Investing in Alternative investment Funds (AIF)
Alternative investment funds as the name itself suggests are alternate to traditional form of investments. The AIF regulations is an attempt to extend the perimeter of regulation to hitherto unregulated funds, so as to ensure systemic stability ,increase market efficiency, encourage formation of new capital and provide investor protection.
Increasingly, affluent, high-net-worth and family office investors in India are using alternative investments in their portfolios over and above their existing stocks, bonds, and cash investments .
Start ups, because of huge cash requirement and risks involved are generally funded by venture capitalist – Angel Investors – Private Equity investors – Crowd Funding and these lending institutions which mentor and handhold start ups are regulated by SEBI (Alternative investment Funds (AIF)) Regulations, 2012 and these regulations also control the type and source of funds that these lending institutions can receive. These institutions invest in a large portfolio of startups and spread their risks. They have over the years acquired sufficient competence to assess ventures by startups set up by newly minted young technical graduates from prestigious institutions. Many investors would like to invest in these lending institutions and have the monetary benefit of participating in early stage companies and receive more than normal returns.
The SEBI regulations categorizes these lending institutions into 3 Categories .Category 1 includes Venture capital (VC) funds, SME funds, Social Venture Funds, Infrastructure Funds and such other funds as may be prescribed. Category 2 includes those that are not included in category 1 and 3 and includes real estate funds, private equity funds and distressed funds. Category 3 includes hedge funds, PIPE funds (Private Investment in Public Equity). Angel fund is a sub category of venture capital funds.
Regulation prescribes disclosure of investment strategy by AIF, investment in AIF by raising of funds through private placement, launching schemes to attract investors etc. This regulation ensures safety for investors who are tempted or attracted to investments in start ups. It may also be noted that government and other agencies in the startup eco system also support these expert lending institutions.
Investment Strategy. (9)
(1) All Alternative Investment Funds 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 two-thirds of unit holders by value of their investment in the Alternative Investment Fund. Investment in Alternative
Investment Fund. (10)
Investment in all categories of Alternative Investment Funds shall be subject to the following conditions:-
(a) The Alternative Investment Fund may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units;
(b) Each scheme of the Alternative Investment Fund shall have corpus of at least twenty crore rupees;
(c) the Alternative Investment Fund shall not accept from an investor, an investment of value less than one crore rupees: Provided that in case of investors who are employees or directors of the Alternative Investment Fund or employees or directors of the Manager, the minimum value of investment shall be twenty five lakh rupees.
(d) the Manager or Sponsor shall have a continuing interest in the Alternative Investment Fund of not less than two and half percent of the corpus or five crore rupees, whichever is lower, in the form of investment in the Alternative Investment Fund and such interest shall not be through the waiver of management fees: Provided that for Category III Alternative Investment Fund, the continuing interest shall be not less than five percent of the corpus or ten crore rupees, whichever is lower.
(e) The Manager or Sponsor shall disclose their investment in the Alternative Investment Fund to the investors of the Alternative Investment Fund;
(f) No scheme of the Alternative Investment Fund shall have more than one thousand investors;
(g) The fund shall not solicit or collect funds except by way of private placement.
Placement Memorandum. (11)
(1)Alternative Investment Fund shall raise funds through private placement by issue of information memorandum or placement memorandum, by whatever name called.
(2) Such information or placement memorandum as specified in sub-regulation (1) shall contain all material information about the Alternative Investment Fund and the Manager, background of key investment team of the Manager, targeted investors, fees and all other expenses proposed to be charged, tenure of the Alternative Investment Fund or scheme, conditions or limits on redemption, investment strategy, risk management tools and parameters employed, key service providers, conflict of interest and procedures to identify and address them, disciplinary history, the terms and conditions on which the Manager offers investment services, its affiliations with other intermediaries, manner of winding up of the Alternative Investment Fund or the scheme and such other information as may be necessary for the investor to take an informed decision on whether to invest in the Alternative Investment Fund.
Regulation 2(1)(h) defines the fund, in other words the composition of the corpus as – “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”.
- Can an AIF make an invitation to the public for subscription?
Ans: No, Prohibited by Regulation 4(b).
4(b) – the applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities;
- Is there any limit on size of a scheme launched by an AIF?
Ans: No, Each scheme of AIF(other than angel fund) shall have corpus of atleast 20 crore rupees.In case of an angel fund,it shall have a corpus of atleast 10 crore rupees.
- Can an AIF raise any amount if fund for any investor?
Ans : See Regulation 10( c ) above
- What are reporting requirements vis – a –vis an investor?
