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“An Overview on Alternative Investment Funds (AIF)”

WHAT IS AN ALTERNATIVE INVESTMENT FUND?

AIF or Alternative Investment Fund means any fund established or incorporated in India which is a privately pooled investment vehicle that 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.

TYPES OF AIFS

  1. Category I AIFs – AIFs which 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.

Examples:

  • Venture capital funds (Including Angel Funds)
  • SME Funds
  • Social Venture Funds
  • Infrastructure Funds
  1. Category II AIFs- Funds that are invested in equity and debt securities are included in this category. Funds that aren’t already classified as Category 1 or III are also included.

Examples:

  • Real Estate Funds
  • Private Equity Funds
  • Funds for distressed assets
  1. Category III- AIFs that employ diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.

Examples:

  1. Hedge Funds
  2. Investment in Public Equity Fund (PIPE)

COMPARATIVE STUDY:

Criteria

Category I

Category II

Category III

Categorization

  1. Venture capital funds (Including Angel Funds)
  2. SME Funds 
  3. Social Venture Funds 
  4. Infrastructure Funds
  1. Real Estate Funds
  2. Private Equity Funds 
  3. Funds for distressed assets
  1. Hedge Funds 
  2. Public Equity Fund (PIPE)

 

 

Registration Fee

INR 5,00,000/- (For Angel Funds INR 2,00,000/-)

INR 10,00,000/-

INR 15,00,000/-

Continuing interest by Sponsor/ Manager

Lower of the following

2.5% of corpus

Or

INR 5 crores

Lower of the following

2.5% of corpus

Or

INR 5 crores

Lower of the following

5% of corpus

Or

INR 10 crores

Open ended/ Close ended

Close ended

Close ended

Open or Close ended

Ability to invest in Listed securities

Limited ability for listed investments.

Different norms across sub categories

Upto 49.99% investments can technically be done in listed securities

Investments upto 100% can be made in listed securities

Investment Concentration Norm

Investment of not more than 25% of the investible funds in an investee company directly or through investment in the units of other AIFs

Investment of not more than 25% of the investible funds in an investee company directly or through investment in the units of other AIFs

Investment of not more than 10% of the investible funds in an investee company directly or through investment in the units of other AIFs.

For investment in listed equity of an Investee Company, the investment limit of 10% can be on investible funds or the net asset value.

REGISTRATION PROCESS:

  1. All applicants desirous of seeking registration as an Alternative Investment Fund (‘AIF’) are required to submit their applications only online, through the SEBI Intermediary Portal at https://siportal.sebi.gov.in.
  2. Private Placement Memorandum (‘PPM’) is a primary document in which all the necessary information about the AIF is disclosed to prospective investors and SEBI has mandated a template of PPM. The template for PPM for Category I & II AIFs is provided at  https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_2_p.pdf and for Category III at https://www.sebi.gov.in/sebi_data/commondocs/feb-2020/an_2_p.pdf.
  3. AIFs shall launch scheme(s) subject to filing of PPM with SEBI through a SEBI registered Merchant Banker along with the due diligence certificate.
  4. The First Close of a scheme shall be declared not later than 12 months from the date of SEBI communication for taking the PPM of the scheme on record and Corpus of the scheme at the time of declaring its First Close shall not be less than the minimum corpus specified in AIF Regulations for the respective category/sub-category of the AIF. With respect to open ended schemes of Category III AIFs, the First Close shall refer to the close of their Initial Offer Period.

COMPLIANCE FRAMEWORK

To Investors: The manager is required to provide the following reports or disclosures to the investors of the AIF

Particulars

Frequency

Submission date

Annual report to the investors including the following information:

  1. Financial information of investee companies;
  2. Material risks and how they are managed, which may

include

  1. Concentration risk at fund level;
  2. Foreign exchange risk at fund level;
  3. Leverage risk at fund and investee company levels; 
  4. Realization risk (i.e. change in exit environment) at fund and investee company levels;
  5. Strategy risk (i.e. change in or divergence from business strategy) at investee company level;
  6. Reputation risk at investee company level; and 

Extra financial risks, including environmental, social and corporate governance risks, at fund and investee company level.

