ALL ABOUT ALTERNATIVE INVESTMENT FUND

AIFs means any fund established or incorporated in India in the form of a trust or a company or an LLP or a body corporate which-

Is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for benefit of its investors.

It is not covered under– SEBI (Mutual Funds) Regulation1966 and SEBI (Collective Investment scheme) Regulation 1999.

Items not considered as AIFs

Family trusts
ESOP trusts
Employee welfare trusts or Gratuity trusts
Holding companies
Other SPV not established by the fund manager
Funds managed by securitization company or reconstruction company register.

Accredited Investor– means any person who is granted a certificate of accreditation by an accreditation agency who-

In case of individual, HUF, Family Trust or SOP has:

(a) Annual Income of at least Rs 2 crore; or

(b) Net Worth of at least Rs 7.5 crore out of which not less than Rs 3.75 crore is in the form of a financial asset.

(c) Annual Income of at least Rs 1 crore; and minimum Net Worth of Rs 5 crore out of which not less than Rs 2.50 crore is in the form of a financial asset.

In case of a Body corporate, has Net Worth of at least Rs 50 crore.

In case of a trust other than family trust has Net Worth of at least Rs 50 crore.

CATEGORIES OF AIFs

Category I AIF	Category II AIF	Category III AIF
Invest in start-up or early stage venture or social venture or SMEs or Infrastructure or other sectors or areas desirable for growth of economy.	Which doesn’t fall in category I and III and which doesn’t undertake leverage or borrowings other than to meet day to day operational requirements.	Which employs diverse or complex trading strategies high raise investment.
Lesser Compliance.	Lesser compliance.	Heavy Compliance.
Incentive from government.	No incentives.	No incentives.
SME FUND INFRA FUND VENUTRE CAPITAL FUND	DEBT FUND PE FUND	HEDGE FUNDS

ADVANTAGES OF AIFs

Access to high-growth investments

Portfolio diversification

Professional fund management

Funding support to new businesses and startups

REGISTRATION OF AIFs

Mandatory registration.
Category to be disclosed at the time of incorporation of registration.
Can change category if no investment taken or made by AIF + Approval of SEBI.
Can launch schemes File placement memorandum of each scheme with SEBI
Placement Memorandum to contain Invest, Strategy, Objective, Method

Any change in investment / strategy / objective / Method-2/3^rd approval of unit holder.

INVESTMENT IN AIFs

Each scheme of AIF shall have corpus of at least Rs 20 crore and the AIF not accept from an investor, an investment of value less than Rs 1 crore.
In case the investors are employee or director of the AIF Fund or employee or directors of the manager minimum value of investment Rs 25 lakh.
Manager or sponsor shall have a continuing interest in AIF not less than Category I and II 2% of corpus or Rs 5 crore whichever is lower, Category III 55 of corpus or Rs 10 crore whichever is lower.
Manager or sponsor shall disclose their investment in AIF to the investors of the AIF.
No scheme of the AIF shall have more than 1000 investors.
AIF shall collect Funds only by way of private placement.

FOREIGN INVESTMENT IN AIFs

Investor from a country whose securities market regulator in signatory to IOSCO’s MMOU or Bilateral MOU with SEBI.

If Foreign Investor, directly or indirectly holds>25% of corpus, then fulfill these conditions;

Shouldn’t be in UNSC’s Sanction list.
FATFF Complaint

Corpus of open-ended scheme falls below Rs 20 crore:

Inform SEBI within 2 days of receipt of request for redemption
Get corpus increased to Rs 20 crore within 3 months.

If AIFs fails to bring back the corpus it shall redeem entire units of all investors and wind up the scheme.

In case repeated violation SEBI to take Action.

MODAILITIES FOR FILING OF PLACEMENT MEMORANDUM THROUGH A MERCHANT BANKER

At least 30 days prior to launch
Merchant Banker to check veracity and adequacy
Merchant Banker to give Due Diligence certificate
Details of Merchant Banker to be written in Placement memorandum.
If any subsequent change in placement memorandum inform SEBI on consolidated basis within 30 days + Due Diligence certificate by Merchant banker.
Merchant banker not an associate of sponsor, manager, trustee, AIF.

