Concept Paper on Regulation for Alternative Investment

7/31/2019 Concept Paper on Regulation for Alternative Investment

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CONCEPTPAPERONPROPOSEDALTERNATIVEINVESTMENTFUNDSREGULATIONFOR

PUBLICCOMMENTS

A. EXISTINGSCENARIO

Atpresent

Investment

Management

Regulation

islimited

toMutual

Fund

Regulation,CISRegulations,VCFRegulationandRegulationofPortfolioManagers.

MutualFundsandCISareclearly intheretailsegmentandarewellregulated,the

regulationofnonretailsegmentisnotonacomprehensivebasis.

B. WHYCOMPREHENSIVEREGULATIONFORPRIVATEPOOLSOFCAPITAL/

ALTERNATIVEINVESTMENTFUNDSISREQUIRED?

1. SEBI(VentureCapitalFunds)RegulationswereframedbySEBIin1996toencourage

fundingofentrepreneursearlystagecompanies.However,ithasbeenfoundover

theyearsthatVCFsarebeingusedasavehicleformanyotherfundssuchas:

(i) PrivateEquity(PE)

(ii) PIPE(PrivateInvestmentinPublicEquity)

(iii) RealEstate

While investmentobjectivesof these fundsmayhavevalideconomic reasonsyet

thishasresultedinaneglectoftheoriginalaimofpromotingearlystagecompanies

asenvisagedunderVCFRegulations.Secondly,becausetheVCFsarepopulatedby

PrivateEquity,

PIPE

and

Real

Estate

Funds,

itisnot

possible

togive

targeted

concessionstoVCFstopromotestartuporearlystagecompaniesasthere isclear

possibilitythattheadvantageswillbereapedbywellestablishedlistedcompanies

orothermainstreamplayers.AtthesametimetheinvestmentrestrictionsonVCFs

whichoperateinunlistedspace,aresuchthatPEandPIPEfundsfindsitrestrictive.

Further,therearesomeregulatoryconcessionsneededbyPEandPIPEfundsand

whichmaynotbeappropriateforVCFs.Forinstance,therearerequeststhatthey

shouldbeallowedtoinvestinsecondarymarketsaswell.Recentlytherehavebeen

requestsbyvariousPEFundsregisteredasVCFtogivethemexemptionsfromTake

overRegulationsand InsiderTradingRegulations.Tosumup,VCFsarebeingused

as

an

omnibus

investment

fund

which

leaves

most

of

the

private

investment

funds

dissatisfied.

2. RegistrationofVCFisnotmandatoryunderVCFRegulation. Notallplayers inthe

VCForPE industryare registeredwithSEBI. Theseunregisteredentitiesarenot

subject to investment restrictionswhich are applicable to registered VCFs. Thus

registered VCFs seek to enjoy similar opportunities which are exploited by


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unregisteredfunds.Toavoidhavingregulatorygapsandtohavelevelplayingfield

thereisaneedtohaveuniformnormsforsametypeoffundorindustry.

3. Thereremainsaconsiderableneed forlongtermcosteffectivefundingthatcanbe

sourcedfromdiversepartsoftheprivatesectorcapitalmarketsorprivatepoolof

capitalsuch

asPE

orPIPE

funds

etc.,

and

that

can

be

translated

into

meaningful

financeforstartups,smallandmediumbusinessandinfrastructure. Itisfeltthata

morecomprehensive legal framework isnecessary topromotethegrowthof this

marketinearnest.

4. There isaneedto recognizeAlternative InvestmentFunds (AIF)suchasPEorVC

etc., as a distinct asset class apart frompromoterholdings, creditors andpublic

investors.

5. The patient source of active capital provided by PE or VC etc., plays a very

important role in the growth of the corporate sector and they bring a lot of

governanceandgoodqualitymoneyonthetableof investeecompany. However,

recent financial difficulties inwestern countries have underlined thatmany AIF

strategies are vulnerable to some risks in relation to investors, other market

participantsandmarkets andmayalsoservetospreadoramplifyrisksthroughthe

financial systems. The regulatorneeds tohaveoverallpictureof risksposedby

such funds. Therefore, it is necessary to establish a framework capable of

addressingthoseconcerns.

6. InvestorsinVCFs,PEetc.,aresophisticatedandwellinformed. SEBIactsmoreasa

facilitatorwithminimal regulation. However,withexponentialgrowthofprivate

fundindustry

and

their

systemic

importance

for

stability

offinancial

market,

globallyprivatepoolsofcapitalarenowbeingsubjectedtoregulationofdifferent

degreebyvariousjurisdictions. Someoftheinstanceshavebeenillustratedinpara

Cunderheading GlobalExperience. Thealternateasset industryneeds tobe

regulatedforfairandefficientfunctioningoffinancialmarket.

C. GLOBALEXPERIENCE

1. Inmostofadvancedeconomies,multiplevehiclesexisttoprovidevariousavenues

forthe institutional investorsto investbasedontheir investmentneeds including

hedge

funds,

private

equity

funds,

commodity

funds,

real

estate

funds,

infrastructure funds, investment trusts, etc. Investors in these funds are largely

institutional, high net worth individuals and corporates. These investors while

entrusting their funds to the fundmanagers seeks commitment from such fund

managerbywayskininthegame. Sucharrangementleadstoconflictasthefund

managerisaninvestoraswellasamanager. Therefore,aframeworkisrequiredto

addresssuchconflicts.


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2. TheG30 Report recommends that Managers of private pools of capital that

employ substantial borrowed funds should be required to register with an

appropriatenational regulator (.).The regulatorof suchmanagers shouldhave

authority to require periodic regulatory reports and public disclosures of

appropriate information regarding the size, investment style, borrowing, and

performanceofthe

funds

under

management.

The

G30

recommendations

also

dealwiththe moralhazardissueidentifiedbytheFinancialStabilityForum(now

knownasFinancialStabilityBoard) in2000bystatingthat Since introductionof

evenamodestsystemofregistrationandregulationcancreateafalse impression

of lower investment risk, disclosure, and suitability standards will have to be

reevaluated. TheG30 also considers that for funds above a sizejudged tobe

potentiallysystemicallysignificant;theregulatorshouldhaveauthoritytoestablish

appropriatestandardsforcapital,liquidity,andriskmanagement.

3. TheEuropeanParliamentandCouncilhascomeoutwithaproposalforaDirective

on Alternative Investment FundManager (AIFM)1 such as Hedge Funds, Private

EquityManagers,etc.Thesalientfeaturesofthedirectivesare:

(i) A legally binding authorization and supervisory regime for all AIFM

managingAIF in theEuropeanUnion, irrespectiveof the legaldomicileof

theAIFmanagedexceptforAIFMmanagingportfoliosofAIFwithlessthan

100millionofassetsoroflessthan500million,incaseofAIFMmanaging

only AIF which are not leveraged and which do not grant investors

redemption rights during a period of five years following the date of

constitutionofeachAIF.

(ii)

Tooperate

inthe

European

Union,

allAIFM

will

be

required

toobtain

authorizationfromthecompetentauthorityoftheirhomeMemberState.

(iii) AIFMtoprovidetotheirinvestors,initiallyandonanongoingbasis,aclear

descriptionof the investmentpolicy, includingdescriptionsof the typeof

assetsandtheuseofleverage;redemptionpolicyinnormalandexceptional

circumstances; valuation, custody, administration and risk management

procedures;andfees,chargesandexpensesassociatedwiththeinvestment.

(iv) Disclosuresandreportingtothecompetentauthorityonaregularbasis.(v) Powerofcompetentauthority to set leverage limits forAIF toensure the

stabilityandintegrityofthefinancialsystem.

1AIFM includesallfundmanagersotherthanthosecoveredundertheDirectives fortheUndertakings for

CollectiveInvestmentsinTransferableSecurities(UCITS).


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(vi) AIFMto issueannualdisclosureonthe investmentstrategyandobjectives

of its fundwhen acquiring control of companies and general disclosures

about the performance of the portfolio company following acquisition of

control.

