In a significant move that expands the scope and powers of the scope and powers of the Securities and Exchange Board of India (SEBI) beyond the universe of listed companies, the market regulator cleared the framework of the rules governing Alternative Investment Funds (AIF).
With a view to extending the perimeter of regulation to unregulated
funds and ensuring systemic stability, increasing market efficiency,
encouraging formation of new capital and providing investor the Board
approved proposal to frame SEBI (Alternative Investment Funds)
Regulations, 2012.
Earlier, SEBI had put a concept paper along with the
draft AIF Regulations on SEBI website on August 1, 2011. Salient
features of the AIF Regulations, as approved by the Board, include the
following:
Scope of the Regulations and applicability to existing funds
a.
AIFs whether operating as Private Equity Funds, Real Estate Funds,
Hedge Funds, etc. must register with SEBI under the AIF Regulations.
b.
SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”)
shall be repealed. However, existing VCFs shall continue to be regulated
by the VCF Regulations till the existing fund or scheme managed by the
fund is wound up. Existing VCFs, however, shall not raise any fresh
funds after notification of these Regulations except commitments already
made by investors as on date of the notification. Such VCFs may also
seek re-registration under AIF regulations subject to approval of 66.67%
of their investors by value.
c.
Existing funds not registered under the VCF Regulations will not be
allowed to float any new scheme without registration under AIF
Regulations. However, schemes floated by such funds before coming into
force of AIF Regulations, shall be allowed to continue to be governed
till maturity by the contractual terms, except that no rollover/
extension or raising of any fresh funds shall be allowed.
d.
Existing funds not registered under the VCF Regulations which seek
registration but are not able to comply with all provisions of AIF
Regulations may seek exemption from the Board from strict compliance
with the AIF Regulations.
Categories of funds
The Regulation seeks to cover all types of funds broadly under 3
categories. An application can be made to SEBI for registration as an
AIF under one of the following 3 categories:-
i. Category I AIF
– those AIFs with positive spillover effects on the economy, for which
certain incentives or concessions might be considered by SEBI or
Government of India or other regulators in India; and which shall
include Venture Capital Funds, SME Funds, Social Venture Funds and
Infrastructure Funds. These funds shall be close ended, shall not engage
in leverage and shall follow investment restrictions as prescribed for
each category. Investment restrictions for VCFs are similar to
restrictions in the existing VCF Regulations. Depending upon the
specific need of each type of funds, Category I funds shall be given
concessions.
ii. Category II AIF –
those AIFs for which no specific incentives or concessions are given by
the government or any other Regulator; which shall not undertake
leverage other than to meet day-to-day operational requirements as
permitted in these Regulations; and which shall include Private Equity
Funds, Debt Funds, Fund of Funds and such other funds that are not
classified as category I or III. These funds shall be close ended,
shall not engage in leverage and have no other investment restrictions.
This forms the residual category, funds which cannot be classified
either as Category I or III will be classified as Category II.
iii. Category III AIF
– those AIFs which Funds including hedge funds that are considered to
have negative externalities such as exacerbating systemic risk through
leverage or complex trading strategies. These funds can be open ended or
close ended, may engage in leverage subject to limits as may be
specified by the Board. Category III funds shall be regulated through
issuance of directions regarding areas such as operational standards,
conduct of business rules, prudential requirements, and restrictions on
redemption, conflict of interest as may be specified by the Board.
Other salient features
- AIF Regulations will be applicable to all pooled investment vehicles other than Mutual Funds, CIS Schemes, Family Trusts, ESOP Trusts, Employee Welfare Trusts, holding companies, funds managed by Asset Reconstruction Companies, Securitisation Trust or any such pool of funds which is directly regulated by any other regulator in India.
- The Alternative Investment Fund shall not accept from an investor an investment of value less than rupees one crore. Further, the AIF shall have a minimum corpus of Rs. 20 crore.
- The fund or any scheme of the fund shall not have more than 1000 investors.
- The manager or sponsor shall have a continuing interest in the AIF of not less than 2.5% of the initial corpus or Rs.5 crore whichever is lower and such interest shall not be through the waiver of management fees.
- Category I and II AIFs shall be close-ended and shall have a minimum tenure of 3 years. However, Category III AIF may either be close-ended or open-ended.
- Schemes may be launched under an AIF subject to filing of information memorandum with the Board along with applicable fees.
- Units of AIF may be listed on stock exchange subject to a minimum tradable lot of rupees one crore. However, AIF shall not raise funds through Stock Exchange mechanism.
- AIFs shall not be permitted to invest more than 25% of the investible funds in one Investee Company. Further, AIFs shall not invest in associate companies.
- All AIFs shall have QIB status as per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.
- The Regulations provide for transparency and disclosures and mechanism for avoidance of conflict of interest.
- AIFs shall provide, on an annual basis, the investors with financial information of portfolio companies as also material risks and how these are managed.
- SEBI shall have right to inspect or investigate the AIFs and to issue necessary directions.
- SEBI will take up with government to extend the tax pass through status to AIFs.
The
SEBI (Alternative Investment Fund) Regulations shall become effective
from the date of their notification in the Gazette of Government of
India.
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