Traditional Investment instruments include cash, stocks and bonds. However, all the other investment instruments other than the ones mentioned earlier are clubbed under the category of alternative investments. Definition of alternative investment may differ from country to country. However, most of the countries include fixed deposits and real estate in the definition of traditional investment instruments while hedge funds and private equity are considered to be alternative investment instruments.
AIFs – The Concept
Alternative Investment Funds or AIFs are the funds which are established for the purpose of pooling capital from Indian as well as from foreign investors. This capital is then invested according to a pre decided policy. Regulation 2(1)(b) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 define Alternative Investment Funds as any “privately pooled investment fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP)”. Thus, in Indian context, Alternative Investment Fund is a private fund which is not governed by any regulatory agency other than SEBI in India.
Alternative Investment Funds generally target institutional investors and very high net worth individuals. A single Alternative Investment Fund can launch various schemes.
There are several types of Alternative Investment Funds. However, these funds can be broadly classified into three categories.
I) The first type of Alternative Investment Funds specialize in investments in start-up, social ventures, early stage ventures or Small and Medium Enterprises. These funds have bias towards investment areas which are economically or socially desirable. There are certain regulations which prohibit such funds from engaging in leveraging, barring specifically mentioned modes. The various types of leveraging allowed are for meeting short term funding requirements and it should not last for more than thirty days. Such leveraging must not be carried out for more than four times in a year and should not involve more than ten percent of the total corpus.
II) This category includes funds such as debt funds and Private Equity. This class of Alternative Investment Funds does not receive any particular kind of incentives or sops. This category also does not engage in leverage other than for the purpose of meeting day to day funding requirements.
III) This category of funds makes heavy use of leverage. These funds are focused on making short term gains. Category III funds can invest in Category I and II funds. These funds also do not receive any concessions or incentives. The main constituent of this category is Hedge Fund.
The Regulator- SEBI
Alternative Investment Funds are governed by various SEBI regulations. The regulatory body recently revised its guidelines for the funds. The new regulations will bring about more transparency as it requires funds to make comprehensive disclosures. The funds are now required to provide “disciplinary history” pertaining to its managers, sponsors, partners and directors. It is also required to provide such history of its associates and promoters. The funds are also required to present details of present and past cases, disputes related to non-payment of statutory dues and other such litigations. The Category III funds are given some relaxation in this regard.
Category III Alternative Investment Funds are required to report to the custodian the amount of leverage at the end of the day by the end of next working day. The circular states, “It has been observed that with respect to reporting of amount of leverage at the end of the day, the AIF is dependent on various parties in order to calculate and submit to the custodian the amount of leverage at the end of the day. Such various parties provide information at varied time periods due to which the AIFs are finding it difficult to report to the custodian the amount of end-of-day leverage on the same day.”
AIFs are also required to provide information to SEBI about all the requests for redemption. Such information must be provided within two days of the receipt of such request.
These funds also face restrictions on the raising of funds and its investments. The minimum investment amount requires is Rs. 1 crore and all the funds required to be raised through private placement. A single scheme should have minimum corpus of Rs. 20 crore and it cannot have more than 1000 investors. In the case of close ended AIFs, the units may be listed on a stock exchange. However, such listing may be made only after the final closure of the scheme or fund. It should also be ensured that the minimum tradable lot for the fund is Rs. 1 crore.
Category III funds have to comply with additional requirements such as monthly reporting to SEBI. These funds are also required to fulfill the norms related to leverage, redemption and risk management. Category III funds cannot carry leverage exceeding twice the Net Asset Value of the fund.