(vii) AnAIFMauthorizedinitshomeMemberStatewillbeentitledtomarketits

funds to professional investors on the territory of any Member State.

Member States may allow for marketing to retail investors within their

territoryandmayapplyadditional regulatory safeguards for thispurpose.

Such requirements shallnotdiscriminateaccording to thedomicileof the

AIFM.

(viii) To facilitate internationalcooperation inmacroprudentialregulations, the

competent authorities of the home Member State will be required to

transmitrelevantmacroprudentialdata,inasuitablyaggregatedformat,to

publicauthoritiesinotherMemberStates.

Under thenew rules,AIFswillbe required toholdmore capitalandmakemore

disclosuresandnonEuropeanhedgefundswillhavetogaina"passport"tooperate

withintheEU.

4. Under the Private Fund Investment Advisers Registration Act of 2010 (The Act),

enactedaspartof theDoddFrankWall StreetReformandConsumerProtection

Act, 2010 (C P Act 2010), Investment Advisers to private funds including hedge

fundsandprivateequity funds are required to registerwith theSECunless they

qualifyfor

one

ofthe

exemptions

provided

such

asadvisers

toVenture

Capital

Funds, smaller advisers (advising to private fundswith AUM less thanUSD 150

million),foreignprivatefundadvisers,familyofficesetc. TheActeliminatestheso

called private adviser exemption for advisers with fewer than 15 clients, upon

which most private fund managers relied to avoid registration under the

Investment Advisers Act of 1940. Now all hedge fund and private equity fund

advisersthatarerequiredtoregisterwiththeSECmustdosobeforeJuly21,2011,

andmustbefullycompliantwithrequirementsundertheInvestmentAdvisersAct

of1940. Suchadviserswillberequiredtofilereportscontainingsuchinformation

asSECdeemnecessarytoprotectinvestorsorfortheassessmentofsystemicrisk.

Even

if

exempt

from

SEC

registration,

(such

as

VCFs

or

private

fund

less

than

150

million),theywillbesubjecttorecordkeepingandreportingobligations. Theyalso

remainsubjecttoantifraudrulesandthustotheSECsenforcementauthority. The

VolckerRulemadeunderCPAct,2010prohibitsabankingentityfromacquiringor

sponsoringanyhedgefundorprivateequityfund.

5. The IOSCOConsultationReportonHedgeFundsOversight(June2009),the IOSCOTaskForcesuggeststhatprogresstowardsaconsistentandequivalentapproachof


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regulators to hedge fund managers should be a high priority. The Task Force

recommends that regulatory oversight for hedge funds should be riskbased,

focusedparticularlyon the systemically important and/orhigher riskhedge fund

managers.

Accordingly,inthe

updated

list

of38

IOSCO

objectives

and

principles

ofregulations,

IOSCO in this principle 28 suggests effective oversight of hedge funds.Although

some jurisdictions may regulate hedge funds as CIS, hedge funds should fully

complywiththeseprinciples:

(i) Hedge funds and/or hedge fundmanagers/advisers should be subject to

mandatoryregistration.

(ii) Hedgefundmanagers/adviserswhicharerequiredtoregistershouldalsobe

subjected to appropriate ongoing regulatory requirements relating to

organizational and operational standards, conflicts of interest and other

conductofbusinessrules,disclosuretoinvestorsandprudentialregulation.

(iii) Primebrokersandbankswhichprovide funding tohedge fundsshouldbe

subjected to mandatory registration/regulation and supervision. They

shouldhaveinplaceappropriateriskmanagementsystemsandcontrolsto

monitortheircounterpartycreditriskexposurestohedgefunds.

(iv) Hedge fundmanagers/advisers and prime brokers should provide to the

relevant Regulator information for systemic risk purposes (including the

identification,analysisandmitigationofsystemicrisks).

(v) Regulators should encourage and take account of the development,

implementation and convergence of industry good practices, where

appropriate.

(vi) Regulatorsshouldhavetheauthoritytocooperateandshare information,

where appropriate, with each other, in order to facilitate efficient and

effectiveoversightofgloballyactivehedgefundmanagers/advisersand/or

hedgefundsandtohelp identifysystemicrisks,market integrityandother

risksarisingfromtheactivitiesorexposuresofhedgefundswithaviewto

mitigating

such

risks

across

borders.

6. IOSCOonOctober2010publishedareportonPrivateEquityConflictsofInterests.

This reportoutlineprinciples againstwhichboth the industry and regulators can

assessthequalityofmitigationofconflictsof interestsbyprivateequityfirms. In

these funds, one of the key risks identified by IOSCO is the conflicts of interest

amongthepartiesinvolvedinprivateequitysponsoredtransactionswhichcanpose

riskstofundinvestorsortheefficientfunctioningoffinancialmarkets.


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IOSCO has identified key mitigating factors which may serve to minimise the

occurrence of conflicts of interest between the private equity firm and its fund

investor,viz.

(i)

Compensation

arrangement

on

the

basis

of

performance

related

remunerationplusacostoffundmanagement.

(ii) Negotiatedcontractualagreementwitheachindividualinvestorsstipulating

thematerialtermsandconditionsofthefundincludingthefundsstructure,

its investment strategy, the allocation of fees and costs, allocation of

investment opportunities, any firm coinvestment arrangements, the

allocationanddistributionofprofits,thecontentandfrequencyofinvestors

reporting;keymananddevotionoftimeprovisions,mechanismsforconflict

anddisputeresolution,etc.

(iii) Investorsshouldbedisclosedofnewinvestmentactivity,abreakdownboth

fundexpenses/incomeandprofit/loss,andareviewoftheperformanceof

individualportfolioassets,etc.Suchdisclosureshouldbeclear,fairandnot

misleading.

(iv) Contractual requirement for each fund tomaintain an investor advisory

committee, comprising a small sampleof fund investors. The committees

mainfunctionistoreviewthefirmsapproachtowardsresolvingallmaterial

fundrelatedconflictsofinterestbeforethefirmtakesanyproposedcourse

of action. The committee should act as a forum for conflictmanagement

ratherthan

investment

decision

making.

(v) Establishment of robust and effective information barriers between

potentiallyconflictedbusinessunits.

7. The InstitutionalLimitedPartnersAssociation (ILPA)hasdevelopedPrivateEquity

principleswiththegoalof improvingPE industryforbenefitofall itsparticipants.

These principles seek to provide for alignment of interest, governance and

transparencypracticesforPEindustry.

D.

REGULATORY

PHILOSOPHY

FOR

THE

NEW

STRUCTURE

(i) SEBIproposestocreateastructurewhereregulatoryframeworkisavailableforall

shades of private pool of capital or investment vehicles so that such funds are

channelized in thedesired space in a regulatedmannerwithoutposing systemic

risk. Atoneendofthespectrum,therewillbeMutualFundsorCISwhicharefor

retail investorswithprudentialregulationseekingtoregulateallkindsofrisks.On

the other end there are private pools of capital of institutions or sophisticated


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investorswhoentrustpooledfundstoamanagerwhohimselfneedstohaveown

fundsformingpartofthe corpus. Such pools of capital could also potentially

employleverage.Atthisend,regulationdoesnottrytoregulatethebusinessrisks

but would like to provide some minimum ground rules for disclosures, and

governance practices to minimize conflict. In between there would be various

specializedfunds

where

risks

are

graded

and

investment

portfolios

designed

tosuit

specificregulatory/otherincentives.

(ii) Making clear distinction among the various types of private pooled investment

vehiclesofinstitutionalorsophisticatedinvestorswillallowGovernment/Regulator

totailormakeconcessions/relaxationsthatmaybedesirableforindividualkindsof

funds such as VCF or SME funds, Social Venture Funds etc. These

concessions/relaxationswillbe tied to investment restrictions for specialkindsof

fundsand funds likeprivateequity,PIPEorstrategic fundmaynotbeallowed to

availsuchconcessions.

