SEBI (AIF) Regulations, 2012

SEBI (AIF) Regulations, 2012 (Part 1)

Introduction to Alternative Investment Funds (AIFs): AIFs are investments that lie outside traditional asset classes, such as stocks, bonds, or cash, and are less liquid with a longer holding period.
Definition of AIF: A privately pooled investment vehicle that collects funds from sophisticated investors for investing in accordance with a defined investment policy.
Key Characteristics of AIFs:
- Higher minimum investment size (Rs 1 cr) compared to mutual funds
- Open to sophisticated investors, including Indians, non-resident Indians, and foreign persons
- Invests in unlisted and debt securities
Classification of AIFs:
- Debt Fund: Invests primarily in debt or debt securities
- Hedge Fund: Employs diverse trading strategies and invests in securities with diverse risks
- Infrastructure Fund: Invests primarily in unlisted securities or partnership interests of infrastructure projects
- Private Equity Fund: Invests primarily in equity or equity-linked instruments
- SME Fund: Invests primarily in unlisted securities of small and medium enterprises
- Social Impact Fund: Invests primarily in securities of social ventures or social enterprises
- Venture Capital Fund: Invests primarily in unlisted securities of start-ups or early-stage venture capital undertakings
Important Terminologies:
- Corpus: Total amount of funds committed by investors to the AIF
- Investable Funds: Corpus of the scheme, net of expenditure for administration and management
- Investee Company: Company in which the AIF makes an investment
- Unit: Instrument/security issued to beneficiaries/investors, representing a share in the AIF or scheme
Exceptions to AIF:
- Mutual funds established under SEBI (Mutual Funds) Regulations, 1996
- Schemes covered under SEBI (Collective Investment Schemes) Regulations, 1999
- Holding companies, ESOP trusts, family trusts, employee welfare trusts, and other SPVs not established by fund managers
Key Players in AIF Ecospace:
- Sponsor: Person or persons who set up the AIF
- Manager: Person or entity appointed to manage the AIF's investments
- Custodian: Person who has been granted a certificate of registration to carry on the business of custodian under SEBI (Custodian) Regulations, 1996
Other Terms:
- Co-investment: Investment made by managers or sponsors of Category I or Category II AIFs
- Accredited Investor: Person who is granted a certificate of accreditation by an accreditation agency, with a net worth exceeding a certain threshold
- Deemed Accredited Investors: Central government, state governments, developmental agencies, and other entities that meet specific criteria

SEBI (AIF) Regulations, 2012 (Part 2)

Control: Defined as per Regulation 2(1)(e) of the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011, for listed companies, and as per Section 2(27) of the Companies Act, 2013, for other cases.
Controlling Interest: Holding of not less than 50% of the voting rights or interest in a company directly/indirectly.
Accreditation Agency (AA): A subsidiary of a recognized stock exchange or a subsidiary of a depository, responsible for accrediting investors as Accredited Investors (AIs).
Accreditation: The process of verifying documents and issuing accreditation certificates to eligible investors.

Key Responsibilities of Accreditation Agencies

Verification of documents submitted by applicants for accreditation
Timely processing of applications and issuance of accreditation certificates
Maintaining data of accredited investors
Verification of accreditation status
Maintaining confidentiality of investor information

Eligible Entities for Accreditation

Subsidiaries of recognized Stock Exchanges with minimum 20 years of presence, net worth of 200 crore rupees, and nation-wide terminals
Subsidiaries of Depositories

Classification of AIFs

Category I Alternative Investment Fund: Invests in start-up or early-stage ventures, social ventures, SMEs, infrastructure, or other sectors considered socially or economically desirable
Category II Alternative Investment Fund: Does not fall under Category I or III, and does not undertake leverage or borrowing other than for day-to-day operational requirements
Category III Alternative Investment Fund: Employs diverse or complex trading strategies and may employ leverage, including investment in listed or unlisted derivatives

Eligibility Criteria for AIFs

The AIF activity should be permissible under the Charter documents of the entities
The regulation prohibits making an invitation to the public to subscribe to its securities
Fit and proper criteria: The applicant, Sponsor, and Manager should be fit and proper persons
Expertise: The key investment team of the Manager should have relevant certification and professional qualification

Conditions for Certificate of Registration

The AIF shall not carry on any other activity other than permitted activities
The AIF shall forthwith inform SEBI of any material change in the information already submitted
AIF cannot change its category subsequent to registration, except with the approval of SEBI

Investment Strategy

All AIFs shall have a well-defined investment strategy, investment purpose, and investment methodology
Any material alteration to the strategy requires the consent of at least two-thirds of unit holders by value of their investment and permission of SEBI

Investment in Alternative Investment Fund

Eligible Investors: Any investor, whether Indian, foreign, or non-resident Indian, is eligible to invest in AIF
Mode of Issuance: Units to be issued only in dematerialized form
Minimum Corpus: Each Scheme of an AIF shall have a corpus of at least Rs 20 crores (Rs 5 crores for Social Impact Funds)
Minimum Investment Size: At least Rs 1 crore by each investor, except for accredited investors

Guidelines for Borrowing by Category I and Category II AIFs

Category I and Category II AIFs shall not borrow funds directly or indirectly, except for borrowing funds to meet temporary funding requirements and day-to-day operational requirements
Borrowing for the purpose of meeting temporary shortfall in amount called from investors for making investments in investee companies is allowed, subject to certain conditions.

