Alternative Investment Funds in India (AIF)

Alternative Investment Funds in India (AIF)

 

Meaning:-

Alternative Investment Fund means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which:-

1. Is a privately pooled investment vehicle which collects funds from investors, whether Indian or Foreign, for investing it in accordance with a defined investment policy for the benefits of the investors; and
2. Is not covered under the following
   1. SEBI’s Mutual Fund Regulations, 1996
   2. SEBI’s Collective Investment Schemes, 1999
   3. Family Trusts
   4. Gratuity Trusts
   5. Holding companies within the meaning of Section 4 of the Companies Act, 1956
   6. Other SPV’s not established by fund managers including Securitization Trusts; and
   7. Any other pool of funds which is directly regulated by any other regulator in India.

 

Features of AIF:-

1. AIFs have to be mandatorily registered with SEBI
2. A certificate of registration under AIF regulations will have to be obtained from SEBI.
3. The funds which are currently registered as “Venture Capital Funds’ under the SEBI (Venture Capital Funds) Regulations, 1996 shall continue to be regulated by the said regulations till the existing funds or schemes are would up. Such funds shall not launch any new schemes. Upon expiry of the schemes, the funds should get themselves registered under the Alternative Investment Funds Regulations to continue their business. In effect, the SEBI (Venture Capital Funds) would be scrapped in full in due course of time and the Alternative Investment Funds Regulations shall replace and govern them.
4. AIF can seek registration under any one of the 3 different categories. The following are those:-

Category – I:-

“AIF which invests in start-ups or early stage ventures or social ventures or SME’s or Infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME funds, social venture funds, infrastructure funds and such other AIFs.

 These funds may enjoy special tax benefits under Section 10(23FB) of the Income Tax Act, 1961.

 Category – II:-

AIF which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in these regulations.

 Funds such as Private Equity Funds or Debt Funds for which no special incentives or concessions are given by the government or any other regulator are included in this category.

 Category – III:-

AIF which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

 Funds such as Hedge Funds or funds which trade with a view to make short-term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other regulator shall be included in this category.

 

5. The certificate of registration once granted shall be valid till the AIF is would up.
6. AIF can be registered in the form of a company, trust or LLP.
7. AIF cannot make any invitation to the public to subscribe to its securities. The memorandum and articles of association or trust deed or partnership deed should prohibit it from making any invitation to the public.
8. The key investment team of the Manger of the AIF should have adequate experience, with at least one key personnel having not less than 5 years’ experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has relevant professional qualifications.
9. The objectives of the fund, the targeted investors, proposed corpus, investment style and strategy and proposed tenure of the fund or scheme shall be clearly described at the time of the registration.
10. SEBI may grant an in-principal approval to the applicant and grant the final certificate of registration afterwards, subject to the fulfilment of some conditions. The AIF may accept commitments from investors during this period but shall not accept any monies till the final registration is granted.
11. The AIF cannot carry any other activity other than the permitted activities under this regulation.
12. An AIF which has been granted registration under a particular category cannot change its category subsequent to the registration. This is possible only with the approval of SEBI.
13. AIF can raise funds from any investors whether Indian, Foreign or Non-Resident Indians by way of issue of units.
14. AIF can launch different schemes under a category, subject to the prior approval of SEBI.
15. Each scheme of the AIF shall have a corpus of at least Rs. 20 Crores.
16. The minimum amount that an AIF can accept from an investor is Rs. 1 Crore
17. The minimum amount that an AIF can accept from an investor who is an employee or director of the AIF or Manager is Rs. 25 Lakhs.
18. The Manager or Sponsor of the AIF shall have a continuing interest in the AIF by having a minimum investment of 2.5% of the corpus of the AIF or Rs. 5 Crores, whichever is lesser. This investment cannot be through the waiver of the management fees. In case of Category – III AIF, the continuing interest should not be less than 5% of the corpus or Rs. 10 Crores, whichever is lesser.
19. Each scheme of AIF should have NOT have more than 1000 investors. However, if the AIF is formed as a company then the provisions of the Companies Act shall apply.
20. The AIF shall not solicit or collect funds except by way of private placement.
21. Category – I and Category – II AIFs shall be closed ended funds and the tenure of fund or scheme shall be determined at the time of application. The minimum tenure for such funds is a minimum of 3 years.
22. Category – III AIF may be open ended or close ended.
23. Units of AIF may be listed on a stock exchange. The minimum tradable lot should be Rs. 1 Crores.