(iii) TheproposalintendstoregulateprivatepoolsofcapitalwhereinstitutionsorHigh

Networth Investors (HNIs) invest as Alternative Investment Funds. While

institutionsandHNIsareexpectedtobesavvyinvestorsandneednotbeprotected

frommarketand credit risk, there isneed for a framework todeter from fraud,

unfair tradepractices andminimize conflictsof interest. Mitigationof potential

conflict and deterrence to fraud etc., will be addressed through disclosure,

incentivestructures,reportingrequirementandlegalagreements.

(iv) The alternate investment vehicle such as PE fund is raised privately rather than

throughpublicfunding. Thefundsareforlongterm,drawdownoffundsfrom

investorsisstaggered,

based

on

illiquid

structure

and

exit

ispermitted

on

expirationoffundterm.Thedutiesowedbyafundmanagertothefund investors

willbe largelyshapedbyfunddocumentsthataresubjectofnegotiationbetween

the fund and its investor. Dispute if any, would preferably be settled through

mediation,conciliationorarbitrationetc.

E. PROPOSEDALTERNATIVEFUNDREGULATIONANDOTHERRELATEDFUNDS/

REGULATION

(i) AIFandPMSRegulationPMS

Thereare substantialnumber (266)ofPortfolioManagers registeredwith

SEBIwho inprincipleoffer tailormadeboutique investmentmanagement

servicetotheirclients.EvenafterSEBIhasmadeitmandatoryforportfolio

managers to segregate client accounts, the services provided by many

portfoliomanagers are standardized portfolio strategieswhere assets of

clients are handled without customization, leading to proxy fund


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management throughthis route.The lowminimum investmentamountof

Rs.5 lacsmakes these products accessible to retail investorswithout the

protection which are available to retail investor under theMutual Fund

framework.Totheextentthattheservicesunderthisrouteresemblefund

managementinsteadofcustomizedservices,thereisneedtorecognizeand

regulatethem

asprivate

pool

ofcapital.

PortfolioManagerswho continue toprovide individualized /personalized

portfoliomanagementservicestoclientsshallcontinuetoberegisteredas

individualportfoliomanagerswithhigherminimum investmentamountof,

say,Rs.25 lakhs.Theywillberequiredtosegregatetheclients fundsand

prohibitedtopoolthefund/securitiesofclients.

All portfolio managers who seek to pool assets such as for investing in

unlisted securities should be required to register as an alternative

investmentfund.PortfolioManagerswhoprovidestrategiesfallingintoone

orothertypeofAlternativeFundsdescribedabovewouldbepermittedto

operateasAlternativeInvestmentFunds.

Ifportfoliomanagersintendnottodealinfundsandonlygiveadvice,then

theywouldberequiredtoregisterthemselvesasInvestmentAdviserunder

aseparateregulation.

Thusportfoliomanagerswhoseektoprovidecustomizedserviceononeto

onebasiswithoutpooling fundor securitiesof clientswill continue tobe

governedbyexistingPortfolioManagerRegulationsandpoolingofprivate

capitalorproviding

strategies

falling

under

alternative

investment

funds

wouldbecoveredundertheAIFRegulation.

(ii) AIFandVCFRegulationTheexistingVCFRegulationsareproposedtobesubsumedinAIFRegulation

astheVCFswouldbeonekindofAIF. Theexistinginvestmentcriterionfor

VCF isproposed tobe retained substantially.After thecommencementof

AIFRegulation,theVCFRegulationwouldstandrepealedandVCFswouldbe

governedbyAIFRegulation.

(iii) AIFandFVCIRegulationForeign Venture Capital Investor (FVCI) regime was introduced in 2000,

toincentivizeforeignventurecapitalandprivateequityinvestorswhowere

otherwiseinvestingundertheFDIroutetoinvestthroughtheFVCIrouteso

thatsuchinvestmentistrackedbySEBIandalsotoattractmorecapitalfrom

suchplayers into thedomesticmarket.Asapartof this incentive,certain


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benefitsweremadeavailable to themascompared toFDI investors.Such

benefitsincludefreeentryandexitpricing,exemptionfromtheapplicability

oftheprovisionsunderthetakeovercodeintheeventoftransferofshares

from FVCIs to thepromoters, FVCIbeing accordedQualified Institutional

Buyerstatus,exemptionof lockinpost IPO(subjecttocertainconditions),

etc.Inview

ofthe

above

benefits,

several

investors

inrecent

times

are

consideringinvesting in IndiaundertheFVCIrouteascomparedtotheFDI

route.

FVCIarerequiredtomake66.67% inunlistedequityshareorequity linked

instrumentsofunlistedcompany.FVCIcan invest its100% investiblefunds

inSEBIregisteredVentureCapitalFund(VCF). FVCIRegulationisproposed

to be retained and not subsumed in AIF Regulation. However, FVCI

RegulationmaybeamendedtoallowFVCItoinvestindifferentAIFsuchas

SMEFund,SocialVentureFundsinadditiontodomesticVCFs.

(iv) SocialVentureFunds(SVFs)The report of the subcommittee of the Central Board of Directors of

ReserveBankofIndiatostudyissuesandconcernsintheMFIsectorbyShri

Y.H.Malegam(MalegamCommittee)hasrecommendedcreationofSocial

VentureFunds (SVF) inconsultationwithSEBI. Ithasbeensuggestedthat

SVFwillbe targeted towards Social Investorswho arewilling to accept

muted returns, say10% to 12%. This fund could then invest in Micro

FinanceInstitution(MFIs)whichsatisfysocialperformancenormslaiddown

by the fund andmeasured in accordancewith internationally recognized

measurementtools.

Therefore,

aframework

for

SVF

asone

ofthe

AIF

has

beenproposed inthedraftregulation.

(v) AIFandFundManagersThe Fund Managers or Investment Managers of Alternative Investment

Funds areproposed tobe regulatedunder a framework for regulationof

InvestmentAdvisors.Sucha framework shallbeproposed to regulate the

advisoryfunctionsbeingperformedbyvarioustypesof fundmanagerssuch

asfundorassetmanagerstoMForwealthmanagersetc.

F. SEBI(ALTERNATIVEINVESTMENTFUNDS)REGULATIONS

1. To create regulations for alternative investment funds under the title SEBI

(Alternative Investment Fund)Regulationswhichwould registerand regulate the

formation of investment fundswhich raises capital from a number of HighNet

Worth investorswithaviewto investing inaccordancewithadefined investment

policyforthebenefitofthoseinvestors,interaliainthefollowingcategories:


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(i) VentureCapitalFund

(ii) PIPEFunds

(iii)

PrivateEquity

Fund

(iv) DebtFunds

(v) InfrastructureEquityFund

(vi) RealEstateFund

(vii) SMEFund

(viii) SocialVentureFunds

(ix) StrategyFund(ResidualCategory,includingallvarietiesoffundssuchas

hedgefunds,ifany).

2. ELIGIBILITYANDREGISTRATION

(1) ItwouldbemandatoryforalltypesofprivatepoolsofcapitalorinvestmentfundstoseekregistrationwithSEBI.

(2)Thefundscouldbeformedascompanies,trustsorbodycorporateincludingLLPstructure.

(3)The regulations would require that the fund manager/ asset managementcompanyor trusteesof the fundbespecified,andchangeof suchentitiesbe

reportedtotheregulator.

(4)Atthetimeofapplication,thefundwouldspecifythecategoryunderwhichitis

seekingregistration,thetargetedsizeoftheproposedfundanditslifecycleand

thetargetinvestor.

3. FUNDSTRUCTURE

(1)Fundsshallbecloseended.(2)Fund size can be revised upward up to XX% giving SEBI suitable reasons.

Minimuminvestmentamountwouldbespecifiedas0.1%offundsizesubjectto

a minimum floor of Rs.1crore. (The minimum investment criterion would


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preventretail investorsstraying intofundsandthegranularitywouldensurea

maximum number of investors as 1000 precluding the possibility that some

fundsmight disguise themselves as private poolswhile approaching a large

numberofretailinvestors.) IncaseofanAIFconstitutedascompanyorLLPthe

numberof shareholders orpartners shall not exceed fifty. The size ofunits

issuedwill

not

be

less

than

Rs.10

lakh.

