Alternative Investment Funds- Registration Process€¦ · Alternative Investment...

Alternative Investment Funds-Registration ProcessCHAPTER 16

Types of Alternate investment Funds

Legal structure and documentations required

Registration process for AIF’s

AIF’s target participants

Investment restrictions on an AIF

Alternative investment scenario in India

Category I AIF

• AIFs that invest in start–ups or early stage ventures or sectors

considered socially or economically more desirable and thus should

be entitled to benefits and be subject to greater regulation. These

include the following:

• Venture Capital Funds: Invest at least 2/3rd of their corpus in Venture

Capital Units

• Small and Medium Enterprise (SME) Funds:

◦ At least 75% of the corpus to be invested in SMEs.

◦ Investment in Listed SMEs – permitted subject to conditions.

Category I AIF• Social Venture Funds:

◦ At least 75% of the corpus to be invest in social ventures.

◦ Investment in listed SMEs – same conditions as applicable to SME funds

• Infrastructure Funds: Invest at least 75% of the corpus in infrastructure sector

• Angel Funds: Invest in VCUs, however, cannot invest less than Rs. 25 lakhs and more than Rs. 5 crores and investments are locked-in for 1 year.

Category II AIF•AIFs that do not employ any leverage or borrowing other than to meet day to day needs and as such do not get any special benefits (e.g. private equity fund, debt fund etc.). This is the miscellaneous category.

•Invest primarily in unlisted investee companies.

Category III AIF•AIFs that employ diverse or complex trading strategies and may employ leverage (including through investment in listed and unlisted derivatives). This category of AIFs is open or closed ended and interested in making short term returns (e.g. hedge funds).

•Invest in securities of listed or unlisted investee companies, derivatives, complex or structured products.

Comparative

Analysis

Point of

differentiation

Category I Category II Category III

Tenure Close ended, minimum tenure of 3

years, extendable up to 2 years with

2/3rd in value investor consent.

Same as category I. Open or close ended.

Listing Listing permitted only after final close

on recognized stock exchange with

minimum tradable lot of Rs.1 crore

while listing is not permitted for angel

funds.

Same as category I. Same as Category I only if it

is close ended.

Minimum investment

in an investee

company

Not more than 25% of the corpus Same as Category I Not more than 10% of the

corpus

Code of Conduct Not applicable Not applicable Directions regarding

operational standards to be

followed, code of conduct

etc. to be issued by SEBI

Point of

differentiation


Borrowing Can use leverage for temporary

funding only for maximum 30 days, 4

occasions in a year only and maximum

10% of the corpus

Same as Category I May engage in leverage or

borrow subject to a

maximum limit specified by

the SEBI and subject to

details of the leverage

employed being disclosed.

Valuation Valuation of its investments to be

carried out once every 6 months by

an independent valuer appointed by

the AIF (extendable to 1 year with

75% in interest investor consent).

Same as category I. NAV Calculation: To be

independent of the fund

management function.

Disclosure of NAV: Quarterly

for closed ended funds;

monthly for open ended

funds

Point of

differentiation


Agreement with

merchant bankers

Option of underwriting available

under the SEBI (Issue of Capital and

Disclosure ) Regulations, 2009 is

available for VCF and SME

Same as VCF and SME

Funds

Not applicable

Insider Trading

Regulations

VCF and SME Funds are exempt from

certain provisions of Insider Trading

Regulations

Same as VCF and SME

Funds

Not applicable







Investment

Management

Agreement

ManagerTrustee

(If the AIF is a Trust)

Portfolio Entities

AIFSponsor

Sponsor

Commitment

Investors

Schematic representation of a typical AIF (trust) structure

Typical Fund structure, governance and management• Settlor: A settlor is the author of the trust and settles the trust with

an initial settlement, determines the purpose of the trust and identifies the beneficiaries through the indenture of trust. A settlor has no rights or obligations other than as provided in the indenture of trust.

• Designated partners (in case AIF is an LLP): The designated partners are responsible for statutory compliances under the LLP Act.

• Trustee (in case AIF is a trust): The Trustee administers the trust property for the benefit of the beneficiaries. He is bound by obligation to fulfil the trust and is typically entitled to receive trusteeship fee in return.

Typical Fund structure, governance and management• Investors (beneficiaries of a trust or partners of an LLP): The

investors make their commitments to the AIF through a contribution agreement or LLP agreement.

• Manager: Appointed by the AIF to manage its investments and may also be the same as the sponsor of the AIF. The manager shall establish and implement written policies and procedures to identify, monitor and appropriately mitigate conflicts of interest throughout the scope of business.

Typical Fund structure, governance and management.•Sponsor: Any person or persons who sets up the AIF. The AIF Regulations provide for many obligations that should be discharged either by the manager or sponsor. Except the few as follows:I. Act in a fiduciary capacity towards the investors and disclose to the

investors, all conflicts of interest as and when they arise or seem likely to arise.

II. Act in the interest of the investors of the AIF and not act detrimental to the interests of the investors or place its own interests above the interests of the investors.

III. Maintain high standards of integrity and fairness in all its dealings and in conduct of the business and render at all times high standards of service, exercise due diligence and exercise independent professional judgment including abiding by high level principles on avoidance of conflicts of interest with associated persons.

IV. Not offer assured returns to any prospective investors.

Fund Documentation•Constitutive Document of the AIF: This can be a trust deed (for a trust), LLP Agreement (for an LLP) and MoA/AoA and SHA (for a company).

•Private Placement Memorandum: The AIF helps to raises capital commitments through private placement. The AIF Regulations require that such private placement memorandum shall contain all material information about the AIF and other information as may be necessary for the investor to take an informed decision on whether to invest in the AIF.

•Investment Management Agreement: The powers and duties of the trustee is delegated to the manager of the AIF through this agreement.

Fund Documentation•Contribution Agreement: A tri-partite agreement between the trustee, manager of the AIF and the contributor that sets out in detail the commercial understanding between the contributor vis-à-vis the AIF.

•Side Letters: In order to provide investors with any special information rights or governance rights, the manager (on behalf of the AIF) may enter into special side letter arrangements with certain specific investors.

•Agreements with service providers: (a) placement agents, (b) third party trustees; (c) custodians; (d) auditors etc.







Registration processCover Letter: The AIF application is accompanied by a cover letter specifying whether the AIF:

• is registered with the SEBI as a venture capital fund;

• has been undertaking the activities of an AIF prior to the application; and/or

• is making the application for registration of a new fund.

Registration processForm A: The form prescribed by the SEBI which needs to be duly filled in and submitted to SEBI along with all supporting documentation including the below:

•Details of the AIF.

•Details of the trustee.

•Details of the sponsor.

•Details of the manager.

•Details of the business plan and investment strategy.

•Details of regulatory action taken in the past.

Registration processDemand Draft: This needs to be prepared in favor of SEBI, payable at Mumbai for a sum of INR 1 lakh and is required to be submitted along with the application. In order to get the certificate of registration a registration fee will need to be paid to SEBI after confirmation from SEBI that the application has been approved. The registration fees for Category I AIF is INR 5 Lakhs (except for Angel Funds where it is INR 2 Lakhs), for Category II AIF is INR 10 lakhs and for Category III AIF is INR 15 lakhs.

Registration processTrust Deed: The extract of the registered trust deed needs to be submitted for final registration. Registration is required with the Sub-Registrar of Assurances typically, in the jurisdiction of the principal office of the trust (i.e., the AIF) under the (Indian) Registration Act, 1908. The signatories to the trust deed will need to be present for the registration.

Registration processPrivate Placement Memorandum: This may be in draft form. It should contain all material information about the following:

•The manager and the background of key investment team of the manager.

•The targeted investors, fees and all other expenses proposed to be charged, the tenure, conditions or limits on redemption, investment strategy, risk management tools and parameters employed

•Key service providers, conflict of interest and procedures to identify and address them, disciplinary history, the terms and conditions on which the Manager offers investment services, its affiliations with other intermediaries, manner of winding up of the AIF







Part

icip

an

ts

Foreign Investors: As per the notification issued by RBI, a person resident

outside India including foreign portfolio investors and non-resident Indians

can invest in units of AIFs under the automatic route.

Domestic investor: While any person can invest in AIFs under the AIF

Regulations, certain domestic investors such as banks, insurance companies

and pension companies are governed by their respective regulators.

Banks: Banks can invest in only Category I AIFs. Further, per the directions

issued by the RBI in May 2016, banks cannot hold more than 10% of the unit

capital of a Category I AIF.

Investment companies: The Investments – Master Circular on IRDAI

(Investment) Regulations, 2016 released by the IRDAI consolidates various

circulars and notifications released by the IRDAI.

Pension Funds: While certain pension funds can invest in AIFs, the Pension

Fund Regulatory and Development Authority has prescribed detailed

investment norms in its circulars.







Restrictions on ( AIF)

•Investors: No scheme of an AIF shall have more than 1000 investors, except in relation to an angel fund which shall not have more than 200 investors provided that the provisions of the Companies Act, 2013 shall apply to an AIF established as a company.

•Corpus: Corpus of each scheme will be at least INR 20 Crore (except for Angel Funds where it is INR 10 crores). If the corpus is above INR 500 Crore, a SEBI registered custodian will have to be appointed by the AIF.

•Minimum investor commitment: Commitments from investors will be invited on a private placement basis and the minimum commitment amount is INR 1 Crore.

Restrictions on AIF•Manager/Sponsor: The manager or sponsor of the AIF will need to have a continuing interest in the AIF of the lower of 2.5% of the corpus or INR 5 Crore, which cannot be set off against management fees and such interest will have to be disclosed upfront to investors.

•Investments offshore: AIFs can invest in securities of companies incorporated outside India subject to guidelines issued by the RBI and SEBI.

•Co-investment: Co-investment by the sponsor or manager of the AIF cannot be on more favorable terms than what is offered to the AIF.

Restrictions on AIF•Associates: AIF can invest in associates after obtaining approval of 75% of the investors in value of their investments in the AIF.

•Audits and Reports: Books of accounts of the AIF are required to be audited annually. Further, within 180 days from the year end, AIFs are required to provide reports to their investors including financial information of investee companies and material risks and how they will be managed.

Restrictions on AIF•Alteration of strategy: No material alteration to the fund strategy can be made unless consent of at least 2/3rd of unit holders by value of their investment is obtained.

•Change in category: According to a circular issued by SEBI dated August 7, 2013, only AIFs who have not made any investments under the category in which they were originally registered are allowed to make an application for a change in category to SEBI.

Restrictions on AIF•Alteration to the Memorandum: According to the SEBI Circulars, all AIFs shall intimate any change to the Memorandum to all investors and SEBI once in every 6 months, specifically indicating the changes made.

•Listing: Listing is permitted only after final close on recognized stock exchange with minimum tradable lot of INR 1 Crore.

•Valuation: Valuation of its investments to be carried out once every 6 months by an independent valuer appointed by the AIF (extendable to 1 year with approval of 75% of the investors by value of their investments in the AIF).

Restrictions on AIF•Reporting: Category I AIFs that do not employ leverage are required to submit reports to SEBI on a quarterly basis in a prescribed format, within 7 Calendar Days from the end of the quarter.

•Investment by Category I AIFs and Category II AIFs in the shares of entities listed on institutional trading platform after the commencement of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2015 shall be deemed to be investment in ‘unlisted securities’ for the purpose of the AIF Regulations.







The scenario in India•India's alternative investment industry has grown to Rs 27,500 crore in size. Year-on-year, AIF investments have more than doubled from INR 11,254.71 crores at the end of September last year.

•The country had been frustratingly lagging behind in development of Alternative Investment products.All that changed to a great degree in 2015 when while presenting the Union budget for financial year 2016, the finance minister announced that foreign investments would be allowed in alternative investment funds (AIFs).

•As of 30 June 2016, market regulator SEBI has allowed as many as 235 entities to set AIFs.

The scenario in India•Cashing on the positive sentiment created among foreign investors due to Prime Minister Narendra Modi’s historic election win in 2014 and AIF framework, many well homegrown banks, NBFCs and fund houses have launched new India-focused funds, both domestic and offshore, in partnership with multi-billion dollar pension funds from around the globe.

•Global investors including Blackstone, GIC, KKR and others are pouring billions of dollars into Indian real estate through various vehicles to take advantage of the rising demand for offices and retail spaces, and corresponding jump in rents.

“Success is a lousy teacher. It

seduces smart people into

thinking they can't lose.”

-Bill Gates

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