Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

Exemptions: AIFs do not include funds that fall under the SEBI (Mutual Funds) Regulations, 1996, SEBI (Collective Investment Schemes) Regulations, 1999, or any other regulations established by SEBI for managing fund activities.

Legal Forms

An AIF can be set up as a:

Trust
Company
Limited Liability Partnership (LLP)
Corporate Body.

Regulation

AIFs in India are regulated by the Securities and Exchange Board of India (SEBI).

Types of AIFs in India

SEBI has categorised Alternative Investment Funds into 3 categories:

Category I AIFs

Category I Alternative Investment Funds (AIFs) are funds that invest in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable.
Category I AIFs include Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds.

Types of Category I AIFs

Venture Capital Funds (VCFs): Invest in early-stage startups and businesses with high growth potential.
Angel Fund: It is a sub-category of Venture Capital Fund under Category I Alternative Investment Fund that raises funds from angel investors and invests in accordance with the provisions of AIF Regulations.
SME Funds: Support Small and Medium Enterprises (SMEs) by providing capital for expansion
Social Venture Funds: Invest in businesses with social or environmental impact, such as clean energy and sustainability projects
Infrastructure Funds: Finance infrastructure projects like roads, railways, airports, and smart cities.

Category II AIFs

According to SEBI, AIFs that do not fall under Category I and Category III and do not undertake leverage or borrowing except for meeting everyday operational needs, fall under Category II.
Category II AIF are those AIFs for which no specific incentives or concessions are given.
Various types of funds such as Real Estate Funds, Private Equity Funds, Funds for Distressed Assets, Fund of Funds, Debt Funds etc. are registered as Category II AIF.

Types of Category II AIFs

Private Equity Funds: Invest in unlisted private companies to help them grow before being listed on the stock market.
Debt Funds: Debt fund is an Alternative Investment Fund (AIF) which invests primarily in debt or debt securities of listed or unlisted investee companies according to the stated objectives of the Fund.
Fund of Funds: A Fund of Fund is an AIF which invests in another AIF.

Category III AIFs

Alternate Investment Funds (AIFs), which employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
Various types of funds such as Hedge Funds, PIPE Funds, etc. are registered as Category III AIFs.

Types of Category III AIFs

Hedge Funds: Hedge Funds pool funds from private investors to invest in domestic and international markets. Hedge Funds use techniques like short selling, arbitrage and margin trading for high-risk, high-reward investing
Private Investment in Public Equity (PIPE) Funds: Invest in listed companies at a discount when they need capital.

Who can invest in AIFs?

Indian residents, Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), Persons of Indian Origin (PIOs), and foreign nationals .

Minimum Investment in AIFs

Alternative Investment Funds (AIFs) are primarily meant for sophisticated investors and therefore have a relatively high minimum investment requirement.
Minimum Investment: An investor is generally required to invest at least ₹1 crore in an AIF.
Concessional Limit: For an employee or director of the AIF or an employee or director of the Manager, the minimum investment requirement is ₹25 lakh.
The high entry threshold reflects the complexity and relatively higher risks associated with AIF investments compared with conventional investment products such as mutual funds.

Investor Limit

AIFs can have a maximum of 1,000 investors per scheme (49 investors for angel funds).

FAQs

1. What is an Inter-Corporate Deposit (ICD)?

An Inter-Corporate Deposit is an unsecured borrowing by a corporate entity from another corporate entity. It enables companies with surplus funds to lend to companies requiring finance.

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