Regulated by the Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012, AIFs provide a structured framework for pooled investment vehicles that raise capital through private placements and adhere to defined investment policies.
SEBI’s AIF Regulations aim to strike a balance between effective oversight and streamlined operations, enabling fund managers to operate with a relatively lean organizational structure. Eligibility requirements include a minimum of five years of professional experience in fund management or securities advisory, along with relevant qualifications such as Chartered Accountant (CA), Chartered Financial Analyst (CFA), or Master of Business Administration (MBA) in finance. The key investment team must collectively meet these criteria, and the designation of a compliance officer is mandatory. SEBI is the process of introducing an examination qualification as an alternative to the experience criteria, further simplifying the pathway for aspiring first-time fund managers.
The AIF regime is a continuously evolving regulatory framework, and first-time fund managers should be cognizant of SEBI’s strong focus on compliance in light of their objective of investor protection. Accordingly, first time fund managers should establish comprehensive compliance manuals and internal processes. This would be essential in order to adhere with the regulatory requirements and fulfilling the commitments made in their AIF documentation. These safeguards would therefore avoid/mitigate any potential future regulatory and/or investor actions. Additionally, they can leverage communication channels with SEBI via participation in reputed industry bodies to collectively voice their opinions and concerns, as SEBI has demonstrated a track record of being an understanding regulator.
While unregulated limited liability partnerships and other similar structures may at times appear to be the alternatives to regulated investment vehicles like AIFs for first-time fund managers, however, they may not comply with the regulatory requirements. It is therefore advisable for fund managers to avoid experimenting with these legally questionable structures. Instead, first-time fund managers may look towards an angel fund AIF license to begin with since it provides operational relaxations compared to other categories of AIFs. Despite certain investment restrictions applicable on the angel funds, the first-time fund managers who believe that the relaxations outweigh the restrictions, may at least make a beginning with such vehicles.
SEBI is also actively working on developing the accredited investor framework to provide exemptions for investors who meet specific income/asset/net worth criteria. Currently, accredited investors are exempt from the minimum capital commitment requirement otherwise prescribed for investment in AIFs. These options augur well for fundraising by the first-time fund managers who also have the opportunity to raise capital from non-resident investors under the automatic route as far as exchange control laws are concerned. Therefore, the first-time fund managers may not necessarily require an overseas vehicle to begin with and as they expand, they can explore overseas options, such as GIFT City, which the Government of India has been promoting through favourable policy measures, to raise overseas capital in a more tax efficient manner.The Indian Government’s commitment to economic welfare measures through AIFs underscores the sector’s importance in driving growth and fostering entrepreneurship. Institutions like the Small Industries Development Bank of India (SIDBI) manage dedicated Funds of Funds (FoFs) with a focus on startups and the Micro, Small, and Medium Enterprises (MSME) sector, which invest in AIFs targeting these segments. Initiatives such as the Self-Reliant India Fund (SRI) and the National Investment and Infrastructure Fund (NIIF) further contribute to the availability of domestic institutional capital for AIFs. Indian family offices, banks, insurance companies and overseas Development Financial Institutions (DFIs), have also recognized the potential of AIFs and made significant investments in them. Notably, SIDBI even provides certain relaxations for first-time fund managers in the equity space, such as allowing for a higher management fee and operating expense structure. Large private asset managers have also launched their FoFs further adding to the pool of capital available to AIFs.The future of AIFs as an asset class looks promising, with strong regulatory support and ample availability of capital. Now may be an opportune time for first-time fund managers to take the plunge and become a part of India’s remarkable growth story.
Tejesh Chitlangi is Senior Partner & Sushreet Pattanayak, Partner at IC Universal Legal