SEBI (AIF) Regulations, 2012 (Part 3)

Drawdown Amount: The flexibility of borrowing to meet a shortfall in the drawdown amount shall not be used as a means to provide different drawdown timelines to investors.
Disclosure: The manager shall disclose the details with respect to the amount borrowed, terms of borrowing, and repayment to all the investors of the AIF/scheme on a periodic basis as per the terms of the agreement with the investors of the AIF.
Cooling Off Period: All Category I and Category II AIFs shall maintain a thirty-day cooling-off period between two periods of borrowing as permissible under AIF Regulations.

Borrowing and Cooling Off Period

Borrowing: AIFs can borrow to meet a shortfall in the drawdown amount, but this flexibility shall not be used to provide different drawdown timelines to investors.
Cooling Off Period: A thirty-day cooling-off period is required between two periods of borrowing for Category I and Category II AIFs.

Large Value Funds (LVFs)

Definition: LVFs are AIF schemes for Accredited Investors with a minimum commitment of ₹70 crore per investor.
Tenure Extension: LVFs are now subject to a maximum extension limit of five years beyond their original tenure, with any proposed extension requiring approval from at least two-thirds of the unit holders by value.

Offer Document and Private Placement Memorandum (PPM)

Offer Document: An AIF must prepare an Offer document to enable investors to understand the objective and details of the scheme.
Private Placement Memorandum (PPM): The PPM is the primary document in which all necessary information about the AIF is disclosed to prospective investors.
Contents of PPM: The PPM shall have two parts: Part A for minimum disclosures and Part B for supplementary information.
Disclosure: The PPM shall disclose all material information about the AIF, Investment Manager, Key Management Personnel, investment strategy, fees, and other expenses.

Filing of PPM with SEBI

Filing Requirement: The PPM shall be filed with SEBI at least 30 days prior to the launch of the scheme.
Intermediary: The appointment of a Merchant Banker is mandatory, and the Merchant Banker shall file the PPM with SEBI, exercise due diligence, and provide a due diligence certificate.

Tenure of Schemes

Category I & II AIFs: Close-ended with a minimum tenure of 3 years.
Category III AIF: Either open-ended or close-ended.
Extension of Tenure: Close-ended AIFs can extend their tenure by 2 years, subject to approval from 2/3rd of the unit holders by value.

Listing and Investment Conditions

Listing: Units of close-ended AIFs may be listed on a stock exchange with a minimum tradable lot of ₹1 crore.
Investment Conditions: AIFs can invest in unlisted, listed securities, and securities of companies incorporated outside India, subject to RBI and SEBI guidelines.
Restrictions: Category I and II AIFs cannot invest more than 25% of investable funds in one Investee Company, while Category III AIFs cannot invest more than 10%.

Compliance Requirements

SEBI (Prevention of Insider Trading) Regulations: AIFs must comply with these regulations and have a Policy for prevention of Insider Trading.
PMLA and Rules: AIFs must have a KYC and AML Policy, register with FIU-India, and file Suspicious Transactions Reports.
Other Compliance: AIFs must appoint SEBI-registered intermediaries, display the SEBI Registration Certificate, and file monthly/quarterly returns on the SEBI Portal.

General Obligations, Responsibilities, and Transparency

Conflict of Interest: AIFs must ensure transparency and disclosure of information to investors, including financial, risk management, and operational information.
Reports to Investors: AIFs must provide annual reports to investors, including financial information, material risks, and how they are managed.
Compliance Officer: Every AIF must have a Compliance Officer responsible for monitoring compliance with all applicable regulations.

SEBI (AIF) Regulations, 2012 (Part 4)

Reputation Risk: AIFs must consider reputation risk at the investee company level and extra-financial risks, including environmental, social, and corporate governance risks, at both fund and investee company levels.
Reporting Requirements: Category III AIFs must provide quarterly reports to investors within 60 days of the end of the quarter, covering the above-mentioned risks.

Valuation

Valuation Procedure: AIFs must provide investors with a description of their valuation procedure and methodology for valuing assets.
Independent Valuation: Category I and II AIFs must undertake valuation of their investments at least once every 6 months by an independent valuer, while Category III AIFs must ensure that NAV calculation is independent from the fund management function.
Valuation Frequency: Category I and II AIFs can enhance the valuation period to one year with the approval of at least 75% of investors by value.

