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Welcome AIF Rules!

Published on Sat, May 26,2012 | 10:51, Updated at Sat, May 26 at 16:26Source : |   Watch Video :

2 rounds of consultations have done the alternative investment fund regulations a world of good. Because the final regulations out this week are being cheered by most in the industry. Since there's nothing to complain about no long whining discussion on AIF. Instead Payaswini Upadhyay lists the top 5 changes that impact domestic fund activity.


'Positive', 'a job well done', 'great effort'- that's how the domestic fund industry is lauding SEBI's Alternative Investment Fund or AIF guidelines.


Under the guidelines, 3 categories have been laid down Category I includes Venture Capital, SME, Social Venture, and Infrastructure Funds


Category II includes those funds that do not fall into Category I and do not undertake leverage or borrowing such as Private Equity, Debt and Fund of Funds and hedge funds or funds that have diverse, complex trading strategies using leverage fall under Category III

Depending on the kind of fund and hence the category, funds will get specific incentives and tax pass through.


Prakash Nene

Managing Director, Multiples Alternate Asset Management

"For the incentive for AIF Category I is for eg there is a new regime which has just come out that when you're investing at a premium in a company, then there could be issues in terms of the premium being treated as income in the hands of the investee company – now VCFs are exempt from that. Perhaps they will extend this to AIF 1, they will not do to AIF II. Similarly there is a TDS pass through for the VCF today i.e. income distributed by VCF, you don't have to deduct tax at source. Something like that may not be available to AIF II."


Sidharth Shah

Head-Funds Practice, NDA

"For other two categories, there is no clarity given in the regulations. For those categories, one would still need to depend on general provisions for taxation of Trust- a specific determinate Trust- and also rely on the famous AIG ruling which basically gives certain principles of pass through. So, for them, till the time clarity is brought in, they will need to rely on those provisions for a pass through."


Inclusion of domestic hedge funds under AIF is the second important change. For these funds, SEBI will provide operational standards, conduct of business rules, prudential requirements, restrictions on redemption and conflict of interest- all this on a case-to-case basis.


Sidharth Shah

Head-Funds Practice, NDA

"There have been large number of portfolio managers who are keen to bring in strategies- hedge fund strategies in the domestic market but for the lack of appropriate regulatory framework, they were not able to do so because on one hand they had a Portfolio Manager Regulation which required segregation of accounts and on the other hand, it had mutual fund regulation which is too restrictive for a hedge fund strategy. Recognition of hedge funds as a category under the new regulation will definitely encourage more sophisticated products to be developed by the fund managers."


Challenges in the transition period is the third key aspect of the AIF regulations. SEBI registered funds can achieve their targeted corpus under the old Venture Capital Funds Regulations. The unregistered funds will have to register within 6 months- until then, they cannot raise fresh money


Prakash Nene

Managing Director, Multiples Alternate Asset Management

"There are few challenges in transition- one of course is that people who want to go into AIF II now because there are no restrictions there but they may not have the minimum size per investor which is what is prescribed as Rs 1 cr- they'll have to go, interact with SEBI to try and get an exemption for this. Then there are certain conditions that have been laid down for AIF II- what kind of trust deed should be there, what kind of private placement memorandum should be there- so if you existing documents have not covered these things, then you'll have to make amendments to the existing documents, go back to SEBI, ask for exemption for some of those stringent conditions. This process may take 3-6months."


A maximum of 1000 investors and minimum Rs 1 crore of investment per investor- AIF rules impose this condition on all funds but it may impact real estate funds in particular.


Sidharth Shah

Head-Funds Practice, NDA

"I think a large number of domestic real estate funds had depended on relatively more retail participation from investors- ranging from Rs 5 lakh to 25 lakh in most cases- and they are the ones who are going to feel the pinch of the new regualtions because suddenly they will not be able to target that HNI segment for which Rs 1cr may still be a significant amount of capital to commit to a single AIF. And that's where their investment strategy may need to change to target ultra-HNI, institutional or even corporate capital."


Ensuring corporate governance and investor protection- the fifth and perhaps the most important aspect of the AIF guidelines. Conflict of interest by sponsor, associated party transactions, extensive disclosures, minimum ticket size- by mandating all of this SEBI has given a fillip to governance and investor interest. And this probably makes the AIF guidelines a regime that’s made most stakeholders happy; at least for now.


In Mumbai, Payaswini Upadhyay


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