 

 

Investment Restrictions:-

1. AIF may invest in securities of companies incorporated outside India subject to such conditions or guidelines that may be stipulated or issued by the RBI and SEBI from time to time.
2. Category I and Category II AIF cannot invest more than 25% of the corpus in one Investee company.
3. Category III AIF cannot invest more than 10% of the corpus in one Investee company.
4. AIF cannot invest in associates except with the approval of 75% of the investors by value.
5. Un-invested portion of the investible funds may be invested in:-
   1. Liquid mutual funds
   2. Bank deposits
   3. Treasury bills
   4. CBLOs (Collaterised Borrowing and Lending Obligations)
   5. Commercial papers
   6. Certificate of deposits, etc.

 

6. Conditions applicable to Category I AIF’s:-
   1. They can invest in investee companies or venture capital undertakings or SPVs or in LLPs or in units of other AIF funds.
   2. The investment in other AIF funds is restricted to the AIFs of the same category.
   3. They cannot borrow funds directly or indirectly or engage in any leverage except for meeting temporary funding requirements for not more than 30 days and not more than 4 such occasions in a year and not more than 10% of their investible funds.
   4. If the AIF is in the form of a Venture Capital Fund then the following investment conditions shall apply:-
      1. Atleast 2/3^rd of the investible funds shall be invested in unlisted equity shares and equity linked instruments of venture capital undertakings or in companies listed or proposed to be listed on a SME exchange or SME segment.
      2. The remaining 1/3^rd of the investible funds shall be invested in:-
         1. Subscription to IPO’s of Venture Capital Undertakings.
         2. Debt or Debt instruments of a Venture Capital Undertaking
         3. Preferential allotment, including through QIFs of equity shares or equity linked instruments of a listed company subject to lock-in of 1 year.
         4. The equity or equity linked instruments of financially weak companies or a sick industrial company whose shares are listed.
         5. Any SPVs which are created by the fund for the purpose of facilitating or promoting investment in accordance with these regulations.
   5. If the AIF is in the form of an SME Fund then the following investment conditions shall apply:-
      1. Atleast 75% of the investible funds shall be invested in unlisted securities or partnership interest or venture capital undertakings or investee companies which are SMEs or in companies listed or proposed to be listed on SME exchange or SME segment of an exchange.
      2. If the investment is made into companies that are listed on an SME exchange then a lock-in period of 1 year from the date of investment shall apply.
   6. If the AIF is in the form of a Social Venture Fund then the following investment conditions shall apply:-
      1. Atleast 75% of the investible funds shall be invested in unlisted securities or partnership interest of social ventures.
      2. Such funds may accept, grant, provided that utilization of such grants shall be restricted to (i) above, and provided that the amount of grant accepted from a person shall at least Rs. 25 Lakhs or more and provided that no profit or gains shall accrue to the provider of such grants.
      3. These funds may give grants to social ventures, provided that appropriate disclosure shall be made in the placement memorandum.
   7. If the AIF is in the form of an Infrastructure Fund then the following investment conditions shall apply:-
      1. Atleast 75% of the investible funds shall be invested in unlisted securities or units of partnership interest or venture capital undertaking or investee companies or SPVs, which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects.
      2. These funds can also invest in securitized debt instruments or listed debt securities of investee companies or special purpose vehicles, which are engaged in or formed for the purpose of operating, developing or holding infrastructure projects.

