Alternative Investment Funds (AIFs)

GS 3 – ECONOMY

 

Alternative Investment Funds (AIFs) are privately pooled investment vehicles established in India that collect funds from investors—both Indian and foreign—for investing in accordance with a defined investment policy. They offer exposure to asset classes beyond traditional investments like stocks, bonds, or mutual funds. AIFs are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012.

Legal Structure

AIFs can be constituted in various forms:

• Trust
• Limited Liability Partnership (LLP)
• Company
• Body Corporate

Most AIFs in India are established as trusts.

Categories of AIFs

SEBI classifies AIFs into three categories:

Category I AIF

These funds invest in sectors considered socially or economically desirable, such as:

• Venture Capital Funds (VCFs)
• Angel Funds
• Infrastructure Funds
• Social Venture Funds
• SME Funds

They often receive government incentives and are aimed at promoting early-stage ventures, startups, and infrastructure projects.

Category II AIF

These funds do not fall under Category I or III and include:

• Private Equity Funds
• Debt Funds
• Fund of Funds (FoFs)

They typically invest in unlisted companies or debt instruments and are not permitted to undertake leverage or borrowing other than to meet day-to-day operational requirements.

Category III AIF

These funds employ diverse or complex trading strategies and may use leverage, including through investment in listed or unlisted derivatives. They include:

• Hedge Funds
• Long-Short Funds
• Derivatives Funds

They aim at short-term returns and can invest in listed or unlisted derivatives.

Key Investment Norms

• Minimum Investment: ₹1 crore per investor (₹25 lakh for employees/directors of the AIF).
• Maximum Investors: Limited to 1,000 investors per scheme.
• Manager/Promoter Commitment: Minimum contribution of 2.5% of the corpus or ₹5 crore, whichever is lower, for Category I and II AIFs; and 5% or ₹10 crore for Category III AIFs.

Taxation

• Category I & II AIFs: Tax pass-through status—income is taxed in the hands of investors.
• Category III AIFs: Taxed at the fund level; investors are not taxed on distributions.