Chapter 17: Regulatory Framework

The SEBI (AIF) Regulations, 2012 establish the statutory operating charter for all privately pooled investment funds in India.

Core Institutional Conditions

1. Minimum Scheme Corpus: Every scheme must have a minimum corpus of ₹20 Crore (₹5 Crore for Angel Funds).
2. Minimum Ticket Size: Standard investors must commit at least ₹1 Crore (₹25 Lakh for employees/directors of the AIF/Manager; ₹25 Lakh for Angel Funds).
3. Investor Cap: Maximum 1,000 investors per scheme (200 for Angel Funds).
4. Mandatory Continuing Interest (Sponsor Commitment):
   • Category I & II AIFs: Minimum 2.5% of corpus or ₹5 Crore, whichever is lower.
   • Category III AIFs: Minimum 5.0% of corpus or ₹10 Crore, whichever is lower.
   • Angel Funds: Minimum 2.5% of corpus or ₹50 Lakh, whichever is lower.
5. Accredited Investor (AI) Framework: Sophisticated investors with annual income $\ge$ ₹2 Crore or net worth $\ge$ ₹7.5 Crore can access Large Value Funds (LVFs) (committing at least ₹70 Crore), which enjoy exemptions from standard PPM filings and greater operational flexibility.

SEBI establishes strict portfolio concentration and risk limits across fund categories:

+----------------------------------------------------------------------------------------------------+
|                                    AIF PRUDENTIAL INVESTMENT CONDITIONS                           |
+--------------------------+-------------------------------------+-----------------------------------+
| REGULATORY CONDITION     | CATEGORY I & II AIFs                | CATEGORY III AIFs                 |
+--------------------------+-------------------------------------+-----------------------------------+
| **Single Investee Cap**  | Max **25%** of investible funds in  | Max **10%** of investible funds   |
| (Concentration Limit)    | a single investee company.          | in a single investee company.     |
+--------------------------+-------------------------------------+-----------------------------------+
| **Permitted Leverage**   | Prohibited (only temporary borrowing| **Permitted**; gross exposure up  |
|                          | max 30 days, 10% limit).            | to **2.0 times Net Asset Value**. |
+--------------------------+-------------------------------------+-----------------------------------+
| **Dematerialization**    | Mandatory demat issuance of units   | Mandatory demat issuance of units |
|                          | with NSDL or CDSL.                  | with NSDL or CDSL.                |
+--------------------------+-------------------------------------+-----------------------------------+
| **SEBI Inspection**      | SEBI has statutory powers to inspect| SEBI has statutory powers to      |
| **Powers**               | books, records, and systems.        | inspect books, records & systems. |
+--------------------------+-------------------------------------+-----------------------------------+

Market Surveillance and Structured Digital Database (SDD)

Under SEBI (Prohibition of Insider Trading) Regulations, 2015:

• AIF managers dealing with listed companies must maintain a tamper-proof Structured Digital Database (SDD) containing the nature of Unpublished Price Sensitive Information (UPSI), the names and PANs of all persons with whom UPSI is shared, and time-stamped audit logs.

Alternative Investment Funds operate under strict cross-border and anti-money laundering frameworks.

1. Foreign Exchange Management Act (FEMA), 1999

• Inbound foreign investment into AIF units is permitted under the automatic route under the Foreign Exchange Management (Non-debt Instruments) Rules, 2019.
• Downstream FOCC Test: If the Sponsor and Manager are owned and controlled by resident Indian citizens, the AIF's investments into Indian companies are treated as purely domestic investments, regardless of the percentage of foreign capital held by LPs.
• Outbound Investment: AIFs can invest up to 25% of their investible funds in offshore companies with an Indian nexus, subject to an overall industry cap allocated by SEBI and RBI.

2. Prevention of Money Laundering Act (PMLA), 2002

• AIFs must conduct strict Client Due Diligence (CDD) and verify the identity of the Ultimate Beneficial Owner (UBO) holding more than 10% interest in corporate, partnership, or trust investors.
• Enhanced Due Diligence (EDD) must be conducted for Politically Exposed Persons (PEPs).

3. Market Conduct and Investor Redressal

• Compliance with SEBI (PFUTP) Regulations, 2003, prohibiting fraudulent, deceptive, or manipulative trade practices.
• Integration with SEBI's SCORES online grievance portal (21-day resolution TAT) and SMART ODR online conciliation and arbitration platform.