previous financial year of the Sponsor and Investment Manager should also be provided. These statements should include the balance sheet, profit and loss account, and cash flow statement. The statements should be audited by a chartered accountant and certified as accurate.

»The financial information provided by the Sponsor and Investment Manager is used to assess their financial stability and capacity to manage the AIF, helps to ensure that the AIF is managed by entities with sufficient financial resources and expertise, and that the interests of investors are protected.

For the Sponsor and Investment Manager to ensure that the financial information provided is accurate, complete, and up-to-date, and that it complies with the requirements of SEBI (AIF) Regulations, 2012. If Any discrepancies or issues with the provided information could result in delays or rejection of the AIF registration application. In this way, the Sponsor and Investment Manager should carefully review all financial information and ensure that it meets the necessary requirements before submitting the application to SEBI.

An AIF (Alternative Investment Fund) is allowed to accept joint investors for the purpose of investment, provided that the investment amount is not less than one crore rupees. Joint investors can be an investor and their spouse, parent, or daughter/son. However, in such cases, not more than two persons are allowed to act as joint investors in the AIF. If any other investors act as joint investors, the minimum investment amount of one crore rupees applies for each investor. Joint investors are defined as those where each investor contributes towards the AIF.