The Securities and Exchange Board of India (SEBI) has published its draft SEBI (Alternative Investment Funds) Regulations, 2011, which seek to introduce a comprehensive regulatory framework to regulate private pools of capital, also known as alternative investment funds (AIFs). At present, SEBI regulates mutual funds, collective investment schemes, venture capital funds (VCFs) and portfolio managers.
The draft regulations will regulate AIFs which collect funds from institutional or high net worth investors in India and those who manage AIFs for investments in India. The draft regulations will include the existing SEBI (Venture Capital Fund) Regulations, 1996 (VCF Regulations), although existing VCFs will continue to be regulated by the VCF Regulations until the fund or scheme is wound up.
Categories of AIFs
The draft regulations aim to draw clear distinctions between AIFs by setting out the investment criteria and relevant regulatory concessions for each fund. The following categories of AIF have been identified:
- Venture Capital Fund
- PIPE Fund
- Private Equity Fund
- Debt Fund
- Infrastructure Equity Fund
- Real Estate Fund
- SME Fund
- Social Venture Fund
- Strategy Fund (residual category, including hedge funds)
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The following conditions apply to AIFs:
- AIFs can use limited liability partnerships (LLPs) – like trusts and companies – as a pooling vehicle.
- If an AIF is constituted as a company or LLP, it can have a maximum of 50 shareholders and partners. If the AIF is set up as a trust, up to 1,000 investors are permitted.
- The minimum size of an AIF has been increased to ₹200 million (US$4 million) with an option for upward revision of 25%.
- The minimum ticket size for investors will be 0.1% of the fund size, subject to a minimum amount of ₹10 million.
- Each fund must have a minimum lifespan of five years, which can be extended by two years with the approval of at least 75% of participating investors.
- The sponsor of the fund must
contribute at least 5% of the total amount of the fund from their own account. This contribution will be locked in until the last investor in the fund has been given an exit. - Each fund or scheme must be registered separately under the draft regulations.
- Investments in any single investee company should not exceed 25% of total amount of the AIF.
- The AIF manager cannot invest directly into the investee companies.
- AIFs (except strategy funds) are permitted to invest in certain categories of non-banking finance companies such as infrastructure finance companies, asset finance companies, core investment companies and companies engaged in microfinance activities.
- Investors will be locked in for a minimum period of three years.
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The legislative and regulatory update is compiled by Nishith Desai Associates, a Mumbai-based law firm. The authors can be contacted at nishith@nishithdesai.com. Readers should not act on the basis of this information without seeking professional legal advice.
