Alternative investment funds surge in FY21

NARAYANAN V Chennai | Updated on June 18, 2021

Changes in structure, clarity on tax issues among reasons for growing investor interest

Investment by alternative investment funds (AIFs) touched ₹2-lakh-crore mark during January-March, rising more than 30 per cent over the year-ago period despite the effect of the pandemic.

According to latest data available with market regulator SEBI, the cumulative net investments made by AIFs at the end of March 2021 stood at ₹2-lakh crore against ₹1.53-lakh crore at the end of the previous fiscal.

Commitments raised by AIF also jumped 22 per cent to ₹4.51-lakh crore as of March 2021 from ₹3.69-lakh crore in the year-ago period, while funds raised by AIF went up by 23 per cent to ₹2.30-lakh crore at the end of FY21.

“As the economy grows so will be the investors’ requirement and sophistication of products. Investors are looking for higher returns, diversification of portfolio. AIFs also went through a lot of changes so the structure and guidelines are very clear now. So all these factors made people get much more comfortable with the product,” said Ankur Bansal, Co-Founder and Director of Blacksoil.

Blacksoil currently manages an alternative credit platform consisting of an RBI-registered NBFC and four SEBI-registered AIFs.

AIF is a privately pooled investment vehicle that collects money from sophisticated private investors from both India and overseas for investing as per pre-decided investment policy.

Three categories

Under the SEBI guidelines, AIFs are classified into three categories. Category I AIF includes venture capital funds, angel funds, SME funds, social venture capital funds and infrastructure funds. Category II AIF covers private equity (PE) funds, real estate funds, funds for distressed assets, debt funds and funds of funds. Category III AIF are those trading with a view to making short-term returns and include hedge funds and PIPE funds. There are over 750 AIFs registered with the market regulator SEBI.

“When AIF regulations came out in 2012, initially there were some tax issues and people were concerned about the pass-through status of trusts but all that has been sorted out now. So, clarity on tax issues is one of the reasons for the popularity of AIFs,” said Vinod Joseph, Partner, Argus Partners.

“Secondly, even if an AIF is getting investments from foreign investors, none of FDI restrictions apply to them as long as the AIF is owned and controlled by Indian citizens/ residents. That’s another reason why AIF is becoming so popular because you can attract as much foreign investment as you want and not be subject to FEMA rules,” he added.

Joseph also said that SEBI coming up with a standardised template for AIFs also made the whole process much more transparent and straightforward and helped people to get comfortable with the concept of AIFs.

Category II AIF accounted for 66 per cent of the total investments followed by Category III at 24 per cent and Category I at 10 per cent.

Published on June 18, 2021

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