Alternative investment funds (AIFs) appear to be getting a lot of attention from capital markets regulator Securities and Exchange Board of India (SEBI). On February 6 alone, SEBI came out with five separate consultation papers on AIFs, besides one on January 6, delving into various aspects.

According to SEBI, alternative investment fund or AIF is a 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 them in accordance with a defined investment policy for the benefit of its investors.

There are three categories of AIFs — Category I (investments in start-up or early stage ventures or social ventures or SMEs or infrastructure); Category II (real estate funds, private equity funds and funds for distressed assets); and Category III (investments in diverse or complex trading strategies that may employ leverage including through investment in listed or unlisted derivatives).

Attracts huge funds

AIFs have been attracting huge funds of late. According to the latest SEBI data, ​at the end of ​June 2022, these three category funds raised nearly over ₹3.4-lakh crore and had made investments worth ₹3.1-lakh crore.

Due to the significant amount of money involved, the regulator has issued consultation papers with a comprehensive approach. One of the proposals is to offer Alternative Investment Funds (AIFs) and their investors the choice to carry forward unliquidated investments from a scheme upon its completion. Currently, AIFs can be extended to up to two years with the approval of 75 per cent of investors.

The regulator is now considering allowing the transfer of unliquidated investments to new schemes, provided that they receive the consent of 75 per cent of investors (by the value of their investments), and the manager organises bids for at least 25 per cent of the unliquidated investments, which will allow investors who do not wish to continue in the new scheme to exit.

The option of creating a liquidation/rollover scheme is a welcome development, as it will provide relief to AIFs approaching the end of their term but facing difficulties with unliquidated investments.

Upfront commission

To avoid duplication of charges paid by investors, especially who opt for the adviser or portfolio manager route, SEBI has asked the AIFs to give an option of direct AIF plan to investors. Besides, SEBI has also mooted a trail model for upfront commissions as in the case of mutual funds to check mis-selling of products. Though initially this may impact distributors’ income, in the long run, it is expected to benefit both the main stakeholders — managers and the investors.

Another important proposal was getting consent for buying/selling investments from/to associates of AIF.

Demat of AIFs

Of the 1,022 AIFs registered with SEBI, only a handful have dematerialised their units. The regulator has now proposed that dematerialisation of AIF units should be made compulsory and that by April 1, 2024, all schemes of AIFs with corpus exceeding ₹500 crore shall compulsorily dematerialise their units.

This will speed up the settlement process and improve transparency. However, there is a possibility of stiff resistance from foreign investors to open demat accounts. Besides, fund managers may also see some procedural difficulties in the case of close-ended funds.

In a move to promote first-time managers, SEBI also plans to replace the five years experience criteria with certification requirement. Further, it has also proposed that the compliance officer of the manager of an AIF may be required to obtain relevant certification from an institution notified by SEBI. However, it will be better to retain the experience criteria for certain threshold of fund size (over ₹500 crore).

Related Topics
comment COMMENT NOW