Key Takeaways: - AIF - Framework and categories - Investors and Parties to an AIF - Setting up of AIF

1. Introduction to AIF in India
CS Meenakshi Jayaraman

2. Research Credits
Iswariya BS
Subash

3. Legends Used
AIF Alternative Investment Fund
CA Contribution Agreement
ESOP Employee Stock Option Plan
HNWI High Net Worth Individuals
IMA Investment Management Agreement
PIPE Private Investment in Public Equity
PPM Private Placement Memorandum
SEBI Securities and Exchange Board of India
SME Small and Medium Scale Investors
SPV Special Purpose Vehicle

4. Presentation Schema
AIF in India Suitable Investors
Advantages and
Disadvantages of AIF
Parties to an AIF Typical AIF structure Registration with SEBI
Investment
restrictions
Statistics Conclusion

5. AIF in India

6. Alternative Investment Fund
Alternative Investment Fund
Meaning
• Privately Pooled investment
Vehicle
• Collects funds from Indian /
foreign / Non-resident
investors
Excludes
• Family trust set up for the
benefit of relatives
• ESOP trust
• Employee welfare trust /
gratuity trust
• Holding company
• Other SPV, including
securitization trusts
• Funds managed by
securitisation /
reconstruction Company
• Any pool of funds directly
regulated by any other
regulator
Not covered under
• SEBI (Mutual Funds)
Reg.,1996
• SEBI (Collective Investment
Scheme) Reg.,1999
• Any other regulations of the
Board to regulate fund
management activities

7. Categories of AIF
AIF
Category-
I
Category-
II
Category-
III
Venture Capital
fund
Infrastructure
Fund
Social Venture
Fund
SME Fund
Private Equity
Funds
Funds for
distresses
assets
Real Estate
Funds
Hedge Funds
PIPE Funds

8. Points to be considered in SEBI (AIF) Reg., 2012
Minimum Corpus of a Scheme
Rs.20 crore
Minimum contributors
commitment
Rs.1 crore
Appointment of Custodian
If scheme corpus exceeds
Rs.500 crore for AIF I & II
(mandatory for Cat III AIF)
Auditing the Books of accounts
of AIF
Annually within 180 days form
the year end
Listing
Only after the final close of the
scheme with minimum
tradable lot of Rs.1 crore
Maximum number of investors
1000 investors
(provisions of Companies Act,
2013 to apply if AIF is set up as
a company)

9. Suitable Investors
Minimum contribution per scheme per investor being Rs. 1
crore – HNWIs are the suitable investors for AIF schemes
AIFs would be an investment vehicle for HNWIs /
sophisticated investors / individual family offices
HNWIs prefer AIF to retail funds - due to its higher risk-
reward ratio.
Fund managers of an AIF adopt complex strategies to
perform better than the market.

10. HNWIs in India and World
As per the above data, the number of HNWIs in India has increased from 2.56 lakhs in 2018 to 2.63 lakhs in 2019
with an annual growth rate of 3%
Source: Capgemini World Wealth Report 2020 (in thousands)

11. Advantages & Disadvantages of AIF
Advantages
• Leveraging Fund manager’s experience
• Minimum volatility as a result of diversification of assets
• Tax Benefits
Disadvantages
• Fund manager cannot be held liable for losses
• Not feasible for small scale investors
• High Management Fees
• Cost not shared by many investors as is the case of Mutual Funds

12. Parties to an AIF
AIF
Sponsor
Manager
Custodian
Trustee
Trust established under Indian Trusts
Act, 1882 / an Act of Parliament / State
Legislation
Holding and administering on behalf of
the contributors
Registered intermediary under
SEBI (Custodian) Regulations,
1996
To keep safe custody of securities
Fit and proper person as per
Schedule II of SEBI (Intermediaries)
Regulations, 2008
Any person appointed by AIF to
manage its investments
Fit and proper person as per
Schedule II of SEBI (Intermediaries)
Regulations, 2008
Person(s) involved in setting up an
AIF

13. Fit and proper person
• Integrity, reputation
and character
Criteria 1
• Absence of
convictions and
restraint orders
Criteria 2
• Competence
including financial
solvency and net
worth
Criteria 3
SEBI takes into consideration the following criteria for
deciding whether a person is fit and proper (inclusive
definition)

