Alternative Investment Fund

For a developing economy like India investment is crucial for public infrastructure. Which of the following is incorrect w.r.t Alternative Investment Funds (AIFs)?

1.      Category I AIFs are those who invest in start-ups or early stage ventures or social ventures that government considers socially or economically viable.

2.      Category II AIFs are those funds are allowed to invest anywhere in any combination, but cannot take debts, except for day-to-day operation purposes.

3.      Category III AIFs are funds that make short-term investments and then sell, like hedge funds, come under this.

Select the correct answer

a       1, 2 and 3 only
b       1 and 2 only
c       1 and 3 only
d       None of the above

Solution (d)

All are correct

Types of AIFs

AIFs are categorized into the following three categories, based on their impact on the economy and the regulatory regime intended for them:

Category I AIF are those AIFs with positive spillover effects on the economy, for which certain incentives or concessions might be considered by SEBI or Government of India; Such funds generally invests in start-ups or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable. They cannot engage in any leverage except for meeting temporary funding requirements for not more than thirty days, on not more than four occasions in a year and not more than ten percent of the Venture Capital Funds, SME Funds, Social Venture Funds and Infrastructure Funds. Giving effect to the announcement by Union Finance Minister on angel investor pools in the Union Budget 2013-14, SEBI in June 2013 has approved a framework for registration and regulation of angel pools under a sub- category called ‘Angel Funds’ under Category I- Venture Capital Funds.
Category II AIF are those AIFs for which no specific incentives or concessions are given. They do not undertake leverage or borrowing other than to meet the permitted day to day operational requirements, as is specified for Category I AIFs. eg. Private Equity or debt fund.
Category III AIF are funds that are considered to have some potential negative externalities in certain situations and which undertake leverage to a great extent; These funds trade with a view to make short term returns. These funds are allowed to invest in Cateogy I and II AIFs also. They receive no specific incentives or concessions from the government or any other Hedge Funds (which employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives).