ALTERNATIVE INVESTMENT FUNDS (Syllabus: GS Paper 3 – Economy)

Context: The Securities and Exchange Board of India (SEBI) has proposed relaxation of rules on valuation of investment portfolio of alternative investment funds (AIFs).

Alternative investment funds (AIF)

• About: AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which 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.
• Mutual Funds Regulations: AIFs are distinct from funds covered under the SEBI (Mutual Funds) Regulations, 1996, as well as other regulations such as the SEBI (Collective Investment Schemes) Regulations, 1999.
• Exemptions from Registration: Certain entities, such as family trusts for the benefit of 'relatives' as per the Companies Act, 1956, employee welfare trusts, gratuity trusts for employees, and 'holding companies' under Section 4 of the Companies Act, 1956, are exempt from registration under the AIF Regulations.

Categories of AIFs:

• Category I AIFs: Invest in start-ups, early stage ventures, and socially or economically desirable sectors.

o Include venture capital funds like angel funds, SME funds, and social venture funds.

• Category II AIFs:

o Not classified under Category I or Category III.

o Do not undertake leverage except for day-to-day operational needs.

o Include real estate funds, debt funds, private equity funds, and funds for distressed assets.

• Category III AIFs:

o Employ complex trading strategies and may use leverage.

o Include hedge funds, PIPE funds, and those investing in derivatives.