What is an Alternative Investment Fund [AIF]
AIF is an alternative investment fund regulation private pooled investment vehicle that collects funds from investors [whether in India or abroad] to invest in accordance with defined investment policies to benefit investors. AIF can be in the form of a trust or company or a limited liability partnership or a body corporate.
Why choose AIF
AIF regulations strive to extend regulation to unregulated funds to ensure system stability, increase market efficiency, and encourage the formation of new capital and consumer protection.
Who is not covered
Currently, AIF rules do not apply to mutual funds, collective investment plans, family trusts, employee stock ownership plans and other employee benefit trusts, holding companies, special purpose instruments, securitization or redevelopment company-managed funds, and any directly regulated funding pools in India. Any other regulatory agency.
AIF category
AIF needs to seek extensive registration within one of three categories -
Class I AIF: The following is included in Class I
1. Investing in funds for start-ups or early or social enterprises or SMEs or infrastructure
2. Other sectors or areas that the government or regulatory agency considers to be socially or economically desirable, including venture capital funds
3. AIFs with positive spillover effects on the economy, SEBI or the Indian government or other Indian regulators may consider certain incentives or concessions
The second type of AIF: The following content belongs to the second category
1. AIF, the government or any other regulatory agency does not give specific rewards or concessions
2. Except for the daily operation requirements allowed by these regulations, no leverage shall be made.
3. These include private equity funds, debt funds, fund funds, and other funds not classified as Class I or Class III.
Class III AIF: The following content belongs to Class III
1. AIF includes hedge funds that trade in order to obtain short-term returns;
2. Adopt multiple or complex trading strategies
3. Leverage leverage by investing in listed or unlisted derivatives
Applicability of AIF regulations to real estate funds
After understanding AIF and its broad categories, we will analyze whether AIF regulations apply to real estate funds.
First, AIF must seek registration in one of the three categories above in accordance with the AIF rules. Therefore, if the fund does not fall into any of the above three categories, it will not seek registration from SEBI.
If we look at category 1, then funds that invest in start-ups or early-stage or social enterprises or SMEs or infrastructure need to be registered.
If we look at the definition of infrastructure, the interpretation of Regulation 2[m] states that infrastructure should be defined by the Indian government from time to time.
By convention, this term usually refers to the technical structure that supports society, such as roads, water supplies, sewers, power grids,
Telecommunications, etc., can be defined as "the physical components of interconnected systems that provide goods and services that are critical to achieving, maintaining or improving social living conditions.
Therefore, the infrastructure does not include real estate or construction activities as it involves land investments and the development of land through the construction of apartments, towns and other residential and commercial projects.
However, if the real estate fund conducts certain projects for social purposes, such as buying land for charities, then the fund may be covered by social risk funds.
The article further states that "or other sectors or areas that the government or regulatory body considers to be socially or economically desirable and other alternative investment funds that may be designated;"
The AIF regulations were notified only a few days ago until the date, and the government did not specify other AIF funds in category 1. In addition, what the government or regulators consider to be socially and economically viable is a very broad concept. However, before the government specifically proposed the specific content of the first category, the real estate does not belong to the first category, so no registration is required.
In addition, the clause also stipulates - alternative investment funds that are generally considered to have a positive spillover effect on the economy and alternative investment funds that the Indian board of directors or government or other Indian regulators may consider offering incentives or concessions will be included
By adding these boundaries to Category 1, SEBI makes Category 1 very vague and open to disputes and litigation, as SEBI intends to have a positive spillover effect on the economy that is not defined or clarified. Different people or organizations may have different opinions on this, which will lead to unnecessary litigation and difficulties for business owners. However, before a clear understanding, business owners need to be cautious about the decision to seek registration under the AIF rules.
Class II AIF
Now let's see if the real estate fund belongs to the second type of AIF.
If we look at the funds covered in the second category above, they
1. Should not belong to the first and third categories
2. No leverage or borrowing shall be allowed except to meet the daily operational requirements and the provisions of this regulation;
3. Funds should be obtained, such as private equity funds or debt funds, and the government or any other regulatory agency does not give specific rewards or offers.
For the first type of real estate fund, we noticed that it does not belong to the first category or to the third category because they are basically hedge funds. In addition, the government did not give the real estate department specific rewards or concessions. Therefore, if we look at the applicability of the second type of real estate funds, if they do not take leverage or borrow, these funds may belong to the second type of AIF, except for short-term requirements.
AIF's impact on real estate funds
According to these regulations, the minimum investment amount for each investor must be 100 million rupees. Therefore, attracting investors' funds will become more difficult for real estate funds, which have raised less than INR 1 million from investors. Now they need to find high-value investors, although this is not the only challenge for raising domestic companies. They must now also invest 2.5% of the corpus or Rs 500 crore, whichever is lower, to ensure that the risk of the management company is consistent with the risk of the investor. In addition, a single investment in a company or project must not exceed 25% of the entire corpus.
In addition, real estate funds registered in the form of LLP will also be protected by AIF rules. In the LLP structure, since investors are also partners, the risk of abuse of investor rights is very small. Therefore, applying AIF regulations to LLP structures reduces the flexibility available for such structures.
in conclusion
If we look at the AIF rules from a short-term perspective, given the difficult funding environment today, the larger size of the investor's face may pose some challenges and may limit the growth of asset classes in some way, but obviously in the long run, these Regulations appear to have mature factors that can play a key role in the development and formation of alternative asset classes in India. It is also clear that alternative investments are more complex and risky than equity and debt investments, and it is recommended that only HNIs and informed investors can invest in this asset class before the market matures. Once the market matures, it will Be made public to everyone. In the long run, as investors' confidence in these funds increases, we may see more investment in alternative asset classes [in terms of volume and maturity].
Orignal From: Alternative Investment Funds Ordinance
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