Alternative Investment Fund (AIF)

30.03.2024

Alternative Investment Fund (AIF)

Why in the news?                               

     Recently the norms for lenders investing in Alternative Investment Funds have been amended by the RBI.

About the amendment:

• The Reserve Bank of India has revised the norms for regulated entities (REs) with respect to their investments in Alternative Investment Funds.
  • Regulated entities include banks, primary co-operative banks, non-banking financial companies, credit information companies, and EXIM banks, NABARD, NaBFID, National Housing Bank ('NHB'), and Small Industries Development Bank of India ('SIDBI').

• As per the new directive, regulated entities need to set aside provisions only to the extent of their investment in the AIF scheme which is invested by the AIF in the company of the debtor and not the entire investment in the AIF scheme.
• With a view to ensure uniformity in implementation among REs and to address the concerns identified in various representations received from stakeholders, it is advised that downstream investment will not include investment in equity shares of the debtor company of the RE.
• But this will involve other investments, including investments in hybrid equipment.
• Investments in AIFs by RES through intermediaries such as funds of funds or mutual funds are not included in the scope of the circular.

About Alternative Investment Fund (AIF):

• Alternative investment funds (AIFs) are privately pooled investment funds that invest according to a defined investment policy.
• Their goal is to provide investors with exposure to alternative asset classes beyond traditional equities and fixed income.
• These funds pool capital from sophisticated investors (both Indian and foreign) and invest it according to a defined investment policy.
• AIFs follow the SEBI (Alternative Investment Funds) Regulations, 2012.
• They can be structured as companies, LLP, trust etc.
• AIFs attract high rollers including domestic and foreign investors.
• Institutions and high net worth individuals often invest in AIFs due to the need for substantial investment funds.
• AIFs offer potentially high returns but come with higher risk due to their focus on alternative assets.
• Investors should assess their risk tolerance before investing.

Categories of Alternative Investment Funds:

• Category I AIF: These funds can invest in start-ups, early-stage enterprises, social enterprises, SMEs and sectors considered socially or economically desirable by the government or regulators.
• Category II AIFs: These funds include private equity funds, real estate funds, debt funds and funds for distressed assets. They don't use excessive leverage.
• Category III AIFs: These funds employ complex trading strategies including leverage through derivatives. Hedge funds fall into this category.
• Category I and II AIFs are usually closed with a minimum tenure of three years.
• Category III AIFs can be either open-ended or closed-ended.

                                                           Source: Economic Times