SEBI issues new norms on AIF for transparency

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SEBI issues new norms on AIF for transparency
The market regulator Securities and Exchange Board of India (SEBI) has proposed new norms on Alternative Investment Funds (AIF) to modulate unregulated funds and to ensure 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.

The new regulation will provide transparency and disclosures and mechanism for avoidance of conflict of interest.

Alternate Investment is a type of investment other than traditional type like investing in stocks and bonds. This type of investment include investment in tangible assets like art, antiques and some financial assets such as commodities, private equity, hedge funds and venture capital.

Regulations and applicability to existing funds:

a. All 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b. SEBI (Venture Capital Funds) Regulations, 1996 (“VCF Regulations”) shall be repealed.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.

c. Existing funds not registered under the VCF Regulations will not be allowed to float any new scheme without registration under AIF Regulations, and may seek exemption from the Board from strict compliance with the AIF Regulations.

Categories of funds:

i. Category I AIF – Those AIFs with positive spillover effects on the economy, 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.

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.

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.

Few salient features:

  • 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.
  • SEBI will take up with government to extend the tax pass through status to AIFs.
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