TENURE

CATEGORY I AND II – only closed ended

Minimum tenure 3 years.

CATEGORY III – open ended/close ended

No minimum tenure.

Tenure Can be extended by maximum 2 years with 2/3rd approval of Unit holders.

If no approval by unit-holder then liquidates the entire scheme.

Restriction of 2 years do not apply on large value funds for accredited funds.

GENERAL INVESTMENT CONDITIONS

Can invest in foreign entities:-

Only equity/equity listed.

Venture capital undertaking

Overall limit of USD 1500 million.

Terms of Co- Investment shall not be more favourable than AIFs

Exit terms to be identical.

CATEGORY I AND II

Maximum investment in one entity 25% large value fund accredited investor maximum 50 %.

CATEGORY III

Maximum investment in one entity 10%

Large value fund accredited investor max. 20%

If investment in associate, AIF managed by same sponsor/ manager/ associate of sponsor and manager 75% approval of unit holder.

GUIDELINES FOR OVERSEES INVESTMENT BT AIFs/VCFs

File application with SEBI for allocation of limit.
Invstee company should be of a country that is IOSCO Complaint + FATF complaint.
Make investment within 6 months of allocation
If AIF divests in Foreign Investment-

Reinvest the original amount in for invested + bring back appreciation.

Repatriate entire amount limit will be allocated to other AIFs.

If AIF divests its Foreign Investment, sell holding to those eligible to make foreign investment.

CONDITIONS FOR CATEGORY I AIFs

Can invest in venture capital undertaking, SPV, LLP, companies other than category I of the same category II.
Can do hedging including credit default swaps in terms and conditions.
Not allowed to borrow funds except for temporary needs maximum 10% for maximum 30 days up to 4 times in a year maximum.

CONDITIONS FOR CATEGORY II AIFs:-

Can invest in companies, category I, category II,

Primarily unlisted but now listed company also allowed.

No leverage allowed except for temporary needs maximum 10% for maximum 30 days up to 4 times in a year maximum.
Hedging allowed can buy / sell credit default swaps in terms and conditions.
Can act as an underwriter, market makers.

EXEMPT from PIT Regulation. If trade discount in 2 days look in 1 year.

CONDITIONS FOR CATEGORY III AIFs

Can invest in listed / unlisted derivates, complex and structured products, commodity derivates.
Can take leverage with consent of unit holder + limit as specified by SEBI.
Disclose overall leverage periodically to SEBI and investors.
Follow prudential norms and other guidelines given by SEBI.

BORROWING FOR DRAWDOWN AMOUNT

Can borrow if already disclosed in placement memorandum.
Only as a matter- of last resort

When investment is decline is closing

When manager has taken all efforts.

Maximum borrowing-

20% of investment to be made

10% of total investment fund

Outstanding drawdown amount.

Expense to borne by investor whose drawn down value is pending.
Cooling period 30 days from repayment of previous borrowing.

CONCLUSION:

The SEBI (Alternative Investment Funds) Regulations, 2012

created a structured regulatory framework for alternative investments (AIFs) in India. By classifying funds into the different categories and imposing disclosure, investment, and governance norms, Securities and Exchange Board of India (SEBI) aims to protect investors while promoting capital formation in emerging sectors such as startups, infrastructure, and private equity.

FAQs

What is sponsor commitment?

Sponsor/manager must invest:

2.5% of corpus or ₹5crore (whichever is lower)
For Category III: 5% or ₹10crore

What is the fee structure in AIF?

Management fee (1–2%)
Performance fee (Carried interest ~20%)

Can a salaried person invest in an AIF?

Yes, if they meet the minimum investment of ₹1 crore and have a high-risk appetite.

Can AIF give guaranteed returns?

No, AIFs cannot guarantee returns as per SEBI rules.

Can investors exit before maturity in Category I & II AIF?

Generally not allowed (close-ended funds), unless:

Buyback
Transfer to another investor