Obligations of Manager

Investor Complaints: The Investment Manager must address all investor complaints.
SEBI Information: The Manager must provide any information sought by SEBI.
Record Maintenance: The Manager must maintain all records as specified by SEBI.
Conflict of Interest: The Manager must take steps to address conflict of interest as specified in the regulations.
Transparency and Disclosure: The Manager must ensure transparency and disclosure as specified in the regulations.

Dispute Resolution

Dispute Resolution Mechanism: All claims, differences, or disputes between investors and the AIF or Manager must be submitted to a dispute resolution mechanism, including mediation, conciliation, and/or arbitration, as per SEBI's procedure.

Maintenance of Records

Record Keeping: The Manager or Sponsor must keep records for 5 years after the winding up of the fund, including assets, valuation policies, investment strategies, investor details, and rationale for investments.

Winding Up

Winding Up Conditions: An AIF set up as a trust can be wound up after its tenure, in the interests of investors, or if SEBI directs it.
Winding Up Procedure: The assets must be liquidated, and proceeds distributed to investors after satisfying all liabilities.

Distribution of Proceeds

Dissolution Period: The dissolution period refers to the timeframe after the liquidation period, used to wind down remaining unliquidated investments.
Distribution of Proceeds: The AIF may distribute investments in specie to investors or initiate the dissolution period with the consent of at least 75% of investors by value.

Special Type of Funds

Angel Funds: A sub-category of Venture Capital Fund under Category I AIF, investing in startups, with specific eligibility criteria for angel investors.
Special Situation Funds: Category I AIF investing in special situation assets, such as stressed loans and securities of companies under corporate insolvency resolution process.
Specified Alternative Investment Funds: Includes Corporate Debt Market Development Fund, a backstop facility for purchasing investment-grade corporate debt securities in times of stress.

SEBI (AIF) Regulations, 2012 (Part 5)

General Obligations and Responsibilities: The Alternative Investment Fund (AIF), its manager, trustee, and sponsor must abide by the Code of Conduct as given under the SEBI AIF Regulations.
Code of Conduct: Each AIF shall have detailed policies and procedures, which shall be periodically reviewed. The AIF shall inform SEBI of any material changes.
Manager's Responsibilities: The manager of an AIF must ensure that the AIF is organized, operated, and managed in the interest of its unitholders. The manager must also carry out all activities of the AIF in accordance with the placement memorandum and SEBI regulations.
Transparency: The AIF, manager, trustee, and sponsor must act in the interest of unitholders, maintain high standards of integrity and fairness, and exercise due diligence and independent professional judgment.
Custodian: All AIFs are mandatorily required to appoint a custodian registered with SEBI.
Compliance Officer: The AIF and the manager shall appoint a compliance officer to monitor compliance with SEBI regulations.
Books of Accounts: The books of accounts of the AIF shall be audited annually by a qualified auditor.
Records: The manager or sponsor shall maintain records, including descriptions of assets, valuation policies, investment strategies, and particulars of investors.
Reporting: The manager is required to submit reports to SEBI, obtain a Legal Entity Identifier (LEI) for the AIF, and report on Stewardship Activities.
Investor Charter: The Investor Charter is a brief document containing details of services provided to investors, grievance redressal mechanisms, and responsibilities of investors.
Compliance Test Report (CTR): The manager of an AIF shall prepare a CTR on compliance with AIF Regulations and circulars issued thereunder.
Change in Sponsor or Manager: Prior approval of SEBI is mandatory in case of a change in sponsor or manager, or a change in control of the AIF, sponsor, or manager.
Fees: The same fees payable at the time of registration shall be paid to SEBI in case of a change in sponsor or manager.
Registration: Fresh approval of SEBI is required in case of non-submission of documents within the prescribed period.
Change in Category: An AIF cannot change its category subsequent to registration, except with the approval of SEBI.

Key concepts related to AIFs include:

Alternative Investment Fund (AIF): An AIF is an investment vehicle that pools funds from investors to invest in a variety of assets, such as private equity, hedge funds, and venture capital.
SEBI (AIF) Regulations, 2012: These regulations govern the establishment, management, and operation of AIFs in India.
Code of Conduct: The Code of Conduct outlines the ethical standards and best practices that AIFs, their managers, trustees, and sponsors must follow.
Compliance Officer: The Compliance Officer is responsible for ensuring that the AIF complies with all applicable laws, regulations, and guidelines.
Investor Charter: The Investor Charter is a document that outlines the rights and responsibilities of investors in an AIF.
Compliance Test Report (CTR): The CTR is a report that the manager of an AIF must prepare to demonstrate compliance with AIF Regulations and circulars issued by SEBI.

Important Terms:

AIF: Alternative Investment Fund
SEBI: Securities and Exchange Board of India
Code of Conduct: A set of ethical standards and best practices for AIFs, their managers, trustees, and sponsors
Compliance Officer: An officer responsible for ensuring compliance with applicable laws, regulations, and guidelines
Investor Charter: A document outlining the rights and responsibilities of investors in an AIF
CTR: Compliance Test Report, a report demonstrating compliance with AIF Regulations and circulars issued by SEBI.