Annually (For Category I and Category II AIF)

 


 Quarterly (For Category III AIF)

Within 180 days from the year end (For Category I and Category II AIF)

 

Within 60 days of the end of the quarter (For

Category III AIF)

Description of valuation and methodology for valuing assets

 

  1. Valuation to be undertaken by an independent valuer (For Category I and Category II AIF)


Category III AIF to undertake NAV valuations and disclose NAV to the investors

Half-yearly (Can be enhanced to 1 year on approval of 75% of investors by value of their investment)

 

 


Close ended fund –Quarterly

Open ended fund – Monthly

Half-yearly (Can be

enhanced to 1 year on

approval of 75% of investors by value of their investment)

 

 

 

 Close ended fund –

Quarterly

Open ended fund – Monthly

As and when occurred: Any changes to the placement memorandum including modifications in terms or documents of the fund/scheme

Annually

Within one month from the end of the financial year

Reporting: 

  1. Financial, risk management, operational, portfolio, and transactional information regarding fund investments;
  2. Any fees paid to the manager or sponsor; and

Any fees charged to the AIF or any investee company by an associate of the manager or sponsor

Periodically

Periodically

The manager or sponsor is required to disclose their investment in the AIF to the investors

Periodically

Periodically

To the Trustee and Sponsor:

Particulars

Frequency

Submission date

Quarterly Compliance Report to Trustee

Quarterly

Within 15 days from the end of the quarter

  • Manager is required to prepare a compliance test report (CTR) and submit to the (i) trustee and the sponsor, in case the AIF is set up as a trust; or (ii) sponsor, in case of other AIFs

  • In case of observations on CTR, trustee/sponsor to intimate the same to manager.


 

Manager to make necessary changes in CTR basis comments received from trustee/sponsor

Annually 

Within 30 days from the end of the financial year

 

 

Within 30 days from the end of the financial year

 

 

Within 15 days from date of receipt of observations/

comments

Any findings of audit of compliance with terms of PPM along with Annually corrective steps, if any (in case of AIFs which have not raised any funds from their investors, they shall submit a Certificate from a Chartered Accountant to the effect that no funds have been raised)

Annually

Within six months from the end of the financial year

To SEBI: Prior Approval/Intimation to SEBI

Particulars

Frequency

Submission date

Prior SEBI approval if any change in control of AIF, sponsor or manager

Prior approval

As soon as possible

Submission of quarterly report (online) to SEBI relating to their Quarterly activity as an AIF

Quarterly

Within 10 days from the end of the quarter

Submission of report on leverage undertaken (For Category III AIF)

Quarterly

Quarterly

AIFs shall report the utilization of overseas investment limits on SEBI intermediary portal

Event Based

Within 5 working days of such utilization

In case the AIF has not utilised/partly utilised the overseas investment limits within a period of 6 months from the date of SEBI approval (validity period), the same shall be reported on the SEBI intermediary portal.

Event Based

Within 2 working days after expiry of the validity period

In case the AIF wishes to surrender the overseas limit at any point of time within the validity period, the same shall be reported on the SEBI intermediary portal

Event Based

Within 2 working days from the date of decision to surrender the limit

As and when occurred: Any changes to the placement memorandum, including modifications in terms or documents of the fund/scheme

Annually

Within one month from the end of the financial year

Any findings of audit of compliance with terms of PPM along with Annually corrective steps, if any (in case of AIFs which have not raised any funds from their investors, they shall submit a Certificate from a Chartered Accountant to the effect that no funds have been raised)

Annually

Within six months from the end of the financial year

Direct Tax Compliances

Particulars

Frequency

Submission date

Income tax return 

Annually

31 October of the

Relevant assessment year

Advance tax payment

Quarterly

15th day of June,

September, December, and March of every tax

year

Withholding taxes

  • Withholding tax payments

 

 

 

 

 

  • Withholding tax returns

 

 

 

 

  • Certification for withholding taxes on foreign remittances (Form 15CA/15CB)

 

Monthly

 

 

 

 

 

 

Quarterly

 

 

 




Per foreign remittance

 

7th of the subsequent month except for March which is due by 30 April


 




31 July- first quarter

31 October – second quarter

31 January – third quarter

31 May – fourth quarter

 




At the time of foreign remittance

Statement to be furnished (in Form No. 64C) by AIF to unitholders in respect of income distributed during the previous year (applicable for Category I/II AIF)

Annually

30 June of the financial year following the previous year

Statement to be furnished (in Form No. 64D) by AIF to Income tax authorities in respect of income distributed during the previous year (applicable for Category I/II AIF)

