Alternative Investment Funds (AIFs) are relatively new concept of investments in India which have been defined in Regulation 2 (1) (b) SEBI (Alternative Investment Funds) Regulation, 2012. It refers to any privately pooled investment fund from niche & sophisticated segment of investors, (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). The minimum ticket size of Rs. 1 cr makes it an exclusive, UHNI & Institutional investment product. To enhance risk adjusted performance, AIFs uses various complex strategies like – long-short hedging, unlisted equities, pre IPO investments, real estate, structured credit and other special situation investments.
For all intents and purposes, SEBI currently recognizes AIFs as private investment funds which are not covered by the current jurisdiction of any regulatory body currently operating in India. Being a private investment fund, AIFs are not available through IPOs or other forms of public issue which are applicable to Collective Investment Schemes and Mutual Funds that are registered with SEBI. Thus AIF regulations are completely separate from other fund management regulations including but not limited to SEBI (Mutual Funds) Regulations, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999. As per existing AIF regulations, these private investment funds have been divided into 3 unique categories – Category I, Category II and Category III and the minimum qualifying amount for these schemes is Rs. 20 crores. The only exception to this rule is angel funds that have lower qualifying criteria in terms of fund corpus.
As per SEBI AIF Regulations, 2012 Alternative Investment Funds shall seek registration in one of the three categories
Category I: Mainly invests in start- ups, SME's or any other sector which Govt. considers economically and socially viable
Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator
Category III :Alternative Investment 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.
Tenure and Listing of Alternative Investment Funds / Schemes:
For AIF scheme launched under Category I & II shall be close ended, the tenure shall be determined at the time of application and shall be for minimum three years.
Category III Alternative Investment Fund may be open ended or close ended.
Extension of the tenure of the close ended Alternative Investment Fund may be permitted up to two years subject to approval of two-thirds of the unit holders by value of their investment in the Alternative Investment Fund. In the absence of consent of unit holders, the Alternative Investment Fund shall fully liquidate within one year following expiration of the fund tenure or extended tenure.
Units of close ended Alternative Investment Fund may be listed on stock exchange subject to a minimum tradable lot of one crore rupees. Such listing shall be permitted only after final close of the fund or scheme. However, listing on stock Exchanges is purely voluntary.
Taxation in AIFs:
Category I and Category II AIFs – Pass through status which means income from these funds is taxed at the investor level and not at the fund level. However, the fund deducts 10% on the income credited to the investor.
Category III AIFs - In Cat III AIFs, the income is taxed at the fund level and the rate depends on the investment strategy and asset allocation of the fund. Here the income is considered as the income under the heads of profits or gains from business and the investment fund is taxed in respect of such income at the maximum marginal rate of tax.