Ans : Regulation 21,22,23,24 and 25 sets out the obligation of the AIF on –
- Conflict of interest
d . Obligation of Manager
- Dispute Resolution.
|Conflict of Interest.|
|21. (1) The Sponsor and Manager of the Alternative Investment Fund shall act in a fiduciary
capacity towards its investors and shall disclose to the investors, all conflicts of interests
as and when they arise or seem likely to arise.
|(2) Manager shall establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business.|
|(3) Managers and Sponsors of Alternative Investment Fund shall abide by high level principles on avoidance of conflicts of interest with associated persons, as may be specified by the Board from time to time.|
|22. All Alternative Investment Funds shall ensure transparency and disclosure of information|
|to investors on the following:|
|(a) financial, risk management, operational, portfolio, and transactional information|
|regarding fund investments shall be disclosed periodically to the investors;|
|(b) any fees ascribed to the Manager or Sponsor; and any fees charged to the Alternative|
|Investment Fund or any investee company by an associate of the Manager or Sponsor|
|shall be disclosed periodically to the investors;|
|(c)any inquiries/ legal actions by legal or regulatory bodies in any jurisdiction, as and when|
|(d) any material liability arising during the Alternative Investment Fund‘s tenure shall be|
|disclosed, as and when occurred;|
|(e) any breach of a provision of the placement memorandum or agreement made with the|
|investor or any other fund documents, if any, as and when occurred;|
|(f) Change in control of the Sponsor or Manager or Investee Company.|
|(g) Alternative Investment Fund shall provide at least on an annual basis, within 180 days|
|from the year end, reports to investors including the following information, as may be|
|applicable to the Alternative Investment Fund:-|
|A. financial information of investee companies.|
|B. material risks and how they are managed which may include:|
|(i) concentration risk at fund level;|
|(ii) foreign exchange risk at fund level;|
|(iii)leverage risk at fund and investee company levels;|
|(iv)realization risk (i.e. change in exit environment) at fund and investee company|
|(v) strategy risk (i.e. change in or divergence from business strategy) at investee|
|(vi)reputation risk at investee company level;|
|(vii) extra-financial risks, including environmental, social and corporate governance|
|risks, at fund and investee company level.|
|(h) Category III Alternative Investment Fund shall provide quarterly reports to investors in|
|respect of clause (g) within 60 days of end of the quarter;|
|(i) any significant change in the key investment team shall be intimated to all investors;|
|(j) alternative Investment Funds shall provide, when required by the Board, information for|
|systemic risk purposes (including the identification, analysis and mitigation of systemic risks).|
|23. (1) The Alternative Investment Fund shall provide to its investors, a description of its|
|valuation procedure and of the methodology for valuing assets.|
|(2) Category I and Category II Alternative Investment Funds shall undertake valuation of|
|their investments, atleast once in every six months, by an independent valuer appointed|
|by the Alternative Investment Fund:|
|Provided that such period may be enhanced to one year on approval of at least seventy-five|
|percent of the investors by value of their investment in the Alternative Investment Fund.|
|(3) Category III Alternative Investment Funds shall ensure that calculation of the net asset|
|value (NAV) is independent from the fund management function of the Alternative|
|Investment Fund and such NAV shall be disclosed to the investors at intervals not longer|
|than a quarter for close ended Funds and at intervals not longer than a month for open|
|Obligation of Manager.|
|24. The Manager shall be obliged to:|
|(a) address all investor complaints;|
|(b) provide to the Board any information sought by Board;|
|(c) maintain all records as may be specified by the Board;|
|(d) take all steps to address conflict of interest as specified in these regulations;|
|(e) Ensure transparency and disclosure as specified in the regulations.|
|25. An Alternative Investment Fund, by itself or through the Manager or Sponsor, shall lay down|
|procedure for resolution of disputes between the investors, Alternative Investment Fund,|
|Manager or Sponsor through arbitration or any such mechanism as mutually decided between the investors and the Alternative Investment Fund.|
|5. Can an AIF accept investments from Joint Ventures?
Ans: An AIF may accept the following as joint investors for the purpose of investment of not less than one crore rupees.
a. An investor and his/her spouse
b. An investor and his/her parent
c. An investor and his/her daughter/son
With respect to the above investors, not more than 2 persons shall act as joint – investors in an AIF. In case of any other investors acting as joint investor, for every investor, the minimum investment amount of one crore shall apply.
Joint investors shall mean where each of the investor contributes towards the AIF. [Ref.circular no, CIR/IMD/DF/14/2014 dated June 19, 2014].This circular also gives guidelines for disclosures, reporting and clarifications under AIF Regulations.
AIFs offer an excellent opportunity (safety provided) to investors yet another investment vehicle in the sunrise start up sector linked to emerging innovations around the internet. Investment in VCs/Angel Investment is also referred to as moon shot investments because of the high return potential. Eg. Google –Facebook.