Annually

15 June of the financial year following the previous year

FEMA and Other Regulatory Compliance

Particulars

Frequency

Submission date

The AIF, which has issued units to a person resident outside India shall file the Form InVi with the RBI

Event Based

Within 30 days from date of issue of units

The AIF making downstream investment in another Indian entity which is regarded as indirect foreign investment (as sponsor or

manager is not Indian owned and controlled), shall file Form DI

Event Based

Within 30 days from the date of allotment of equity instruments

Foreign Liabilities and Assets (FLA) return has to be filed with the RBI in lieu of all the foreign investments received and made in the previous year

Annually

15 July of the financial year following the previous year. In case the financials are not audited then once the audited numbers are ready, request for approval to revise the previously filed return to RBI

Reporting of all cash and suspicious transactions with FIU

Immediate

Immediate

CONSTITUTION OF INVESTMENT COMMITTEE

Manager may constitute Investment Committee (by whatever name it may be called) to approve decisions of the AIF. Such Investment Committees may consist of internal members (employees, directors or partners of the Manager) and/ or external members.

INVESTOR CHARTER AND DISCLOSURE OF COMPLAINTS BY AIFS

The Investor Charter is a brief document containing details of services provided to investors, details of grievance redressal mechanism, responsibilities of the investors etc., at one single place, in lucid language for ease of reference and all AIFs shall take necessary steps to bring the Investor Charter to the notice of their investors by disclosing Investor Charter in the Private Placement Memorandum (PPM).

In order to bring about further transparency in the Investor Grievance Redressal Mechanism, data on investor complaints received against AIFs and each of their schemes and redressal status thereof shall be disclosed by all AIFs as a separate chapter in the PPM. AIFs shall maintain data on investor complaints which shall be compiled latest within 7 days from the end of quarter.

ISSUANCE OF UNITS OF AIFS IN DEMATERIALISED FORM

AIFs shall issue units in dematerialized form subject to the conditions specified by SEBI from time to time.

All schemes of AIFs shall dematerialize their units in the following time frame:

Particulars

Schemes of AIFs with corpus ≥ Rs 500 Crore

Schemes of AIFs with corpus < Rs 500 Crore

Dematerialization of all the units issued

Latest by October 31, 2023

Latest by April 30, 2024

Issuance of units only in dematerialized form

November 01, 2023 onwards

May 01, 2024 onwards

TAXATION

Pass through status to AIF’s

  • The Finance Act, 2015, extended tax pass through status to AIFs that are registered with SEBI as Category I AIFs or Category II AIFs under the AIF Regulations.
  • They are governed by a special tax regime as provided under Section 115UB of the Income tax Act, 1961 (the Act)
  • Any income (other than business income) earned by a SEBI registered Category I and II AIF, is exempt from tax in the hands of the AIF under Section 10(23FBA) of the Act. Such income shall be taxable directly in the hands of the investors of the AIF under Section 115UB of the Act.
  • Any income distributed by investment fund is not liable for DDT u/s 115-0
  •  Any income distributed by investment fund (except business income), TDS of 10% has to be deducted by investment fund u/s 194 LBB.
  • The investors shall be chargeable to tax in the same manner as if it were the income accruing or arising to, or received by, such investor had the investments, made by the AIF, been made directly by such investor. Income taxable in investors’ hands shall be deemed to be of the same nature and proportion as in the hands of the AIF.
  • Further, in terms of Section 115UB(2) of the Act, in case there is a loss at the fund level (i.e. current loss or loss which remained to be set off), such loss shall not be allowed to be passed through to the investors but would be carried forward at AIF level to be set off against income of future years in accordance with the provisions of Chapter VI of the Act.
  • Investment fund compulsorily required to file return u/s 139(4F)

Tax status of Category III AIFs

Category III AIFs has not yet been accorded a Pass-through status, which means that income from such funds will be taxed at the investment fund level and the tax obligation will not pass through to unit holders. Income under the head, “Profits or gains from business or profession”, the fund would be taxed in respect to such income at marginal rate of tax.

Disclaimer: This article provides general information existing at the time of preparation and we take no responsibility to update it with the subsequent changes in the law. The article is intended as a news update and Affluence Advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this article. It is recommended that professional advice be taken based on specific facts and circumstances. This article does not substitute the need to refer to the original pronouncement

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