14. Qualifications required for a Manager
• with at least 1 key personnel having not less
than 5 years of experience in advising /
managing pools of capital / in fund / asset /
wealth / portfolio management / in the
business of buying, selling and dealing of
securities / other financial assets
Criteria 1
• at least 1 key personnel with professional
qualification in finance, accountancy,
business management, commerce,
economics, capital market / banking from a
university / an institution recognized by the
Central Government / any State Government
/ a foreign university / a CFA charter from
the CFA institute / any other qualification as
may be specified by the Board
Criteria 2
The Key investment team of Manager of AIF must have adequate experience,
and
Criteria 1 and 2 can either be satisfied by 2 separate Key personnel or
a single key personnel can satisfy both the criterion

15. Typical AIF structure
Manager
Custodian
Trustee
AIF
Foreign
NRIs
Indian
Sponsor
Other AIFs
Unlisted
securities
Foreign
securities
Provides Mgmt.
Services
Mgmt. Fees
Provides
Trusteeship
Services
Provides
Custodial
Services
Investment
Returns
Incorporation
Investment
Service
Providers
Investor
Promoter
Investee
Custodial Fees
Trusteeship
Fees
Setting
up
AIF
Listed
securities

16. AIF registration with SEBI
SEBI will grant
certificate of
registration as an
AIF
Application to be
made in Form A with
necessary
attachments in SEBI
Intermediary portal
(https://siportal.sebi.
gov.in)
Application fee of
Rs.1 lakh by way of
bank draft
And other online
applications as
prescribed by SEBI
from time to time
Generally, the
applicant will
receive reply from
SEBI within 21
working days
On satisfaction of
all the eligibility
criterion, SEBI shall
inform its approval
to the applicant
Applicant has to
pay registration /
re-registration fee
by way of bank
draft

17. How to float a scheme?
Contribution Agreement (CA)
Trustee and Investment Manager will enter into a CA with the investor upon his acceptance to invest
Investment Management Agreement (IMA)
IMA will be executed between Investment
Manager and Trustee
This will be shared with the Contributor once he
shows his interest in investment
Private Placement Memorandum (PPM)
Trustee, Sponsor and Manager will jointly issue the PPM to the Investor

18. Investment restrictions
Category I
Category I
Category II
Category III
Category II
Category I
Category II
Category III
Category III
Category I
Category II
Category III
Category I and II AIFs shall not invest more
than 25% of the investible funds* in 1 Investee
Company
Category III AIF shall not invest more than 10%
of the investible funds* in 1 Investee Company
AIFs cannot invest in other fund of funds
*Investible funds means corpus of the AIF net
of estimated expenditure for administration and
management of the fund

19. Statistics

20. Assets managed by AIF
0
100000
200000
300000
400000
2012 2013 2014 2015 2016 2017 2018 2019 2020
YoY AUM of AIF during the end of December (in crores)
Category I Category II Category III
Year
2012 (in
crores)
2020 (in
crores)
Category I 337 42,352.95
Category II 0 3,52,816.87
Category III 22.5 46,824.91
• Significant increase in the AUM under Category II AIF from nil to
3.5 lakh crores during the period 2012-2020
• Gradual increase in the AUM of Category I and III AIFs.
• Chartered Alternative Investment Analyst Association (CAIA)
members expect that by 2025, the alternative investment fund
industry will grow to 18-24% of global investible market. India
has an important role to play in the coming years.
Source: SEBI website

21. No. of registered AIFs in India
AIFs registered with SEBI (as on 18th February, 2021)
Category I 179
Category II 407
Category III 143
Total AIFs 729
Source: SEBI website

22. Conclusion
AIF is a lucrative product for HNIs planning to multiply their wealth.
Experience of the fund manager is of paramount importance in the success of an AIF.
AUM of AIFs in India have steadily increased without any downfall.
Category-II AIF has shown maximum potential owing to minimum investment restrictions.
Category III AIFs can make leveraged investments, they naturally gain systemic importance. Due to this,
the compliance requirements of Cat-III AIF are higher than the other categories.
Government has been consciously introducing various tax benefits for investors in an AIF. The
regulatory framework is yet to be streamlined.

23. Thank You!
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