Regulatory Update Alternative Investment Funds Regulations, 2012

Vol #15 June 12
Regulatory Update Alternative Investment Funds Regulations, 2012
The Securities and Exchange Board of India (SEBI) has recently notified the SEBI (Alternative Investment Funds) Regulations, 2012 - a comprehensive regulatory framework for regulating private pools of capital or Alternative Investment Funds (AIF Regulations). SEBI had earlier issued a concept paper on August 1, 2011 discussing the proposed introduction of the AIF Regulations and inviting public comments to the same.
The key highlights of the AIF Regulations are briefly summarized in this newsletter:
1. Repeal of the SEBI (Venture Capital Funds) Regulations, 1996 This Regulation has replaced the existing SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations). Funds registered under the VCF Regulations shall continue to be regulated by the said regulations till the existing fund or scheme is wound up.
2. Meaning & Scope of Alternative Investment Fund AIF means any fund established in India in the form of a trust, company, limited liability partnership or a body corporate which:(i) is a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) is not covered under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999 or any other regulations of SEBI, which aims to regulate fund management activities.
The following are specifically excluded from the purview of AIF Regulations (subject to conditions in certain cases): Family Trusts; ESOP Trusts; Employee Welfare Trusts; Holding Companies within the meaning of section 4 companies Act, 1956;
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Other Special Purpose Vehicles not established by fund managers, including securitization trusts, regulated under a specific regulatory framework;
Funds managed by registered securitization company or reconstruction company; and Any such pool of funds which is directly regulated by any other Indian regulator.
3. Categories of AIF SEBI has classified AIF into the following broad categories: Category I: - Funds that invest in start-up or early stage ventures or social ventures or Small Medium Enterprises (SMEs) or infrastructure or other sectors which the government or regulators consider as socially or economically desirable which include VCF, SME Funds, Social Venture Funds (SVF), Infra Funds and such other AIFs as may be specified in the AIF Regulations. Category II: - Funds that do not fall in Category I and III AIF and those that do not undertake leverage or borrowing other than to meet the permitted day to day operational requirement including Private Equity Funds or Debt Funds. Category III: - Funds that employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives, for e.g. Hedge Funds.
4. Registration of AIF All AIFs are required to be mandatorily registered under any one of the above mentioned categories. AIF Regulations permit launch of multiple schemes under an AIF without separate registration from SEBI subject to filing of Information Memorandum with SEBI. The certificate of registration, once granted, shall be valid till the concerned AIF is wound up.
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5. Investment Conditions and restrictions applicable to all categories of AIFs
Investment approach AIF can raise funds through private placement by the issue of Information Memorandum. AIF will be required to state its investment purpose, investment strategy and business model in the Information Memorandum to investors. Any material change in the fund strategy shall require consent of at least two-thirds of unit holders by value.
General investment conditions and restrictions The minimum investment in AIF shall be INR 200 million. The minimum investment by each investor shall be INR 10 million. In case the investor is a director or employee or manager or sponsor of AIF, the minimum investment threshold is relaxed to shall be INR 2.5 million Any AIF/scheme shall not have more than 1,000 investors. AIF may invest in securities of foreign companies subject to certain conditions. Un-invested portion of the funds corpus may be invested in liquid mutual funds or bank deposits or other liquid assets till deployment of funds in accordance with the investment objective of the fund.
6. Key Features of AIF Categories Category I Tenure Minimum tenure of 3 years. Close- ended fund. The tenure may be extended for a further period of 2 years only with the approval by 66.6% of the unit holders by value. No minimum prescribed. tenure Category II Category III
Open-ended or close ended fund. The tenure may be extended for a further period of 2 years in case of close-ended fund subject to approval from investors.
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Leverage / Hedging Shall not borrow/ leverage except for temporary funding requirements, which shall not exceed 30 days. The borrowing cannot be on more than four occasions in a year and cannot exceed 10% of corpus. Shall not borrow /leverage except for temporary funding requirements, which shall not exceed 30 days. The borrowing cannot be on more than four occasions in a year and cannot exceed 10% of corpus. Funds may engage hedging, subject guidelines. in to May leverage or borrow (subject to consent from investors and maximum limit specified by SEBI).
Investment in one investee company Shall not invest more than 25% of its corpus in one investee company. Maximum 10% of the corpus in one investee company.
Tax Pass Through Category I AIFs will be considered as venture capital funds / companies for the purpose of Section 10 (23 FB) of the Income Tax Act, 1961. The income from Category II and III funds will not be exempt under section 10 (23 FB) of the Income Tax Act, 1961. Taxation of such funds would depend on the legal status of the fund i.e. company, limited liability partnership or trust.
Valuation AIF must disclose the valuation procedure and the methodology for valuing assets. Valuation should be carried out by an independent valuer once in every 6 months. This period can be extended to one year with the approval of 75% of the investors by value. AIF must disclose the valuation procedure and the methodology for valuing assets. AIF to ensure that calculation of net asset value is independent from the find management function of the AIF; NAV to be disclosed to investors as per the
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regulations. Reporting Within 180 days from the end of the year an annual report is required to be presented to the investors. Within 180 days from the end of the year an annual report is required to be presented to the investors. Within 60 days from the end of the quarter, AIF is also required to provide a quarterly report to the investors.
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Vol #15 June 12