(3)Funds may be raised only through private placement through informationmemorandum.

4. SETTINGUPOFFUND

(i) TheFundmaybe setupasa trust settledbya sponsororasanLLPwith

designated partners. The report of Committee on Technology Innovation

andVentureCapitalbyPlanningCommissionhas recommended topermit

alsoLLPstructureforVentureCapitalFunds.

(ii) ForobtainingregistrationwithSEBI,thefundwould:

a. Specifyitspurposeandstrategyb. Specifyproposedsizeoffundc. Determinehorizonofthefund,anddurationforwindingupd. Drawupthedrawdownschedule.

(v) SEBIregistrationwouldbeobtainedforeachtypeoffundschemeasperthe

regulation.

(vi)

Investorswould

be

sought

who

are

interested

ininvesting

insuch

funds

for

agivenhorizonforagivensizeofcommitment.

(viii) Investmentswouldbemadeaspertheobjectivesofthefund.

(ix) Atthehorizon,windingdownofthefundwouldbestarted.Windingdown

offundswouldhavetobecompletedwithinthedurationpromised.Method

ofdistributionwouldbestated inthe informationmemorandum. Ifanyof

theinvestmentsremainunliquidatedattheendoftheperiod,theywould

betakenupbytheDesignatedPartnersorSponsorsasthecasemaybe.

5. INVESTMENTRESTRICTIONS

TheinvestmentrestrictionsondifferenttypesofAIFswouldbespecifiedseparately

for each category of fund, as these would be the main differentiating criteria

betweenthedifferenttypesoffunds.Forinstance,IncaseofVCFs,theinvestment

restrictions and obligations which are presently applicable the VCF regulations

wouldbespecified,withsomeadditionalrestrictionstoensurethatfundsflowto


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early stage ventures only. For other types of funds, the investment restrictions

wouldbeonthelinesgivenbelow:

a. In the caseofPIPE funds, investmentswouldbe restricted to sharesof smallsized listedcompanieswhicharenot inanyofthemarket indices. PIPEfunds

maybe

allowed

access

tonon

public

information

while

carrying

out

due

diligence for PIPE transactions under a confidentiality agreement with

restriction indealinginsecuritiesforaparticulartimeframe.

b. In PE funds there would be mainly in unlisted companies or companiesproposedtobelisted.

c. For debt funds, the entire investment would be made in unlisted debtinstruments.Therewouldbe,however,facilityofconvertingdebtintoequityin

caseofnonfulfillmentofcovenants.

d. Forinfrastructureequityfunds,minimum2/3rdofthe investmentwouldbe inequity

ofinfrastructure

projects/companies.

e. ForRealEstateFunds,investmentcouldbeinRealEstateProjectsorshares intheSPVsundertakingRealEstateProjects.

f. Forstrategyfunds,thefundwouldbeguidedbythestrategyitspecifiesatthetimeof registrationwithnoother restrictions. Any fundoperating asHedge

FundshallberequiredtoberegisteredasStrategyFundunderAIFregulation.

g. For Social Venture Fundswill be targeted towards social investorswho arewillingtoacceptmutedreturns. Investmentswouldbemadeprimarily inthe

socialenterprisessuchasmicrofinancesector.

h. SME funds would be for investing in unlisted entities in the SMEs inmanufacturing services sector as also businesses providing infrastructure or

other support toSMEsorSMEcompanieswhichare listedorproposed tobe

listedinSMEexchangeorSMEsegmentofRSE.

6. CONCESSIONS/EXEMPTIONSFORAIF

1. Duediligencedoneby fundsprior to investing in listedcompanieswouldnotattractprovisionsofSEBIInsiderTradingRegulations.

2. AIFs suchasPIPE fundsor SME fundsorVCFswouldbe consideredasQIBs for thepurpose

of

QIPs

under

the

ICDR

Regulations

3. Investments in NBFCs which are Core Investment Companies, Asset FinanceCompanies,InfrastructureFinanceCompaniesorcompaniesengagedinMicroFinance

activitieswouldbepermittedfor alltypesofAIFs(otherthanstrategyfunds).

4. The requirementof lockinperiodofoneyear forpreIPO investmentswouldnotbeapplicable in respectof investmentsmadebyPEFunds,SVF andSMEFundson the

samelinesasforVCFs.


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7. CONDITIONSFOROPERATINGASAIF

Theregulationswouldprovidefor,interalia,thefollowing:

(i)

Therewould

be

mandatory

registration

ofallprivate

pools

offunds

/

schemes.

(ii) Adequate disclosures at the time of fund raising though a information

memorandum and continuous disclosures to investors of the fund at

periodic intervals as provided in contractual agreement. The relationship

between the investorand the fundwouldbegovernedby thecontractual

agreement between them. Standard disclosure documents would be

providedby the respective industryassociations. Anydeparture from the

documentswillberequiredtobehighlighted.

(iii) Contractual agreementwith investorswould stipulate thematerial terms

and conditions of the fund including the funds structure, its investment

strategy, the allocation of fees and costs, allocation of investment

opportunities, any firm coinvestment arrangements, the allocation and

distribution of profits, the content and frequency of investors reporting;

mechanismsforconflictanddisputeresolution,etc.

(iv) Any alteration to the fund strategy shallbemadewith the consentof at

least75%ofunitholders.

(v) Compensation arrangement on the basis of performance related

remunerationplus

acost

offund

management.

Related

disclosures

will

be

onthelinesofpresentPMS.

(vi) Responsibilitiesofthefundmanager/AMC/designatedpartnersortrustees

shallbeclearlydefined.

(vii) Identificationofconflictsofinterestandestablishmentofmechanismfor

managingtheseconflictsofinterest.

(viii) TheAIFshallpoolthemoneyfromHNI,institutionalinvestorsorcorporates

through

private

placement

and

shall

not

solicit

money

from

retail

investors.

Theminimum contribution from the investorswill be Rs.1 crore or such

higheramountasmaybespecifiedforaparticulartypeoffund.

(ix) The investorsmay be locked in the fund for aminimum period of three

yearsorsuchhigherperioddependinguponnatureandtenureoffundand

transferofunitsoffundsmaybeallowedafterlockinperiodandtradingof

unitsoffundstobelimitedtoamongstinstitutional/HNIinvestors.


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Page 14 of30

(x) Units may not be transferable immediately or only after lockin period

amongstinstitutional/HNIinvestorswhichmaybelistedafterlockinperiod

orafterspecificdurationatthechoiceofthefunds.

(xi)

Enablingprovisions

for

issuing

ofguidelines/

circulars

for

each

type

offund

containinginvestmentrestriction,minimumcorpus,minimumcontribution,

periodoflockinetc.

G. DRAFTAIFREGULATIONSFORPUBLICCOMMENTS

1. InthelightoftheabovebackgroundSEBIproposestoframeSEBI(AIF)Regulation2011, draft of which is enclosed. Public comments are invited on the draft

regulation. Comments may be forwarded by email toMs.Maninder Cheema,

DeputyGeneralManager([email protected])byAugust30,2011.

2. Commentsshouldbegiveninthefollowingformat:Nameofentity/person/intermediary

Sr.

No.

Draft AIF Regulation /sub regulation

alongwithno.ofthedraftregulation

Proposed/

suggestedchanges

Rationale

Issuedon:August01,2011


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Page 15 of30

Annexure

DRAFT INDICATIVEREGULATIONS

SECURITIESANDEXCHANGEBOARDOFINDIA

(AlternativeInvestmentFunds)Regulations,2011

S.O...(E).Inexerciseofthepowersconferredbysubsection(1)ofSection30readwith

clause (c) of sub section (2) and sub section 1(b) of section 12 of the Securities and

ExchangeBoardofIndiaAct,1992(15of1992),theSecuritiesandExchangeBoardofIndia

herebymakesthefollowingguidelinesnamely:

CHAPTERI

PRELIMINARY

Shorttitleand

commencement

1. (1) These regulations may be called the Securities and

Exchange Board of India (Alternative Investment Fund)

Regulations,2011.