 

7. Conditions applicable to Category II AIF’s:-
   1. These category funds shall invest primarily in unlisted investee companies or in units of other AIF funds.
   2. They are allowed to invest in units of Category I or Category II AIF funds.
   3. They are not allowed to invest in other Fund of Funds
   4. They cannot borrow funds directly or indirectly and shall not engage in leverage except for meeting temporary funding requirements for not more than 30 days, not more than 4 such occasions and not more than 10% of their investible funds.
   5. They can engage in hedging, subject to SEBI guidelines.
   6. They can enter into an agreement with merchant bankers to subscribe to the unsubscribed portion of the issue or can engage in market making activities, subject to SEBI guidelines.

 

8. Conditions applicable to Category III AIF’s:-
   1. These funds can invest in securities of listed and unlisted investee companies or derivatives or complex or structured products.
   2. They may invest in units of Category I or Category II AIF funds.
   3. They may engage in leverage or borrow subject to consent from the investors in the fund subject to a maximum limit, as per SEBI guidelines.

 

 

Angel Funds:-

These funds form part of the Category – I AIFs, but have been defined separately under Chapter III-A of the act. The following are the salient features of these funds:-

1. These funds can only raise funds by way of issue of units to angel investors.
2. These funds shall have a corpus of atleast Rs. 10 Crores.
3. They can accept funds from an angel investor for a maximum period of 3 years.
4. The minimum amount that they can raise from an angel investor is Rs. 25 Lakhs.
5. They shall raise funds only through private placement only.
6. They can launch schemes under these funds, subject to the prior approval of SEBI.
7. Each scheme shall not have more than 49 angel investors.
8. These funds can only invest in venture capital undertakings, subject to the following conditions:-
   1. That the venture capital undertakings have been incorporated during the preceding 3 years from the date of such investment.
   2. They have a turnover of less than Rs. 25 Crores.
   3. They are not promoted or sponsored by or related to an industrial group whose turnover exceeds Rs. 300 Crores.
   4. The minimum investment in a venture capital undertaking shall be Rs. 50 Lakhs and the maximum investment shall be Rs. 5 Crores.
   5. The investment into the venture capital undertaking shall be locked-in for a period of 3 years.
   6. They cannot invest in associates.
   7. They cannot invest more than 25% of their total investment under all its schemes in one venture capital undertaking.
   8. The units of angel fund cannot be listed on any recognised stock exchange.

 

 

General Conditions:-

1. If the investible funds of Category – I and Category – II AIF’s exceed Rs. 500 Crores then the AIF shall appoint a custodian for safekeeping of securities.
2. The Category – III AIF’s shall appoint custodians irrespective of the size of corpus of the AIF funds.
3. In case of change in control of the AIF, Sponsor or Manager, prior approval of SEBI shall be taken.

 

 

