What is an Alternative Investment Fund (AIF)
AIF is an Alternative Investment Fund Regulations privately pooled funding car which collects funds from traders, whether or not Indian or overseas, for investing it in accordance with an outlined funding coverage for the good thing about its traders. AIF could also be within the type of a belief or an organization or a restricted legal responsibility partnership or a physique company.
AIF Regulations endeavor to increase the perimeter of regulation to unregulated funds with a view to making sure systemic stability, growing market effectivity, encouraging the formation of recent capital and client safety.
Who usually are not coated
Currently, the AIF Regulations don’t apply to mutual funds, collective funding schemes, household trusts, ESOP and different worker welfare trusts, holding corporations, particular objective automobiles, funds managed by securitisation or reconstruction corporations and any such pool of funds which is immediately regulated by every other regulator in India.
Categories of AIFs
An AIF wants to hunt registration broadly beneath one of many Three classes –
Category I AIF: The following are coated beneath Category I
1. Funds investing in start-up or early stage ventures or social ventures or SMEs or infrastructure
2. Other sectors or areas which the federal government or regulators think about as socially or economically fascinating together with the Venture Capital Funds
3. AIFs with constructive spillover results on the financial system, for which sure incentives or concessions may be thought-about by SEBI or Government of India or different regulators in India
Category II AIF: The following are coated beneath Category II
1. AIFs for which no particular incentives or concessions are given by the federal government or every other Regulator
2. Which shall not undertake leverage aside from to satisfy day-to-day operational necessities as permitted in these Regulations
3. Which shall embody Private Equity Funds, Debt Funds, Fund of Funds and such different funds that aren’t categorized as class I or III
Category III AIF: The following get coated beneath Category III
1. The AIFs together with hedge funds which commerce with a view to creating brief time period returns;
2. Which make use of numerous or advanced buying and selling methods
3. Which could make use of leverage together with by way of funding in listed or unlisted derivatives
Applicability of AIF Regulations to Real Estate Funds
After realizing what an AIF is and its broad classes, we analyse whether or not AIF Regulations are relevant to the Real Estate Funds
Firstly AIF has to hunt registration beneath AIF Regulations beneath one of many three classes said above. Therefore if a Fund doesn’t fall beneath any of the three classes said above, then it is not going to search the registration with SEBI.
If we have a look at the Category 1, registration is required by funds which spend money on start-up or early stage ventures or social ventures or SMEs or infrastructure
If we have a look at the definition of infrastructure, Explanation to Regulation 2 (m) states that Infrastructure shall be as outlined by the Government of India occasionally.
And within the regular parlance, the time period usually refers back to the technical constructions that help a society, comparable to roads, water provide, sewers, electrical grids,
telecommunications, and so forth, and will be outlined as “the bodily elements of interrelated techniques offering commodities and providers important to allow, maintain, or improve societal residing situations.
Therefore infrastructure doesn’t embody the actual property or development exercise since this exercise offers in investing in land, creating the land by the use of development of flats, townships and different residential and industrial tasks.
But if the actual property fund carries on sure tasks for a social objective like buying land for charity and many others.; then the fund could also be coated beneath social enterprise funds.
The clause additional states that ‘or different sectors or areas which the federal government or regulators think about as socially or economically fascinating and such different Alternative Investment Funds as could also be specified;’
The AIF Regulations have been notified only a few days again and until date, no different AIF funds have been specified within the Category 1 by the Government. Further what the federal government or regulators think about as socially and economically viable is a really broad idea. However, until the Government particularly comes out with particular inclusions beneath Category 1; a Real Estate Fund is not going to be coated beneath Category 1 and subsequently wouldn’t require Registration.
Further, the clause additionally states that – Alternative Investment Funds that are typically perceived to have constructive spillover results on financial system and for which the Board or Government of India or different regulators in India may think about offering incentives or concessions will bee included
By including these traces to the Category 1, SEBI has made the class 1 very obscure and open to dispute and litigations since what SEBI intends with constructive spillover results on the financial system will not be outlined or clarified. Different folks or organizations could have a special opinion on this which might result in pointless litigations and hardships to enterprise house owners. However, until any readability comes on this, the enterprise house owners must take a cautious method to the choice of searching for Registration beneath AIF Regulations.
Category II AIF
Now we look at whether or not a Real Estate Fund falls beneath the Category II AIF
If we have a look at the funds coated by Category II above, they
1. Shall not fall in Category I and III
2. Shall not undertake leverage or borrowing aside from to satisfy day-to- day operational necessities and as permitted by these laws;
3. Shall be funded comparable to personal fairness funds or debt funds for which no particular incentives or concessions are given by the federal government or every other Regulator
For Real Estate Fund beneath Category I, we discover that at current it doesn’t fall beneath Category I and it additionally doesn’t fall beneath Category III since these are mainly hedge funds. Further, no particular incentives or concessions are given by the Government to the Real Estate Sector. Therefore if we have a look at the applicability of Real Estate Fund beneath Category II, these funds could fall beneath the Category II AIFs if they don’t take leverage or borrowing apart from short-term necessities.
Impact of AIF on the Real Estate Funds
Under these Regulations, the minimal funding quantity must be Rs 1 crore from every investor. Therefore attracting the funds from the traders would develop into robust for the actual property funds, who used to lift quantities as much less as INR 1 million from the traders. Now they would want to search out high-value traders although this isn’t the one problem that lies forward for these elevating home corpuses. They now even have to speculate 2.5% of the corpus or Rs 5 crore, whichever is decrease, to make sure that the managing firm’s danger is aligned with that of the investor. Moreover, a single funding in an organization or a venture can not exceed 25% of your complete corpus.
Further a Real Estate Fund registered within the type of an LLP additionally can be coated beneath the AIF Regulations. In an LLP Structure, because the traders are additionally companions, the danger to the rights of the traders being misused may be very minimal. Therefore making use of the AIF Regulations to the LLP Structure would scale back the flexibleness out there to such a Structure.
If we have a look at the AIF Regulations from a brief time period perspective, in gentle of the troublesome fund elevating setting as we speak, the upper ticket dimension for traders may doubtlessly throw up some challenges and will in a fashion constrict the expansion of the asset class, however clearly, in the long term, these laws seem to have a component of maturity to play a pivotal function within the improvement and shaping up of the way forward for alternate asset class in India. It can be clear that different investments are extra refined and dangerous as in comparison with investments in fairness and debt and until market matures it’s advisable that solely HNIs and nicely knowledgeable traders make an funding on this asset class and as soon as the market matures it’s made open to all. In the long term, we might even see extra investments within the Alternative asset class (when it comes to quantum and maturity) as a result of elevated investor confidence in these funds.