Alternative Investment Fund Registration in India

 

Funds which invest in economically and socially viable early-stage StartUps, Small and Medium Enterprises and new businesses with unique products or services with high potential for growth. Several promotional and incentivizing initiatives have been taken by the government for such funds due to the growth prospect and employment creation fuelled by such funds. These funds have proved to be very helpful to the startup ecosystem in India.

A] Category I comprises the following funds:

➲ Venture Capital Fund (VCF)

Venture Capital Funds are Category I Alternative Investment Funds which provide funding to startups, early-stage venture capital projects or to a small or medium-sized business, to own a part of its equity.

VC’s generally prefer funding businesses, that are already established or that are in their growth stage & have a long-term potential to mitigate their risk of losing investments.

VC’s act as a pool which collects money from various investors who are willing to undertake equity investments in ventures. VC’s, in turn invest this money, in multiple prospective projects including start-ups and SME’s. Such investments are made considering a calculated risk after taking elaborate note of several factors linked to the growth of the projects they invest in.

Unlike any collective investment schemes or mutual funds or hedge funds, investors of a VC get a pro rata share of every business the VC has invested in.

High Net Worth Individual Investors, from India and abroad, who seek high risk-high return ratio highly prefer investing in Venture Capital Form of AIF, Thus, contributing towards the growth of our economy.

➲ Angel Fund [AF]

An “Angel Investor” refers to an individual who is willing to invest in and “ANGEL FUND”. Angel funds are pretty much similar to Venture Capital Funds. The primary difference between the two is what money they use to invest.

This kind of funds comprises of various “angel” investors who contribute to the pool of funds known as the “ANGEL FUND”. Such funds prefer to invest in early-stage or budding start-ups for their growth.

When and “Angel Investor” invests in such funds, they are issued units of such fund.  Angel Funds have a comparatively higher risk-return ratio. The source of returns on investments by such funds are the dividends from the profits that their investee companies make once they achieve growth and profitability.

➲ Infrastructure Fund [IF]

Infrastructure funds invest specifically to invest in companies incorporated for the purpose of development of infrastructure projects. This kind of fund facilitates investment for investors who prefer to put money in infra development projects since the infrastructure sector has considerably high entry barriers and relatively lower levels of competition. Such funds also enjoy various tax benefits and subsidies from the government of India.

Investment in Infrastructure funds generally yields double-fold returns in the form of capital growth and dividend income.

➲ Social Venture Fund [SCF]

Social venture funds [SCF’s] are a result of the evolution of socially responsible investing in India. This type of AIF’s typically invests in companies which focus on making profits and solve environmental as well as social issues simultaneously. Despite the investments being benevolent in nature, the expectation of returns is not far-fetched as the investees would still make profits.

The target investment opportunities for SCF’s are typically the social welfare projects carried out of developing countries as they have great potential for growth as well as social change.

Social Venture Funds engage the latest technology, best managerial practices and huge resource pool towards the target project with an aim at carving out a win-win situation for all the stakeholders including investors, enterprises and society in general by investing in social and infrastructure projects.

➲ SME FUND

SME (small and medium enterprise) funds fall under the Category 1 SIF (Alternative Investment Funds) that prefer investing in listed/unlisted micro, small and medium enterprises.

SME sector is an impediment to the growth of an emerging economy. This Sector generally tends to meet their debt capital requirements through collateral-based lending offered by NBFC’s and other financial institutions. However, there has been a constantly increasing GAP between the demand and supply of debt capital to this sector. A substantial portion of the SME sector lacks collateral security required for collateral-based lending preferred by the Banks and NBFC’s. Also this sector fails to attract the risk investors like Venture funds, angels funds as SME’s don’t offer a high risk-return ratio. Thus, creating a vacuum for equity-based funding for such companies as equity funds are normally directed towards start-ups or established listed and unlisted companies with high return potential.

