What are Alternative Investment Funds (AIFs)?

May 19, 2023

The Securities and Exchange Board of India (SEBI), recently proposed tightening rules for alternative investment funds by restricting their ability to borrow for investments.

About Alternative Investment Funds (AIFs):

It is a special investment category that differs from conventional investment instruments.
AIF is any fund established in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, both Indian or foreign, for investing.
It pools funds from investors and invests them under different categories of investments as specified by the SEBI for the benefit of investors.
These investment vehicles adhere to the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
It is an investment option for high rollers, including domestic and foreign investors in India.
Generally, institutions and high net worth individuals invest in AIF as it needs a high investment amount.
Categories Of AIF:
- Category I AIFs:
  - They can invest in start-ups, early stage ventures, social ventures, SMEs and sectors which the government or regulators consider as socially or economically desirable.
  - They include venture capital funds like angel funds, SME Funds, social venture funds, infrastructure funds and such other AIFs as may be specified.
- Category II AIFs:
  - They are those which are not classified under Category I or Category III.
  - They do not undertake leverage or borrowing other than to meet day-to-day operational requirements and as permitted in the regulations.
  - Various types of funds such as real estate funds, debt funds, private equity funds, funds for distressed assets, etc. are registered as Category II AIFs.
- Category III AIFs:
  - They are funds which employ complex or diverse trading strategies and may employ leverage including through investment in listed or unlisted derivatives hedge funds, PIPE Funds, etc. are registered as Category III AIFs.
Category I and II AIFs are required to be close ended and have a minimum tenure of three years. Category III AIFs may be open ended or close ended.