ALTERNATIVE INVESTMENT FUNDS (AIF) - ECONOMY
News: SEBI proposes new framework for AIFs to strengthen corporate governance
rules
What is in the news?
●
To strengthen the
corporate governance mechanism, the capital markets regulator, the Securities
and Exchange Board of India (SEBI) has proposed to amend the current rules
governing Alternative Investment Funds (AIF).
Key takeaways from the news:
●
Under the proposal, Category I and Category II AIFs should not
borrow funds directly or indirectly or engage in leverage for the purpose of
making investments.
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These AIFs can borrow for
the purpose of meeting shortfall in drawdown while making an investment in an
investee company, subject to certain conditions.
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Conditions for Borrowing: ● Borrowing
by these AIFs should be done only in case of emergency and as a last resort. ● The
amount borrowed should not exceed 10% of the investment proposed to be made
in the investee company. ● The cost
of such borrowing should be charged only to such investors who delayed or
defaulted on drawdown payment. |
●
Category I and Category
II AIFs should maintain 30 days cooling
off period between two periods of permissible leverage.
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AIFs should hold the
instruments or securities of their investments only in dematerialized form.
●
The regulatory intent
behind permitting borrowing for Category I and II AIFs is that the funds
borrowed shall be utilized for meeting operational requirements of the AIF, and
not for the purpose of making investment.
Mandatory Appointment of
a Custodian:
●
The requirement of
mandatory appointment of a custodian for safekeeping of securities for AIFs
with corpus of over ₹500 crore, should be extended to AIFs with corpus of less
than ₹500 crore as well.
Large Value Fund:
●
Large Value Fund for
accredited investors (LVFs) should be permitted to extend their tenure up to
four years, subject to approval of two-thirds of the unit holders by value of
their investment in the LVF.
Certificate of Registration:
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SEBI noted that many AIFs
are still holding their certificate of registration despite having no
fundraising or investment activity in their schemes for several years.
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Considering this, SEBI
suggested that all AIF should pay renewal fee equal to 50% of its applicable
registration fee for the subsequent block of five years from the date of grant
of registration, within three months before expiry of the said block period.
●
Besides, existing AIFs
who have completed five years from the date of grant of certificate of
registration should also pay renewal fee equal to 50% of its applicable
registration fee.
Back to Basics:
Alternative Investment Funds:
●
AIFs are any privately
pooled investment fund (whether from Indian or foreign sources) in the form of
a trust, a company, a body corporate, or a Limited Liability Partnership, as
defined by the Securities and Exchange Board of India (Alternative Investment
Funds) Regulations, 2012.
Types:
Category 1:
●
These funds are invested
in start-ups, small and medium firms, and other businesses that are new or have
the potential to grow financially.
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The government encourages
investments in these businesses because they benefit the economy by increasing
output and creating jobs.
●
Eg:
○ Infrastructure Funds
○ Angel Funds
○ Venture Capital Funds
Category 2:
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Funds that are invested
in both equities and debt instruments are included in this category.
●
The government does not
offer any tax breaks for investments in this category.
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Eg:
○ Fund of Funds
○ Debt Funds
Category 3:
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AIFs in category 3 are
those that provide returns in a short period of time.
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The government has made
no known concessions or incentives in relation to these funds.
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Eg:
○ Hedge Funds