Alternative Investment Funds (AIF) - Legal aspects Suneet Barve Partner IC Universal Legal, Advocates & Solicitors September 18, 2018 1
What is an AIF? What is an Alternative Investment Fund? Are there any exemptions from registration? “Alternative Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which, (i) 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 the benefit of its investors; and (ii) is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Exemptions: • Family trusts • ESOP trusts • Employee welfare trusts • Holding companies • Securitization trusts 2
Legal structure for an AIF Criteria Trust Company LLP Compliance Low High Moderate Client Confidentiality High Moderate Low Market Practice More than 97% of the AIFs Minimal Less than 3% AIFs are set are set up as Trusts up as LLP Acceptability with Investors High Low Moderate and Distributors Ease of Operations High Low Moderate Mitigation of GST on Debatable No Yes Management Fee 3
Typical AIF Structure Contribution Agreements Sponsor Investors (Domestic & Offshore ) Trustee (In- house or third Carry Units party) AIF Employees Trust Deed (if set or Employee (Trust/LLP up as Trust) Benefit Trust Carry distribution /Company ) Investment Management Agreement Investments in Securities Investment Portfolio Companies Manager 4
Categories of AIF – Which one to Select ? (1/2) Criteria Category I AIF Category II AIF Category III AIF - - Angel Fund Private Equity Funds; - Long only Funds; Categorization - Venture Capital Funds; - Structured Credit Funds; - Long-short Funds; - SME Funds; - Debt Funds; - Hedge Funds and any - Social Venture Funds; - Real Estate Funds. other Funds with diverse and and complex trading - Infrastructure Funds. strategies. SEBI Registration Fees Rs.5,00,000 (Rs. 2,00,000 Rs.15,00,000 Rs.10,00,000 for Angel Fund) Continuing Interest by Lower of the following Lower of the following Lower of the following Sponsor / Manager amounts: amounts: amounts: - 2.5% of corpus; or - 2.5% of corpus; or - 5% of corpus; or - - - Rs.5 crores (Rs. 50 Rs.5 crores Rs.10 crores lakhs for Angel Fund) Ability to invest in Listed Limited ability for listed Investments upto 100% can Upto 49.99% investments Securities investments. Different norms be made in listed securities. can technically be done in across sub-categories. listed securities. High Overall Moderate Low restrictions/Compliances 5
Categories of AIF – Which one to Select ? (2/2) Criteria Category I AIF Category II AIF Category III AIF Yes Yes Yes QIB Status [Also, no lock in for [Also, no lock in for investment investment made prior to IPO made prior to IPO if held for at if held for at least one year] least one year] Yes (upto 2X leverage / Leverage No No 100% additional exposure permitted) Investment by DFIs, Yes, subject to compliance Yes, subject to compliance with No Insurance Companies, Banks with prescribed norms prescribed norms Not more than 10% of the Diversification Not more than 25% of the Investible Funds can be invested in Investible Funds can be a single Portfolio Entity. invested in a single Portfolio Entity. Open or Close Ended Close Ended/Open Ended Close Ended Close Ended 6
Investment restrictions for Cat-I AIF-Venture Capital Fund (1/2) “venture capital fund” means an Alternative Investment Fund which invests primarily in unlisted securities of start-ups, emerging or early- stage venture capital undertakings mainly involved in new products, new services, technology or intellectual property right based activities or a new business model. “venture capital undertaking” means a domestic company: (i) which is not listed on a recognised stock exchange in India at the time of making investment; and (ii) which is engaged in the business for providing services, production or manufacture of article or things and does not include following activities or sectors: (1) non-banking financial companies; (2) gold financing; (3) activities not permitted under industrial policy of Government of India; (4) Any other activity specified by SEBI 7
Investment restrictions for Cat-I AIF-Venture Capital Fund (2/2) At least 2/3 rd of the Investible Fund shall be invested in unlisted equity shares or equity linked instruments of a venture capital undertaking or in companies listed or proposed to be listed on a SME exchange or SME segment of an exchange; and Not more than 1/3 rd of the Investible Fund shall be invested in - • subscription in an IPO; • debt or debt instrument of a venture capital undertaking in which the fund has already made an investment by way of equity or contribution towards partnership interest; • preferential allotment, including through qualified institutional placement, of equity shares or equity linked instruments of a listed company subject to lock in period of one year; • the equity shares or equity linked instruments of a financially weak company or a sick industrial company whose shares are listed. “a financially weak company” means a company, which has at the end of the previous financial year accumulated losses, which has resulted in erosion of more than fifty percent but less than hundred percent of its net worth as at the beginning of the previous financial year. • special purpose vehicles which are created by the fund for the purpose of facilitating or promoting investment in accordance with these regulations. The above shall be achieved by the fund by the end of its life cycle. 7
Certain thresholds under AIF Regulations • Each AIF Scheme should have a corpus of at least Rs. 20 crores (Rs. 5 crores for Angel Fund) • Each investor in AIF should commit to invest at least Rs. 1 crore • An employee or director of the Manager of AIF is permitted to invest at least Rs. 25 lakhs • An employee of the Manager participating in the profits/carry of the AIF need not make any investment • Following can invest jointly in an AIF, wherein each joint investor contributes and aggregate investment is at least Rs. 1 crore • Investor and his/her spouse • Investor and his/her parent • Investor and his/her daughter/son • No AIF Scheme can have more than 1000 investors (200 investors for Angel Fund) • Cat-I AIF & Cat-II AIF shall have minimum tenue of 3 years (maximum 5 years for Angel Fund) 9
AIF Registration Eligibility Criteria for AIF Registration: • MOA/Trust Deed/Partnership Deed permits carrying on the activity of AIF • Trust Deed/Partnership Deed to be registered under respective governing laws • MOA/Trust Deed/Partnership Deed to prohibit making an invitation to the public to subscribe its securities • The Applicant, Sponsor and Manager are “fit and proper” based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 • The key investment team of the investment manager of the AIF should have adequate experience with at least 1 (one) key personnel having not less than 5 years of relevant experience • Manager & Sponsor has the necessary infrastructure and manpower to discharge its activities • The Applicant to clearly describe investment objective, investment strategy, proposed corpus, tenure and target investors Process of registration: • Self-registration on SEBI online portal and online payment of Rs. 1 lakh application fee • On receipt of login and password, uploading of Form A on SEBI portal along with final PPM and copy of executed Trust Deed and requisite declarations/understakings • The entire registration process generally takes 8 to 14 weeks 10
AIF Governance related (1/2) Matters requiring three-fourth majority Investor vote in value • To approve winding up of the Fund; • To approve the extension of limit for valuation by the valuer from once every six months (for Cat-I/Cat-II AIF) to once every twelve months; • To approve in-specie distribution by the Fund; • To approve investment by the Fund in an Associate; and • To approve any material change (i.e. changes in fundamental attributes of the Fund) in accordance with the Regulations. Matters requiring two-third majority Investor vote in value • To extend the Term of the Fund; and • To approve material change in the investment strategy. • The Sponsor and Manager of the Alternative Investment Fund shall act in a fiduciary capacity towards its investors and shall disclose to the investors, all conflicts of interests as and when they arise or seem likely to arise • Change in control of Sponsor or Manager with prior SEBI approval • Co-investment in an investee company by a Manager or Sponsor shall not be on terms more favourable than those offered to the Alternative Investment Fund 11
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