Explanations:-

1. “Associate” means a company or a limited liability partnership or a body corporate in which a director or trustee or partner or sponsor or manager of the Alternative Investment Fund or a director or partner of the manager or sponsor holds, either individually or collectively, more than 15% of its paid-up equity share capital or partnership interest.
2. “Certificate” means a certificate of registration granted by SEBI
3. “Company” means a company incorporated under the Companies Act, 1956
4. “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.
5. “Hedge Fund” means an Alternative Investment Fund which employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives.
6. “Infrastructure Fund” means an Alternative Investment Fund which invests primarily in listed securities or partnership interest or listed debt or securitized debt instruments of investee companies or special purpose vehicles engaged in or formed for the purpose of operating, developing or holding infrastructure projects. What form “Infrastructure” is defined by the Government of India from time to time.
7. “Investee Company” means any company, special purpose vehicle or limited liability partnership or body corporate in which an Alternative Investment Fund makes an investment.
8. “Investible Funds” means corpus of the Alternative Investment Fund net of estimated expenditure for administration and management of the fund.
9. “Manager” means any person or entity who is appointed by the Alternative Investment Fund to manage its investments by whatever name called and may also be same as the sponsor of the fund.
10. “Private Equity Fund” means an Alternative Investment Fund which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objectives of the fund.
11. “SME” means Small and Medium Enterprise and shall have the meaning as defined under the Micro, Small and Medium Enterprises Development Act, 2006, or as amended from time to time.
12. “SME Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of investee companies which are SMEs or securities of those SMEs which are listed or proposed to be listed on a SME exchange or SME segment of an exchange.
13. “Social Venture” means a trust, society or company or venture capital undertaking or limited liability partnership formed with the purpose of promoting social welfare or solving social problems or providing social benefits and includes:-
    1. public charitable trusts registered with Charity Commissioner
    2. Societies registered for charitable purposes or for promotion of science, literature, or fine arts.
    3. company registered under Section 25 of the Companies Act, 1956
    4. micro finance institutions
14. “Social Venture Fund” means an Alternative Investment Fund which invests primarily in securities or units of social ventures and which satisfied social performance norms laid down by the fund and whose investors may agree to receive restricted or muted returns.
15. “Sponsor” means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partners in case of a limited liability partnership.
16. “Trust” means a trust established under the Indian Trust Act, 1882.
17. “Unit” means beneficial interest of the investors in the Alternative Investment Fund.
18. “Venture Capital Fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property rights based activities or a new business model and also includes “Angel Funds”.
19. “Venture Capital Undertaking” means a domestic company:-
    1. Which is not listed on a recognised stock exchange in India at the time of making investments.
    2. Which is engaged in the business of providing services, production or manufacture of articles or things and does not include following activities or sectors:-
       1. Non-banking financial companies.
       2. Gold financing
       3. Activities not permitted under industrial policy of Government of India
       4. Any other activity which may be specified by SEBI in consultation with Government of India from time to time.

20. “Angel Investor” means any person who proposes to invest in an angel fund and satisfied one of the following conditions, namely,
    1. An individual investor who has net tangible assets of atleast Rs. 2 Crores excluding value of his principal residence, and who:-
       1. Has early stage investment experience, or
       2. Has experience as a serial entrepreneur, or
       3. Is a senior management professional with atleast 10 years of experience, or
       4. A body corporate with a net worth of atleast Rs. 10 Crores, or
       5. An AIF fund registered under AIF regulations or a Venture Capital Fund registered under the SEBI (Venture Capital Funds) Regulations, 1996.

Real Estate Investment Trusts in India (REITs)

Real Estate Investment Trusts in India (REITs)

Structure:-

REIT’s shall have a three (3) tier structure comprising of Sponsor(s), Trust and Fund Manager.

Features of REIT’s:-

1. REIT shall be mandatorily registered with SEBI.
2. REIT assets or units can be fully held by its sponsors without the need for any public issue for a maximum period of 3 years only. Within the end of 3 years if the REIT has failed to make an initial offer then the REIT shall surrender its certificate of registration to SEBI and cease to be an REIT.
3. If the sponsors of the REIT decide to increase the corpus by way of issuing additional units then the first initial offer of its units should be by way of public issue only. This means that the REIT cannot use the mechanism of private placement or preferential allotment for its first issue of units.
4. The initial offer of units by the REIT can be made only if:-
   1. The value of the assets owned by the REIT is Rs. 500 Crores or more.
   2. The units proposed to be offered to the public is not less than 25% of the total outstanding units post issue.
   3. The offer size is Rs. 250 Crores or more
   4. The minimum expected number of unit holders of the REIT (forming part of the PUBLIC) shall be 200 at all times.
5. Follow-on or subsequent issue of units may be by way of follow-on public offers, preferential allotment, qualified institutional placement, rights issue, bonus issue, offer for sale or any other mechanism as may be specified from time to time by SEBI.
6. REIT units may be issued to any persons, whether resident or foreign. The foreign investors shall be subjected to the provisions or guidelines of RBI.
7. The minimum amount of subscription or application money that a REIT can receive from a unit holder should not be less than Rs. 2 Lakhs.
8. The IPO or FPO should not be for more than 30 days.
9. The allotment of the units post issue shall be done within 12 working days from the date of closing of the issue.
10. REIT units shall be issued only in dematerialized format only.
11. The issue price of the REIT units shall be determined through book building process.
12. Green-Shoe option is available upto 25% of the issue size.
13. After the issue to the public, it is mandatory for the REIT to list the units on a recognized stock exchange within 12 working days from the date of closure of the offer.
14. Trading lot of the REIT units shall be Rs. 1 Lakhs.
15. REIT can redeem units only by way of buy-back or at the time of de-listing of units.