SME funds help bridge this gap of capital requirement faced by the SME sector by offering equity financing to these companies. SME FUNDS earn returns if the investee company reports substantial growth above minimum return (Say 8-10 %) or if the company gets listed on stock exchange attracting public investment(s).

Category II Alternative Investment Fund

Classification of Category II funds is often done by elimination meaning that: All those funds that are not described under category I and III AIF, fall under category II. Category II funds invest in various equity debt securities come and attract no incentives or concessions by the government. Such funds typically invest in unlisted private companies.

Funds resort to borrowing or leveraging funds for its underlying activities in accordance with the provisions laid down by SEBI. Some examples of Category II Alternative Investment Funds [CATEGORY II AIF] are Private Equity Funds [PE Funds], Real Estate Funds, Debt Funds and funds established for distressed assets.

Category 2 Alternative Investment Funds shall not engage in borrowing or leveraging activities except for temporary funding needs of up to 10 % of their investible funds for a period ranging from 30 to 365 days.

Category II comprises the following funds:

➲ Private Equity (PE) Fund

Private Equity funds is a Category 2 Alternative Investment Fund which basically normally invests in unlisted private companies against a share of their ownership. Unlisted private companies are not allowed to raise capital by issue of equity or debt instrument to the public. Hence, they turn towards PE funds to fulfil their funding requirements.

Further, PE Funds mitigate their risk by offering its investors with a diversified portfolio of equities managed by highly experienced fund managers. PE funds typically invest for a time period ranging between 4 to 7 years. Post the investment period, PE Funds expect to be able to exit the investment with a considerable profit.

➲ Debt Fund

Debt Fund are privately pooled funds established for primarily investing in debt instruments of listed as well as unlisted companies.

Debt Funds prefer investing in companies with high growth potential & good corporate practices going through a capital crunch as they can be a good investment option for debt fund investors. However, Companies with low credit score generally offer debt securities with a high yield but also accompany with high risk. So

As per the SEBI Regulations, the amount invested in Debt Fund cannot be utilised for the purpose of giving loans, as Alternative Investment Fund is a privately pooled investment vehicle.

➲ Fund of Funds

Fund of funds as the name suggests is a combination of various Alternative Investment Funds. Such funds don’t make their own portfolio or sector-specific investments. Fund of funds is established to invest in a portfolio comprising of other AIFs. Unlike the fund of funds in case of mutual funds, FUND OF FUNDS under AIF are not permitted to invite capital from the public or issue their units to publicly.

Category III Alternative Investment Fund

Category 3 Alternative Investment Funds are funds which aim at short term returns. In order to achieve short-term capital appreciation, such funds engage various complex and diverse trading strategies. Government has offered no incentives or concessions for category 3 Alternative Investment Funds.

Category III Alternative Investment Funds may borrow or leverage funds subject to consent from its investors and to a maximum limit as may be prescribed by SEBI. Category III AIFs may invest in the units other AIF’s from category I, Category II or Category III AIFs. However, Category III AIFs cannot invest in the units of Fund of Funds.

Category III comprises the following funds:

➲ Hedge Fund

Hedge Funds are Category 3 Alternative Investment Funds which pool funds from institutional and accredited investors and invests in domestic as well as international markets by employing different strategies to earn alpha or active returns. Hedge Funds take up leverage & derivatives to a great extent and are aggressively managed with an aim of generating high returns on their pooled capital. Such funds are comparatively less regulated as compared to similar mutual funds and other investment vehicles.

It is to be noted that Hedge Funds are relatively expensive as compared to other financial investment instruments as they generally charge an asset management fee of 2% and collect a high fee up to 20% of the profits earned.

➲ Private Investment in Public Equity Fund (PIPE)

It is a privately managed pool of privately sourced funds reserved for investment in public equity. Private investment in public equity means buying the shares of publicly traded stock at discounted rates. This basically implies that the investor purchases a stake in the company, whereas the investee company receives a capital infusion for its business.