SEBI Alternative Investment Funds Regulations 2012: Registration and Eligibility
The SEBI (Alternative Investment Funds) Regulations, 2012, provides the definitive regulatory framework for the establishment, operation, and management of Alternative Investment Funds (AIFs) in India. These regulations ensure that private pools of capital are managed with high standards of governance, transparency, and professional ethics. An AIF is a privately pooled investment vehicle that collects funds from sophisticated investors for investing in accordance with a defined investment policy for the benefit of its investors.
Classification of Alternative Investment Funds
Under the SEBI (AIF) Regulations, every fund must seek registration in one of the following four primary categories:
Category I Alternative Investment Fund
These funds invest in sectors that the government or regulators consider socially or economically desirable.
- Venture Capital Funds (VCF): Focus on start-ups and early-stage ventures.
- Social Impact Funds: Invest in social ventures that satisfy social performance norms.
- SME Funds: Focus on small and medium enterprises.
- Infrastructure Funds: Invest in unlisted securities or partnership interests of infrastructure projects.
- Special Situation Funds: Distressed debt funds that acquire stressed assets or finance companies in default.
- Corporate Debt Market Development Fund: A close-ended AIF that acts as a backstop facility during market dislocation.
Category II Alternative Investment Fund
These funds do not fall under Category I or III and are prohibited from undertaking leverage or borrowing except for day-to-day operational requirements as permitted by SEBI.
- Private Equity (PE) Funds: Invest in unlisted companies or listed companies through preferential allotment.
- Debt Funds: Invest primarily in debt or debt-linked instruments of investee companies.
Category III Alternative Investment Fund
These funds employ diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives.
- Hedge Funds: Funds that trade with a view to make short-term returns or are open-ended.
Specified Alternative Investment Fund
SEBI may specify regulations for certain types of funds that do not fall under the other three categories.
Permissible Legal Structures for AIFs
An AIF in India can be constituted in any of the following legal forms:
- A "Trust": Formed under a Trust Deed and registered under the Registration Act, 1908. This is currently the most popular structure for domestic AIFs.
- A "Limited Liability Partnership" (LLP): Incorporated under the Limited Liability Partnership Act, 2008.
- A "Company": Formed under the Companies Act, 2013.
- A "Body Corporate": Established under the laws of the Central or State Legislature.
Eligibility Criteria for Registration
SEBI evaluates AIF applications based on several critical parameters to ensure only "fit and proper" entities operate in the market.
Constitutional Documents
The Memorandum of Association (for companies), Trust Deed (for trusts), or Partnership Deed (for LLPs) must permit the entity to carry on the activity of an AIF. These documents must also explicitly prohibit the AIF from making an invitation to the public to subscribe to its units.
"Fit and Proper" Person Criteria
The applicant, sponsor, and manager must meet the criteria defined in Schedule II of SEBI (Intermediaries) Regulations, 2008. Key components include:
- Integrity, reputation, and character.
- No history of restraint orders or convictions.
- Financial competence based on net worth and solvency.
- No history of being a willful defaulter.
Key Investment Team Requirements
The Manager’s key investment team must fulfill specific educational and certification requirements.
- Professional Qualification: At least one key personnel must hold a professional qualification in finance, accountancy, business management, commerce, economics, capital market, or banking.
- Mandatory Certification: At least one key personnel must hold a relevant certification as specified by SEBI. The current requisite certification is NISM-Series-XIX-C: Alternative Investment Fund Managers Certification Examination.
- Combined Requirement: A single key personnel may fulfill both the professional qualification and the certification requirements.
Operational Infrastructure
The Manager or Sponsor must demonstrate that they have the necessary physical infrastructure and manpower to effectively discharge fund management activities.
Business Plan Disclosures
At the time of registration, the applicant must clearly describe:
- The Investment Objective and target sectors.
- The Targeted Investors and proposed corpus.
- The Investment Style or Strategy.
- The Proposed Tenure of the fund or scheme.
Key Terms for AIF Registration
| Term | Definition |
|---|---|
| Sponsor | Any person or persons who set up the Alternative Investment Fund. |
| Manager | Any person or entity who is appointed by the AIF to manage its investments. |
| Corpus | The total amount of funds committed by investors to the AIF by way of a written contract or any such document. |
| Investible Funds | The corpus of the AIF net of estimated expenditure for administration and management of the fund. |
| Trust Deed | The instrument of trusteeship which is vested in the trustees of the AIF. |
Key Takeaways for Professionals
- Categorisation is Binding: A fund must select its category carefully at the time of application, as it determines the investment conditions and leverage limits applicable to it.
- Non-Public Nature: AIFs are strictly private placement vehicles; any public invitation to subscribe to units is a violation of the regulations.
- Professional Standards: The requirement for NISM certification for key personnel underscores SEBI’s focus on establishing a minimum common knowledge benchmark for fund managers.
- Governance Documents: Ensuring that the MOA, Trust Deed, or Partnership Deed is correctly drafted is the first step in the registration process.