Alternative Means of Investment

Amarchand Mangaldas Partner Pankaj Agarwal and Associate Riddhi Shah in this article analyse the recently notified Alternative Investment Funds Regulations and their implications..By Pankaj Agarwal and Riddhi Shah.Investors can now avail of a new means of investment. Recently, the Securities and Exchange Board of India (SEBI) has notified the SEBI (Alternative Investment Funds) Regulations, 2012 (the AIF Regulations or the Regulations) for the regulation of alternative investment funds (AIFs). This article aims at analyzing the AIF Regulations and their implications. .What does an Alternative Investment Fund mean?.An Alternative Investment Fund (AIF) is any fund established or incorporated in India in the form of a trust, company, limited liability partnership or a body corporate, which collects funds from investors, whether Indian or foreign, for investing for the benefit of its investors, in accordance with a defined investment policy..Mutual funds, family trust, ESOP trusts, employee welfare trusts, collective investment schemes and holding companies are outside the purview of these Regulations. Further, the SEBI (Venture Capital Funds) Regulations, 1996 (VCF Regulations), have been repealed and are subsumed in the AIF Regulations, and the venture capital funds would now be classified as a kind of an AIF..Why was there a need for the SEBI (Alternative Investment Fund) Regulations, 2012?.Whilst, India offers various options for investment funds to be structured, such as private equity funds, hedge funds, venture capital funds and many more, investors could not make the most of these options, due to much ambiguity and uncertainty regarding their regulation. For instance, the VCF Regulations were framed to encourage funding of start-up companies. However, venture capital funds began to be used as an omnibus investment fund, and the established organizations started reaping the concessions intended for start-up companies. Consequently, there was a need for introducing the AIF Regulations to bring clarity and certainty..Prior to the introduction of the AIF Regulations, many funds remained outside the watch of the regulator, which made investors hesitant to make such investments. While institutions and high networth investors (considered to be sophisticated investors) are aware of the market and credit risks, a comprehensive regulatory framework, like the AIF Regulations, was required to minimize such risks through provisions for incentive structures, disclosures and reporting requirements..A bird’s eye view of the AIF Regulations is:.the AIF must be registered with the SEBI;the AIF may launch schemes, which must have corpus of atleast ` 200 million, and no scheme can have more than a thousand investors;the funds may be raised only through private placement by issuing an information memorandum, which must include the investment strategy, investment purpose and its investment methodology;the tenure of the AIFs must be close-ended and must be for a minimum period of three years;the AIF may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units;whilst the AIF units may be listed on stock exchanges, but the AIF is not be allowed to raise funds through the stock exchange mechanism;the AIF shall disclose to the investors information in respect of finance, risk management, operations, legal actions, valuation procedure of assets, etc.; andthe AIF must take prior approval from SEBI in case of any change-in-control of the AIF..How will the AIF Regulations benefit the investors? .While investors are showing an increasing appetite for market linked investment products, the AIF Regulations have been introduced to incentivize higher investor participation in the private capital sector. The AIF Regulations brings down the financial costs borne by investors and increases access to funds by new distribution channels. The investment options that will now be available to investors will, thus, be many more and will be regulated by SEBI, minimizing the apprehension of certain investment risks..Bringing AIFs under the scrutiny of SEBI, by prescribing for stringent disclosure, investigation and penalty provision, will ensure transparency and high investor protection. Further, a minimum three years tenure of the funds should help in creating a more stable investment environment. .Will the AIF Regulations achieve their end? .Investments in the AIFs are not completely free from risks. For instance, the returns on the investments in funds, such as hedge funds and private equity funds, will largely depend on the performance of the investee companies..Further, the AIF Regulations provide for listing of the units of AIFs. However, Indian AIF investors may not be prepared to give up ready returns during the fund’s tenure and take liquidity risk through listing of units..From a fund sponsor’s perspective, the restrictions imposed on the funds could discourage sponsors from setting-up new funds. For instance, there is a provision that the manager or sponsor of the fund must have a continuing interest of atleast 2.5% of the corpus or ` 50 million, whichever is lower..Inspite of the above concerns, at a time when the global and the Indian equity markets are not at their premium, the option of investing in AIFs seems a rather lucrative one. Will the AIF Regulations revive private investment and put the economy on the higher growth trajectory? Only time will tell…. we will just have to wait and watch! .Pankaj Agarwal is a Partner and Riddhi Shah is an Associate with Amarchand Mangaldas, Ahmedabad. The views expressed in this article are that of the authors alone.