 

Eligibility Criteria:-

Eligibility of the Sponsor:-

1. REIT can have a maximum of 3 sponsors.
2. Each such sponsor shall hold more than 5% of the REIT units on post-initial offer basis.
3. The sponsors on a collective basis shall have a net worth of Rs. 100 Crores or more.
4. Each sponsor shall have an individual net worth of Rs. 25 Crores or more.
5. The sponsor or its associate(s) shall have a minimum experience of 5 years in developing real estate or fund management in the real estate industry.
6. If the sponsor is a developer then at least 2 projects of the sponsor should have been completed.

Eligibility of the Trust:-

1. The Trust should be a registered trust under the Indian Trust Act, 1908.
2. The Trust Deed should have its main objectives as undertaking of REIT in accordance with the regulations of SEBI and should include the responsibilities of the Trustees in accordance with the Regulations 9 of SEBI’s REIT regulations.
3. The sponsor, trustees and manager should be separate entities.

Eligibility of the Manager:-

1. If the manager is a body corporate or a company then the manager should have a net worth of Rs. 10 Crores or more.
2. If the manager is an LLP then the net tangible assets should be Rs. 10 Crores or more.
3. The manager should have 5 years or more of experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
4. The manager should have 2 key persons who each have not less than 5 years of experience in fund management or advisory services or property management in the real estate industry or in development of real estate.
5. If the manager is a body corporate or a company then a minimum 50% of its directors should be independent directors. Those directors should also not be members of another REIT(s).

Eligibility of the Trustees:-

1. The trustee is registered with SEBI under SEBI (Debenture Trustees) Regulations, 1993 and is not an associate of the sponsor(s) or manager.

 

Investment Restrictions:-

1. REIT may invest in under-construction properties either directly or through SPV.
2. REIT shall not invest in vacant land or agricultural land or mortgages other than mortgage backed securities.
3. At least 80% of the value of the REIT assets shall be invested in completed and rent generating properties. The remaining 20% may be invested in the following assets:-
   1. Under-construction properties
   2. Non-rent generating properties
   3. Listed or unlisted debt of companies or body corporates in real estate sector.
   4. Mortgage backed securities.
   5. Equity shares of companies listed on a recognised stock exchange in India which derive not less than 75% of their operating income from real estate activity as per the audited accounts of the previous financial year.
   6. Government securities.
   7. Un-utilized FSI of a project.
   8. TDR rights.
   9. Money market instruments or cash equivalents.
4. The REIT shall arrange adequate insurance coverage for the real estate assets of the REIT.
5. At least 75% of the revenues of the REIT and the SPV should be rent generating.
6. REIT should hold at least 2 projects directly or through SPV, which should comprise not more than 60% of REIT assets.
7. The minimum duration of holding a rent generating property shall be 3 years from the purchase of that property.
8. REIT cannot invest in units of other REITs
9. REIT cannot lend to any person or body corporate. Investment in debt securities is not considered as lending.
10. REITs cannot launch any schemes.
11. While purchasing or selling a property, two valuation reports from two different valuers, independent of each other, shall be obtained. The transaction price of purchase of such asset(s) shall be at a price not greater than the average of the two independent valuations. Similarly, the transaction price of sale of such asset(s) shall be at a price not lesser than the average of the two independent valuations.
12. REITs can borrow money but the total borrowing cannot exceed 49% of the value of the REIT assets.
13. No valuer shall undertake valuation of the same property for more than 4 years consecutively. There may be a gap of at least 2 years before re-appointment of the same valuer.