(2) They shall come into force on such date as may be

specified by the Board by notification in the Official

Gazette.

Definitions 2. (1)Intheseregulations,unlessthecontextotherwiserequires,

(a) Actmeans the Securities and Exchange Board of India

Act,1992

(15

of1992).

(b)Alternative Investment Funds (AIF) means pooling or

raising of private capital from institutional or High Net

Worth Investorswithaview to investing it inaccordance

with a defined investment policy for benefit of those

investors and includes private pool of capital such as

private equity funds, Venture Capital Fund, PIPE Funds,

InfrastructureDebtFund,RealEstateFunds,SocialVenture

Fund, Strategic Funds, SME Fund etc. such other similar

funds asmaybespecifiedbyBoard,presentlynotcovered

under

the

SEBI

(Mutual

Funds)

Regulations,

1996,

and

SEBI

(Collective InvestmentSchemes)Regulations,1999orany

other regulations of SEBI to regulate fund management

activities.

(c)BoardmeanstheSecuritiesandExchangeBoardofIndia

establishedundersection3oftheAct.

(d)"Certificate"meansacertificateofregistrationgrantedby

theBoardunderregulation7.


16/30

Page 16 of30

(e)HighNetworth investormeans individualsorcorporateor

any other legal entity located in India or overseas who

investinAIFforavalueofnotlessthanonecrorerupees.

(f)Debt Fund means a private pooled investment vehicle

frominstitutionalinvestorsorHighNetworthinvestorsfor

makinginvestments

primarily

indebt

instruments

of

unlistedcompanies.

(g) Managermeans a fundmanageror assetmanagement

companyofAIF.

(h)PrivateEquityFundmeanspooled funds raisedprivately

from institutional orHighNetworth Investor formaking

investmentsprimarilyinvariousunlistedequityorunlisted

debt securities of companies requiring medium to long

termcapital todevelopandgrow.

(i)PIPE fund means private pooled investment vehicle

consisting capital from institutional or High Net worth

Investorswhichprimarilyinvestsinsharesofsmallersized

listed companies who are not able to obtain funding

throughothersources.

(j) Real Estate Fund means a private pooled investment

vehicle from institutionalorHighNetWorth investors for

investinginRealEstateprojectsorintheSPVsundertaking

RealEstateProjects.

(k) SME Fundsmeans aprivate pooled investment vehicle

from institutional, or High Net worth Investors used for

making investments primarily in unlisted entities in the

smalland

medium

enterprises

(SME)

inmanufacturing

servicesectors,asalsobusinessesproviding infrastructure

orothersupporttoSMEsorthoseSMEswhicharelistedor

proposedtobelistedinSMEexchangeorSMEsegmentof

anexchange.

(l) Strategy Fundmeans all thoseprivate investment fund

includinganyentityoperatingashedgefund,displayingany

one or a combination of some of the following

characteristics:

o poolingofcapitalfrominstitutionalorHighNetWorthInvestors

for

investment

in

securities,

derivatives

and

structuredproducts;

o morediverse risksorcomplexunderlyingproductsareinvolved.

(m) Venture Capital Fund means a private pooled

investment vehicle from institutional or high net worth

investors for providing equity seedcapital to startup or

new ventures or earlystage or to young or emerging


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Page 17 of30

companiesprimarilyinvolvedinneworunprovenproducts

orneworunproventechnologythroughundertakingsthat

havenotbeenpubliclylisted.

(n) Social Venture Fund means funds targeted towards

investors who are willing to accept muted returns and

investinsocial

ventures

such

asMFIs

which

satisfy

social

performancenormslaiddownbythefund.

(2) Wordsandexpressionsnotdefined in theseRegulations,

butdefinedinorundertheActortheSecuritiesContracts

(Regulation)Act,1956ortheCompaniesAct,1956,orany

statutorymodificationorreenactmentthereof,shallhave

the samemeaningashavebeenassigned to thembyor

underthoseenactments.

Scope 3. All Alternative Investment Funds in securities market,

irrespectiveoftheirlegaldomicilewhichcollectsitsfundfrom

institutional or high net worth investors in India or the

managerofsuchfundwhomanagesthefundforinvestments

inIndia,shallbeboundbytheseregulationsandbesubjectto

registrationandoversightoftheBoard.

CHAPTERII

REGISTRATIONOFALTERNATIVEINVESTMENTFUNDS

Registrationof

Alternative

Investment

Funds(AIF)

4. (1) Onand from thecommencementof these regulations,no

entityshall

pool

and

manage

any

private

pool

ofcapital

frominstitutionalorHighNetWorthinvestorsforinvesting

in securities or act as anAlternative Investment Fund or

any of such fund as specified under Sub Regulation (2)

unlessithasobtainedacertificateofregistrationfromthe

Board:

Provided that an Alternative Investment Fund acting as

suchbeforethecommencementoftheseregulationsmay

continue to do so for a period of sixmonths from such

commencement

or,

if

it

has

made

an

application

for

registrationundersubregulation(2)withinthesaidperiod

ofsixmonths,tillthedisposalofsuchapplication.

(2) The funds already registered as VCF under SEBI (VCF)

Regulation,1996shallcontinuetoberegulatedbythesaid

regulationstilltheexistingfundorschememanagedbythe

fundiswoundup.


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Page 18 of30

(3) Anapplicationforgrantofcertificateshallbemadeinthe

prescribed form alongwith the application fee for any of

thefollowingcategoriesinsuchformatasmaybespecified

bytheBoard.

a. VentureCapitalFundb. PIPEFundc. PrivateEquityFundd. InfrastructureEquityFunde. DebtFundf. RealEstateFundg. SMEFundh. SocialVentureFundi. StrategyFund

(4) TheBoardshalltakeintoaccountrequirementsasspecified

inregulation5,6,7inchapterIIIandIVforthepurposeof

consideringgrantofregistrationforaspecificcategory.

(5)Withoutprejudice to thepowersof theBoard to takeany

actionundertheActorregulationsmadethereunder,the

certificateofregistrationanditsrenewalshallbevalidfora

periodofthreeyearsortenureoffundfromthedateofits

issuetotheapplicant.

EligibilityCriteria 5. (1)Forthepurposeofthegrantofacertificatetoanapplicant,

toestablish

an

Alternative

Investment

Fund

inacategory

of

fundasspecified insubregulation(2)ofRegulation4,the

Boardshallconsiderthefollowingconditionsforeligibility,

namely:

a. whether Alternative Investment Fund will beconstituted in form of trust or as limited liability

partnershiporcompany;

b. whether the sponsor or fund manager or AssetManagementCompanyofAIFhas relevantexperience

in

managing

private

pools

of

capital

and

has

managers

with sufficient experience in fund or asset orwealth

and portfolio management of securities or other

financialassets;

c. whetherthesponsororfundmanagerofAIFhasatrackrecord,professionalcompetence,financial

soundness,experience,generalreputationoffairness

andintegrity.


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Page 19 of30

d. whether the applicant is an investment company,investmenttrust,investmentpartnership;or

e. whetherthesponsororfundmanagerofAIFisanassetmanagement company, investment manager or

investment management company or any other

investmentvehicle

incorporated

inIndia;

f. the applicant or sponsor or manager has not beenrefusedacertificatebytheBoard.

g. whether theapplicantorsponsormanager isa fitandproperperson.

(2) For the purposes of determining whether an applicant

orAIF isa fitandproperperson theBoardmay take into

accountthecriteriaspecifiedinScheduleIIoftheSecurities

andExchangeBoardof India (Intermediaries)Regulations,

2008.

(3) For determining the nature or category of the fund, the

Boardshalltake intoconsiderationthe substanceandnot

thenomenclaturegivenbytheapplicantandtheapplicant

shall be required to resubmit the application for

appropriate category as specified by the Board failing

whichtheapplicationshallbeliabletoberejected.

