Page 205 - DCOM510_FINANCIAL_DERIVATIVES

Financial Derivatives

Notes

Caselet SEBI (Alternative Investment Funds) Regulations 2011

n August 1, 2011, the Securities and Exchange Board of India (SEBI) issued a
concept paper discussing the proposed introduction of the SEBI (Alternative
OInvestment Funds) Regulations, 2011 (AIF Regulations) for public comments. At
present, the Investment Management Regulation is limited to the Mutual Fund Regulation,
the Collective Investments Schemes Regulations, the Venture Capital Funds Regulation,
and the Regulation of Portfolio Managers. There is a need to recognise Alternative
Investment Funds (AIF) such as PEs or VCs as asset classes that are distinct from promoter
holdings, creditors, and public investors.

The salient provisions of the proposed SEBI (Alternative Investment Fund) Regulations
that would register and regulate the formation of investment funds, which raises capital
from a number of high net worth investors with a view to investing in accordance with a
defined investment policy for the benefit of those investors, are as follows:
The SEBI (Venture Capital Funds) Regulations, 1996 shall be replaced by the SEBI
(AIF) Regulations, 2011.
All categories of AIFs such as (a) Private Equity Fund, (b) Venture Capital Fund,
(c) Private Investment in Pubic Equity (PIPE) Fund, (d) Debt Fund, (e) Infrastructure
Fund, (f) Real Estate Fund, (g) Social Venture Fund, (h) Small and Medium Enterprises
(SMEs) Fund, and (i) Strategy Fund are mandatorily required to obtain a certificate
of registration from the SEBI. The funds already registered under the VCF Regulations
would continue to be regulated by the same regulations until the existing fund or
scheme is wound up.
The AIF will be required to state the size of the fund, its investment strategy,
investment purpose, and business model in an information memorandum to the
investors.

The minimum size of the AIF has to be ` 200 million. However, the fund size can be
revised upward (up to 25 percent) after providing suitable reasons to the SEBI. The
minimum investment amount would be specified as 0.1 percent of the fund size,
subject to a minimum floor of ` 10 million. The AIF Regulations require the sponsor
of the fund to commit to invest at least 5 percent of the fund, which shall be locked-
in till the redemption by all investors.
All AIFs are required to be close-ended, and the duration of the fund shall be
determined at the time of registration. The tenure of the fund shall be for a minimum
period of five years, and an extension of up to two years may be granted if consent
for such extension is obtained from 75 percent of the beneficiaries. The fund has to
be liquidated within one year following the maturity of the fund term, and all
unliquidated investments need to be acquired by the AIF’s sponsor.
The AIFs are not permitted to invest in (i) NBFC (excluding Infrastructure Finance
Company, Asset Finance Company, Core Investment Company, or companies engaged
in microfinance activity, if the AIF is not a strategy fund), (ii) gold financing, (iii) activities
not permitted under the Industrial Policy of the Government of India, and (iv) any other
activity that may be specified by the SEBI. An AIF that has been granted registration
under a particular category cannot change its category after registration. An AIF shall
not invest more than 25 percent of the fund in one Investee Company.
Source: http://www.nseindia.com/content/us/ismr_full2011.pdf

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