 

Other General Restrictions:-

1. No unit holders of the REIT can enjoy preferential voting or any other rights over any unit holder.
2. There cannot be multiple classes of units of REIT.
3. The trustees shall ensure that subscription amount is kept in a separate bank account in the name of the REIT and is only utilized for adjustment against allotment of units or refund of money to the applicants till the time such units are listed.
4. The trustee shall ensure that the remuneration of the valuer is not linked to or based on the value of the asset being valued.
5. The trustees and its associates shall not invest in units of the REIT in which it is designated as the Trustee.
6. The manager shall appoint an auditor for a period of not more than 5 consecutive years. However, if the auditor is not an individual, he/she may be reappointed for another 5 consecutive years, subject to the approval of unit-holders in the annual meeting.
7. Computation of NAV of the REIT shall be based on the valuation done by the valuer and is declared no later than 15 days from the date of such valuation.
8. Valuation shall be done once in six months.
9. Audit of the accounts of the REIT by the auditor shall be done twice in a financial year.
10. The sponsor should hold a minimum of 25% of the total units of REIT after the initial offer on a post-issue basis for a period of at least 3 years from the date of listing of such units. After the 3 years period, the sponsors may reduce their unit holding. However, such reduction of holding should not be less than 15%.
11. If the sponsors have held units exceeding the minimum 25% limit then such excess units shall be continued to be held for at least one year from the date of listing of units.
12. Each sponsor should hold not less than 5% of the outstanding units at all times.
13. If the sponsors wish to sell their units and exit out of the business then they can do so only after 3 years from the date of listing of units. However, such sale and exit can be only possible to another entity or person who would become the “re-designated sponsor”.
14. The sponsor and the proposed re-designated sponsor shall obtain approval from the unit holders or provide option of exit to the unit holders also in accordance with the guidelines.

 

Explanations:-

1. “Completed Property” means property for which occupancy certificate has been received from the relevant authority.
2. “Associate” includes persons or body corporate or promoters of the body corporate(s), including group companies and companies under the same management.
3. “Floor Space Index (FSI)” mean the buildable area on a plot of land as specified by a competent authority.
4. “Investment Management Agreement” means an agreement between the trustee and the manager which lays down the roles and responsibilities of the manager towards the REIT.
5. “Net Asset Value (NAV)” means the value of the REIT divided by the number of outstanding units as on a particular date.
6. “Preferential Issue” means an issue of units by a listed REIT to any select person or group of persons on a private placement basis and does not include an offer of units made through a public issue, rights issue, bonus issue, qualified institutions placement or any other issue.
7. “Real Estate” or “Property” means land and any permanently attached improvements to it, whether leasehold or freehold and includes buildings, sheds, garages, fences, fittings, fixtures, warehouses, car parks, etc. and any other assets incidental to the ownership of real estate but does not include mortgages.
8. “Real Estate Assets” means properties owned by REIT whether directly or through a special purpose vehicle.
9. “Right-of-first-refusal” or “ROFR” of a REIT means the right given to the REIT by a person to enter into a transaction with it before the person is entitled to enter that transaction with any other party.
10. “Special Purpose Vehicle (SPV)” means any company or LLP in which (a) the REIT holds controlling interest of more than 50%, AND (b) which holds not less than 80% of its assets directly in properties and does not invest in other SPV’s, AND (c) which is not engaged in any other activity other than holding and developing property and any other activity incidental to such holding and developing.
11. “Transferable Development Rights (TDR)” means development rights issued by the competent authority in lieu of the area relinquished or surrendered by the owner or developer or by way of declared incentives by the government or authority.
12. “Under-Construction Property” shall mean a property of which construction is not complete and occupancy certificate has not been issued or received.
13. “Unit” means a beneficial interest in the REIT.
14. “Valuer” means any person who is a registered value under Section 247 of the Companies Act 2013 and who has been appointed by the manager to undertake valuation of the REIT assets.