SEBI Alternative Investment Funds Regulations 2012: Raising Capital and Investment Conditions
This section outlines the regulatory requirements for raising corpus capital, the eligibility of foreign investors, and the general investment restrictions that govern the deployment of funds across various Alternative Investment Fund (AIF) categories.
Raising Corpus Capital
AIFs operate as private pools of capital, and their fund-raising activities are strictly governed to maintain their non-public nature.
Methods and Limits of Capital Raise
- Private Placement Only: An AIF must not solicit or collect funds from the public; capital creation is permitted only through the private placement of units (or partnership interests in the case of LLPs).
- Minimum Corpus Thresholds: Each scheme of an AIF must maintain a minimum corpus of INR 20 crore. Social Impact Funds have a lower threshold of INR 5 crore.
- Investor Count: A scheme cannot have more than 1000 investors. For AIFs constituted as companies, this is further restricted by the Companies Act, 2013, to 200 investors.
- Joint Investors: An investor may invest jointly with a spouse, parent, or daughter/son. A maximum of two such persons can act as joint investors.
- Category III Open-ended Floor: If the corpus of an open-ended Category III AIF falls below INR 20 crore, the manager must restore it within 3 months. Failure to do so requires the redemption of all units.
Prohibition of the Priority Distribution Model (PDM)
SEBI strictly prohibits AIF schemes from adopting a Priority Distribution Model where certain classes of investors bear a loss that is more than their pro-rata holding to protect other classes.
- Loss Sharing: All losses must be shared with investors on a pro-rata basis according to their holding in the fund.
- Restrictions: Any scheme currently following a priority distribution model is prohibited from accepting fresh commitments or making new investments until further clarification from SEBI.
General Investment Conditions
The investment activities of an AIF are guided by the objectives disclosed to investors and specific prudential norms.
Compliance and Alterations
- Adherence to Strategy: All AIFs must state their investment strategy, purpose, and methodology in the Private Placement Memorandum (PPM).
- Material Alterations: Any material change to the fund’s strategy requires the consent of at least two-thirds of the unit holders by the value of their investment.
Foreign Investment Eligibility
Registered AIFs can raise capital from foreign or Non-Resident Indian (NRI) investors subject to FEMA, 1999 guidelines. The fund manager must ensure foreign investors meet the following criteria:
- Regulatory Supervision: The investor’s home securities market regulator must be a signatory to the IOSCO Multilateral Memorandum of Understanding or have a bilateral information-sharing arrangement with SEBI.
- Sanctions and FATF Status: Investors and their beneficial owners must not be on the UNSC Sanctions List. Furthermore, they must not be from countries identified by the Financial Action Task Force (FATF) as "high-risk" (blacklist) or as having not committed to an action plan to address "grey list" deficiencies.
Exclusion of Investors
A Manager may excuse or exclude an investor from participating in a specific investment under two primary conditions:
- Legal Violation: If a legal opinion confirms that the investor's participation would violate an applicable law or regulation.
- Internal Policy Conflict: If the investor has previously disclosed an internal policy in the Contribution Agreement that would be contravened by the investment.
Specific Investment Conditions: Category I and II
Category I and II AIFs are subject to diversification limits to manage risk within the portfolio.
Diversification Limits
- Standard Limit: These funds shall not invest more than 25% of their investable funds in a single investee company, whether directly or through other AIFs.
- Large Value Funds (LVF): For Accredited Investors in an LVF, this limit is relaxed, allowing an investment of up to 50% of investable funds in a single company.
Key Definitions
- Investable Funds: This refers to the total corpus of the scheme net of estimated expenditure for administration and management of the fund for its entire tenure.
- Co-Investment: Managers or Sponsors may co-invest in an investee company alongside the AIF. However, the terms for co-investors must not be more favorable than those of the AIF, and the timing of the exit must be identical.
Summary of Raising and Investing Capital
| Feature | Requirement / Limit |
|---|---|
| Minimum Scheme Corpus | INR 20 Crore (INR 5 Cr for Social Impact) |
| Max Investors per Scheme | 1000 |
| Loss Sharing Basis | Strictly Pro-rata (PDM Prohibited) |
| Strategy Change Consent | 2/3rd of unit holders by value |
| Cat I & II Single Company Limit | 25% of Investable Funds (50% for LVFs) |
| Foreign Investor Compliance | IOSCO signatory & FATF compliant |
Key Takeaways for Professionals
- Investable Funds vs. Corpus: Managers must calculate diversification limits based on "investable funds" (corpus minus estimated expenses), not the total committed corpus.
- Joint Investor Nuance: Joint investment is limited to immediate family (spouse, parent, child), and the total number of persons in a joint holding cannot exceed two.
- Stewardship on PDM: The elimination of the Priority Distribution Model underscores SEBI's focus on equitable treatment of all investors within a scheme, preventing "waterfall" structures that unfairly burden one class with losses.
- International Onboarding: Managers must conduct rigorous due diligence on the jurisdictional status of foreign investors to ensure they do not originate from FATF-non-compliant regions.