Furnishingof

information,

clarification,etc.

6. (1)TheBoardmayrequiretheapplicanttofurnishsuchfurther

information or clarifications regarding the nature of the

fundorfundmanagementactivitiesandmatterconnected

theretotoconsider

the

application

for

grant

ofa

certificate.

(2)Theapplicantor,itsprincipalofficerorthesponsorshall,if

so required, appear before the Board for personal

representation.

Considerationof

application

7. (1)TheBoard,whileconsideringapplicationforregistrationof

an AIF, shall take into account all matters relating to

investmentobjectiveofthefund,thetargetinvestors, size

of

the

fund,

investment

style

or

strategy

etc.,

and

in

particular the following, namely,whether the sponsor or

fundmanagerofAIF:

(a) iseligiblebyprofessionalqualificationofthemanagers

oftheAIF;

(b) has the necessary infrastructure like adequate office

space, and man power to effectively discharge his


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Page 20 of30

activities;

(c) has any past experience in the business of buying,

sellingordealinginsecuritiesormanagingassets.

(d)isafitandproperperson;

(e)satisfiestheeligibilitycriteriaspecifiedinsubregulation

(1)ofRegulation

5

(2)BoardmaygrantcertificateforanyspecificcategoryofAIF,

ifitissatisfiedthattheapplicantfulfilltherequirementsas

specifiedintheregulationsandhaspaidregistrationfeeas

specified in the Schedule and registration canbe granted

withsuchconditionasmaybedeemedappropriate.

Procedurewhere

registrationis

refused

8. (1)Where the Board is of the prima facie opinion that a

certificate ought not to be granted to the applicant, it

would afford an opportunity of hearing to the applicant

beforetakingafinaldecision.

(2)Where an application for a certificate is rejected by the

Board,theorderofrejectionshallbecommunicatedtothe

applicantassoonasmaybe.

(3)Where an application for a certificate is rejected by the

Board,theapplicantshallforthwithceasetoactasanAIF,

provided that nothing contained in this regulation shall

affect the liability of the applicant towards its existing

investorsunder

law

oragreement.

CHAPTERIII

INVESTMENTCONDITIONSANDRESTRICTIONS

Investment

Strategy

9. (1) The AIF shall state investment strategy, investment

purpose and business model in its information

memorandumtotheinvestors.

(2) Anyalterationtothefundstrategycanbemadewiththe

consent

of

atleast

75%

of

unit

holders.

Investmentin

Alternative

InvestmentFund

10. (1) TheAIF shall normally fulfill the conditions as specified

hereunderunlessaseparaterequirementhasbeenspecified

forspecificcategoryoffundbytheBoard:

(a) TheminimumsizeoftheFundshallbeRs.20crore.

(b) Fundsizeshallbespecifiedatthetimeoflaunchof the


21/30

Page 21 of30

Fund.However,itmayberevisedupwardupto25%

aftergivingtheBoardsuitablereasons.

(c)Minimuminvestmentamountshallbe0.1%offundsize

subjecttoaminimumamountofRs.1crore.

(d) ThesponsoroftheFund(ifintheformofatrust)orthe

DesignatedPartner

(ifinthe

form

LLP),

ordirectors

(ifin

theformofacompany)shallcontributefromtheirown

accountanamountofinvestmentequaltoatleast5%of

theFundandthisshallbelockedintilltheredemption

bylastinvestorinthefund.

(e) ThesponsorortheDesignatedPartner(ordirectors)

shalldiscloseitsinvestmentinthefundtotheinvestors;

(f) AIFshallnotsolicitorcollectmoneyorfundfrompublic

oranyretailinvestorsthroughissueof prospectusor

offerdocumentsoradvertisement;

(g) AIFcansolicitprivatepooloffundormoney fromthe

institutional,professionalorHighNetworthinvestors

throughprivateplacementbyissueofinformation

memorandum;

(h) ThenumberofshareholdersorpartnersinAIF

constitutedascompanyorLLPshallbelimitedtofifty.

(i) TheinvestorsinAIFmayhavenoredemptionrights

exercisableforaspecifiedperiodfromthedateofthe

initialinvestmentinaccordancewiththeinvestment

policyofthefund.

(j) AIFormanagersshallnotengageinsellingindividual

assetsofinvestee

company

for

making

aprofit.

(k) Themannerofwindingupofthefundshallbespecified

intheinformationmemorandum.

(2) Notwithstanding the conditions as specified in sub

regulation (1), the Board may specify different

requirementsorcriteriaforeachcategoryofAIFs.

TermoftheFund 11. (1) Thefundsshallbecloseendedandthedurationoffund

shallbedeterminedatthetimeofregistration.

(2)

The

tenure

if

the

fund

shall

be

minimum

for

a

period

of

5

years.

(3) Extensionof the tenureof the fundmaybepermitted

upto 2yearsonlyatatimeandtobeapprovedbya75%

ofthebeneficiaryortheunitholders.

(4) Intheabsenceof consentofunitholders, theAIFshall

fully liquidate the fund within a one year period

followingexpirationofthefundterm.


22/30

Page 22 of30

(5) Ifanyoftheinvestmentsremainunliquidatedattheend

of tenure of the fund, the sponsor, manager or

designated partner shall be liable to take up such

investments.

Schemes

12.

Eachfund

shall

be

astand

alone

entity

and

no

further

schemescanbelaunchedunderoneregistration.

General

Investment

Conditionsand

Restrictions

13. (1) (a) The AIF shall invest in securities or such other

instrumentsasmaybespecified foreachtypeoffundby

theBoard;

(b)Boardmayimposeappropriaterestrictiononuseoffund

for speculative or highly leveraged activities by

particularcategoryofAIFtoensurestabilityandintegrity

ofthemarket;

(c) Boardmayimposeappropriaterestrictiononinvestment

by AIF in complex structured products without the

consentoftheinvestor;

(d) Boardmayspecifycriteriaforchargingperformancefee

ofthemanagersofAIF;

(e) Anysignificantchange inthe investmentstrategyorkey

investmentteamofthefundshallallowthebeneficiaries

to reconsider and reaffirm positively their decision to

commit.

(f) AIFshallnotinvestmorethan25%corpusofthefundin

oneinvesteecompany.

(g) AIFshallnot invest in(i)NBFC(excluding Infrastructure

Finance

Company,

Asset

Finance

Company,

Core

Investment Company or companies engaged in

microfinanceactivity incaseAIF isnotastrategy fund),

(ii)GoldFinancing(excludinggoldfinancingforjewellary)

(iii)Activitiesnotpermitted andunder IndustrialPolicy

ofGovernmentofIndia(iv)anyotheractivitywhichmay

bespecifiedbytheBoard.

(2) An AIF which has been granted registration under a

particular category cannot change its category

subsequent

to

registration.

Commitment of

Manager/Sponsor

/Designated

partner

14. (1)Themanagerorsponsorordesignatedpartnershallhave

aninterestnotlessthan5%ofthefundwhichshouldbe

contributed by them and not through the waiver of

managementfees.

(2)Themanageror sponsorordesignatedpartner shallbe

restricted from transferring their real or economic


23/30

Page 23 of30

interest inAIF inorder toensure continuing alignment

withtheAIF.

(3) Themanager,sponsorordesignatedpartnershallnotco

invest in select underlying deals but rather the entire

equityinterestshallbeviathepooledfundvehicle.

(4)Key

persons

shall

devote

substantially

alltheir

business

timetothefund.

(5) Any fees generated by an affiliate of the manager,

sponsorordesignatedpartnersuchasanadvisoryorin

house consultancy,whether charged to theFundoran

underlyingportfolio company, shallbedisclosed to the

investors.

CHAPTERIV

INVESTMENTCONDITIONSINRESPECTOFDIFFERENTCATEGORYOFFUNDS

Conditionsforall

AIFs

15. (1) The provision of Chapter III and V shall be applicable

mutatis mutandis to all categories of fund specified in this

chapter.

(2) The Board may specify additional detailed guidelines

relating to investment restrictions, disclosure requirements,

reportingrequirementsandanyotherrelevantissuesforeach

typeoffund,asmayberequired.

Investment

Conditionsfor

VentureCapital

Funds

16.

(1)Theobjectiveof aVentureCapitalFund (VCF) shallbe topromote new ventures using new technology or with

innovativebusiness ideas at early stageor startup stage

primarily through acquisition of equity seed capital or

minoritystake.

(2)The total investment in theventure capital fund shallnotbemorethanRs.250crore.

(3)VCF shall not invest in any company that is promoted,directlyorindirectlybyanyofthetop500listedcompanies

bymarketcapitalizationorbytheirpromoters.

(4)At

least

66.66%

of

the

Investment

shall

be

made

in

the

unlistedequitysharesoftheinvesteecompany.

(5)Notmorethan33.33%ofthefundcanbeinvested(i)intheunlisteddebtordebtinstrumentsoftheinvesteecompany

where equity investmenthasbeenmade; (ii)Preferential

allotmentofequity sharesofa listed company subject to

lockinperiodofoneyear;(iii)Theequitysharesorequity

linked instruments of financiallyweak company or a sick


24/30

Page 24 of30

industrialcompanywhosesharesarelisted.

(6)The fund shall not subscribe towarrants of the investeecompany.

Investment

Conditionsfor

PIPEFunds

17. (1)PIPE fund shall invest in shares of small sized listedcompanies

which

are

not

part

ofany

market

indices

in

exchangeshavingnationwideterminals.

(2)At least66.66%ofthe Investmentshallbemade inequitysharesofsuchinvesteecompany.

(3)Notmorethan33.33%ofthefundshallbeinvestedinthedebtordebt instrumentsofsuchcompanieswhereequity

investmenthasbeenmade.(4)NotwithstandinganythingcontainedinSEBI(Prohibitionof

InsiderTrading)Regulations,1992,aPIPEfundmayacquire

securitiesofinvesteecompanyandmaybegivenaccessto

nonpublicinformationsubjecttofollowingconditions;(i) Access to nonpublic information is given only for the

purpose of carrying due diligence for PIPE transactions

underaconfidentialityagreement,

(ii)ThePIPEfundshallbeprohibitedfromsellingordealing

insecuritiesofinvesteecompanyforaperiodoffiveyears,

(iii)The investeecompanyandthePIPEfundshalldisclose

any acquisition or dealing in securities pursuant to such

duediligenceaspertheapplicableregulations.ConditionsforPE

Funds

18. (1)APrivateEquityFundmay investinunlistedequity,equitylinked

instruments

ofcompanies

which

require

funding

to

develop and grow with the primary focus on matching

mediumtolongtermcapitalofinvesteecompanies.

(2)The Private Equity Funds shall invest atleast 50% of thefund in equity shares or equity linked instruments of an

unlistedcompany.

(3)APEfundshallnot investmorethan50% intheequityorequity linked instrumentsofacompanywhichisproposed

tobelisted

(4)APEfundshallnot investmorethan50% inunlisteddebtof

a

company

where

the

fund

has

already

made

equity

investment.

Conditionsfor

DebtFunds

19. (1)DebtFundshallinvestatleast60%ofthecorpusindebtordebt instruments of unlisted companies, not more than

25% of which may in convertible debt, with minimum

maturityof5years.

(2)Debtfundmayinvestremaining40%in


25/30

Page 25 of30

(i)securitizeddebtinstruments

(ii)debtsecuritiesoflistedcompany

(iii)equitysharesofunlistedcompanywheredebtfundhas

investedinunlisteddebtinstruments.

(3)The Debt Fund will have a system of credit assessmentirrespective

ofthe

fact

whether

the

investment

israted

or

unrated.

Conditionsfor

Infrastructure

Fund

20. (1) An InfrastructureFundshall investat least66.67%of itscorpus in the equity or equity linked instruments of

infrastructure companies or SPVs of infrastructure

projects as defined by CentralGovernment or Planning

Commission.

(2) An infrastructure Fund may invest upto 33.33% of itscorpusindebtinstrumentsofinvesteecompanywhereit

has made equity investment or in securitized debt

instruments of an infrastructure company or SPV of

infrastructureproject.

Conditionsfor

SMEFunds

21. (1)TheSMEFundshallinvestprimarilyintheunlistedequityor

equity linked instruments of SMEs in manufacturing,

servicessectorasalsobusinessesproviding infrastructure

or other support to SMEs as defined by theMinistry of

SmallandMediumEnterprises.

(2) The SME fundmay also invest in equity or equity linked

instruments of SME companies which are listed or

proposedtobe

listed

inSME

exchange

orSME

segment

of

RSE and provision of subregulation (4) of regulation 17

willbeapplicablemutatismutandistoSMEfund.

(3)TheSMEFundmayenterintoanagreementwithmerchant

banker to subscribe to the unsubscribed portion of an

public issue or to receive or deliver securities in the

processofmarketmakingunderChapterXAofSEBI(ICDR)

Regulation,2009.

RealEstateFunds 22. (1)TheRealEstateFundsshallinvestatleast75%ofitscorpusin

Real

Estate

Projects

or

fully

built

properties

or

in

the

SPVsengagedinRealEstateProjects.

(2)TheRealEstateFundsmayinvestupto25%corpusinalliedsectorsofRealEstate.

(3)RealEstateFundshallinvestatleast66.67%ofitscorpusinequityofequitylinkedinstruments,andupto33.33%ofits

corpus indebtordebt instrumentsofrealestateprojects

orSPVsengagedinrealestateprojects.


26/30

Page 26 of30

SocialVenture

Funds

23. (1)TheSocialVentureFundshallbetargetedtoinvestorswho

arewillingtoacceptmutedreturns,say10%to12%.

(2) The fund shall invest in social enterprises such asMFIs

whichsatisfysocialperformancenorms laiddownbythe

fund.

Conditionsfor

StrategyFunds

24. (1) TheStrategyFundmayspecifyanystrategyinanyclassof

financialinstruments.

(2) TheStrategyFundmay invest inderivatives,andcomplex

structural products subject to requirement of suitability

anddisclosuretoinvestors.

(3) The Strategy Fund may leverage or float long or short

strategyfundsubjecttoconsentfromtheinvestorsinthe

fund,subjecttoamaximum leverageasmaybespecified

bytheBoard.

(4) The Strategy Fundwhich employ leverage, shall disclose

information regarding the overall level of leverage

employed,theleveragearisingfromborrowingofcashor

securities and the leverage arising from position held in

derivatives, the reuse of assets and themain source of

leverageintheirfund.

(5) TheStrategyFundshallensurethattheleveragelimitsare

reasonable and shalldemonstratehow it complies at all

timeswiththosereasonablelimits.

OtherAIF

25.

The

Board

may

lay

down

framework

for

private

funds

other

thanthefundsspecifiedintheseregulations.

CHAPTERV

GENERALOBLIGATIONSANDRESPONSIBILITIES ANDTRANSPERANCY

General

obligationsof

Alternative

Investment

Funds

26. (1)AIFsshallprovidetotheBoardinformationforsystemicrisk

purposes (including the identification, analysis and

mitigationofsystemicrisks).

(2) AIFs shall review policies and procedures, and their

implementation,

on

a

regular

basis,

or

as

a

result

of

business developments, to ensure their continued

appropriateness.

(3) ThesponsorormanagerofAIFshallappointacustodianfor

safekeeping of securities of the fund if AUM is over 500

crore.

(4) PerformancefeeorincentivestructureformanagersatAIF

shall be such that it does not encourage excessive risk


27/30

Page 27 of30

takingorhighleverageorhighspeculativeactivities.

(5) AIF shall inform the Board in case of any change in the

sponsor,managerordesignatedpartners.

(6) In caseof changeof controlof sponsoror fundmanager,

priorapprovalfromtheBoardshallbetakenbytheAIF.

Avoidanceof

Conflictof

Interest

27. (1) ThesponsorormanagerofAIForAIFshallactinafiduciary

capacitytowardsitsinvestorsandshalldiscloseallconflicts

ofinterestsasandwhentheyariseorseemlikely.

(2) The fiduciary duty of manager, sponsor or designated

partnershallprecludeprovisionsthatallowforthemtobe

exempted or indemnified for conduct constituting a

materialbreachofthefiduciaryduties.

(3) AIFs shall establish and implement written policies and

procedurestoidentify,monitorandappropriatelymitigate

conflictsof interestthroughoutthescopeofbusinessthat

thefirmconducts.

(4)Thesponsor,managerordesignatedpartnerofAIForAIF

shallnotindulgeinfrontrunningorinsidertrading.

(5)Managers, designated partners and sponsors of AIF shall

abideby high level principles on avoidance of conflicts of

interestby associatedpersons asmaybe specifiedby the

Board.

Information

Memorandum

28. (1) AnAIFshalldisclosethroughaplacementmemorandumto

aprospectiveinvestorallmaterialinformationaboutitself,

itsbusiness,

itsdisciplinary

history,

the

terms

and

conditions on which it offers investment services, its

affiliations with other intermediaries and such other

information as is necessary him to take an informed

decisiononwhethertoavailitsservices;

(2)AIFtoprovidetotheirinvestors,initiallyandonanongoing

basis,acleardescriptionoftheinvestmentpolicy,including

descriptionsofthetypeofassetsandtheuseof leverage;

redemption policy in normal and exceptional

circumstances; valuation, custody,administration and risk

management

procedures;

and

fees,

charges

and

expenses

associatedwiththeinvestment;

Transparency

andDisclosures

29. AIFshallensuretransparencyanddisclosureofinformationto

investorsonthefollowing:

(1) AIFshallprovidedetailedfinancial,riskmanagement,

operational,portfolio,andtransactionalinformation

regardingfundinvestments.


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Page 28 of30

(2) Allfees(i.e.,transaction,financing,monitoring,

management,redemption,etc.)generatedbythemanager

ordesignatedpartnershallbeperiodicallydisclosedto

investors.

(3) Allfeeschargedtothefundoranyportfoliocompanybyan

affiliateofthe

manager,

sponsor

ordesignated

partner

shallalsobedisclosed.

(4) Themanager,sponsorordesignatedpartnershallprovide

estimates of quarterly projections of capital calls and

distributions.

(5)Anyinquiriesbylegalorregulatorybodiesinanyjurisdiction

shallalsobedisclosed.

(6) Any material contingency or liability arising during the

fundslifeshallbedisclosed.

(7) Anybreachofaprovisionoftheinformation

memorandum,agreementorotherfunddocumentsshall

bedisclosed.

(8) Activitiesrelatedtochangesintheactualorbeneficial

economicownership,votingcontrolorchangesortransfers

tolegalentitieswhoareapartytoanyrelateddocumentof

thefundshallbedisclosedtounitholders. Suchactivities

includebutarenotlimitedto:

a) Formationofpubliclistedvehiclesb) Saleofownershipinthemanagementcompanyto

otherparties

c) Publicofferingofsharesinthemanagementd) Formationofotherinvestmentvehicles

(9) AnnualreportsofAIFshallincludeportfoliocompanyand

fundinformationonmaterialrisksandhowtheyare

managed.Theseshouldinclude:

a) Concentrationriskatfundlevelb) Foreignexchangeriskatfundlevelc) Leverageriskatfundandportfoliocompanylevelsd) Realizationrisk(i.e.changeinexitenvironment)atfund

andportfoliocompanylevels

e) Strategyrisk(i.e.changein,ordivergencefrom,investment

strategy)

at

portfolio

company

level

f) Reputationriskatportfoliocompanylevelg) Extrafinancialrisks,includingenvironmental,socialand

corporategovernancerisks,atfundandportfolio

companylevel

(10) AIFshallprovidefinancialinformationforPortfolio

CompaniesandFundinformationattheendofeachyear

(within90daysofyearend)toinvestors.


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Page 29 of30

(11)Providequarterlyreportsforportfoliocompaniesandfund

informationattheendofeachquarter(within45daysof

theendofthequarter)toinvestors.

Obligationof

FundManager

30. Thefundmanagershallbeobligedto;

(1)Address

allinvestor

complaints.

(2)ProvidetotheBoardanyinformationsoughtbyBoard.

(3)MaintainallrecordsasmaybespecifiedbytheBoard.

(4)Totakeallstepstoavoidconflictofinterestasspecifiedin

theseregulations.

Dispute

Resolution

31. AnAIFshalllaydownprocedureforresolutionofdisputes

betweentheinvestors,AIFormanagersordesignatedpartner

suchasthroughmediation,conciliationorarbitration.

Powertocallfor

information

32. (1)TheBoardmayatanytimecallforanyinformationfroman

AIF or its manager or sponsor or designated partner or

trusteeoraninvestororpartneroritslenderwithrespect

to anymatter relating to its activity as anAIF or for the

assessmentofsystemicriskorpreventionoffraud.

(2)Where any information is called forunder subregulation

(1) it shall be furnishedwithin the time specified by the

Board.

Maintenanceof

Records

33. (1) The AIF shall be required to maintain following records

describing;

(a)Theassetunderthescheme/fund

(b)Valuation

policies

and

practices

(c)Tradingpracticesorinvestmentortradingstrategies

(d)Particularsofinvestorsandtheircontribution

(e)Analyticalorresearchmethodologies

(2) The recordsunder subregulation (I) shallbemaintained

foraperiodoffiveyearsafterthewindingupofthefund.

CHAPTERVI

PROCEDURE

FOR

ACTION

IN

CASE

OF

DEFAULT

Liabilityfor

actionincaseof

default

34. (1) An AIFwho contravenes any of the provisions of the Act,

regulationsmaybedealtwith inthemannerprovidedunder

the Securities and Exchange Board of India (Intermediary)

Regulations,2008.

(2) Subregulation (1) shall not prejudice the operation of

sections11,11B,11Dor24orChapterVIAof theActorof

anyotherlawforthetimebeinginforce.


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CHAPTERVII

MISCELLANEOUS

Powerofthe

Boardtoissue

clarifications.

35. In order to remove any difficulties in the application or

interpretation of these regulations, the Board may issue

clarifications and guidelines in the form of circulars or issue

separatecircular

orguidelines

orframework

for

each

categoriesoffunds.

Delegationof

powers

36. Thepowersexercisableby theBoardunder these regulations

shallalsobeexercisablebyanyofficerof theBoardtowhom

suchpowersaredelegatedbytheBoardbymeansofanorder

madeundersection19oftheSecuritiesandExchangeBoardof

IndiaAct,1992(15of1992).

RepealandSaving 37. 1. TheSecuritiesandExchangeBoardofIndia(VentureCapitalFund)Regulations,1996herebystandrepealed.

2. Notwithstandingsuchrepeal:a. Anythingdoneoranyactiontakenorpurportedtohave

beendoneor taken, including registrationor approval

grantedtoany fundorscheme, feescollected,scheme

announced, registration or approval, suspended or

cancelled, any inquiry or investigation commenced

under the said regulations, shall be deemed to have

beendoneortakenunderthecorrespondingprovisions

oftheseregulations;

b. Any application made to the Board under the saidregulations and pending before it shall be deemed to

havebeenmadeunderthecorrespondingprovisionsof

theseregulations.

SCHEDULE

Securities and Exchange Board of India

(Alternate Investment Funds) Regulations, 2011

See regulations 4(3) and 7(2)

FEES

Part A

AMOUNT TO BE PAID AS FEESApplication Fee Rs.1,00,000

Registration Fee Rs.5,00,000

Part B1. The fees specified above shall be payable by bank draft in favour of The Securities and

ExchangeBoardofIndiaatMumbai.

Concept Paper on Regulation for Alternative Investment

Documents