Venture capital and Various types of alternate investment Funds

Alternative Investment Fund or AIF refers to funds established or incorporated in India which is a privately pooled investment vehicle that collects funds from super-rich investors, whether Indian or foreign, for investing by a defined investment policy for the benefit of its investors.

Category I AIF:
* Venture capital funds (Including Angel Funds)
* SME Funds
* Social Venture Funds
* Infrastructure funds
* Category II AIF
* Category III AIF

Venture Capital: Venture capital is a type of private equity, a form of investment fund set up to invest in startup and small- to medium-sized enterprises with strong growth potential but do not have access to capital markets. Venture capital generally comes from well-off investors, investment banks, and other financial institutions. They not only inject funds into a new firm but also provide a simultaneous input of skills needed to set the firm up, design its marketing strategy, organise and manage it. The finance is also available for high technology and funds to turn research and development into commercial production even in the pre-start stage.

This type of investment capital is known as venture capital and those investors are called venture capitalists. In partnership with the entrepreneur, the venture capitalist acts as a trigger in launching new businesses and as a catalyst in stimulating existing firms to achieve optimum performance.

SME Funds: As per SEBI regulations, SME funds fall under category 1 AIF (alternative investment fund). These funds require a minimum investment of Rs.1 crore and the minimum lock-in is for 3 years with an additional extension option of 2 years. In addition, to be classified as an SME AIF, they need to invest a minimum of 75% of their assets in listed or proposed-to-be-listed or unlisted SME companies. These funds generate returns when the SME is listed or when the company reports substantial growth post-funding. If the fund delivers returns over the minimum return (say 8%) then the fund management team takes a share of the excess returns.

SME Funds: As per SEBI regulations, SME funds fall under category 1 AIF (alternative investment fund). These funds require a minimum investment of Rs.1 crore and the minimum lock-in is for 3 years with an additional extension option of 2 years. In addition, to be classified as an SME AIF, they need to invest a minimum of 75% of their assets in listed or proposed-to-be-listed or unlisted SME companies. These funds generate returns when the SME is listed or when the company reports substantial growth post-funding. If the fund delivers returns over the minimum return (say 8%) then the fund management team takes a share of the excess returns.

Social Venture Fund (SVF): Social Venture Fund (SVF) investors provide risk capital and support to social enterprise businesses that aim to solve social or environmental problems in exchange for equity or a portion of the enterprises’ profits. A Social Venture Fund (SVF) is an alternate investment fund that invests 75 per cent or more of its corpus in unlisted securities or partnership interests of social ventures that satisfy social performance norms defined by the fund. The fund may accept from and give grants to social ventures and may accept restricted or muted returns.

Infrastructure Funds: An infrastructure fund is an investment scheme that invests primarily in facilities and utilities that provide essential services to communities. These can include airports, roads, seaports, railways, hospitals, education facilities, water supply, gas and electricity and telecommunications facilities.

Category 2 AIF: SEBI clarified that a Cat II AIF can invest in debt securities in addition to equity and equity instruments of investee companies. SEBI clarified that to compute the threshold on diversification, the manager should consider 25% of the investible funds i.e. total commitment of the fund net of estimated expenditure for administration and management. As per the AIF Regulations, the manager or sponsor of a Category II AIF is required to have a minimum continuing interest in the AIF of not less than 2.5% of the fund’s corpus or INR 5 crores, whichever is lower.

Category 3: Category 3 AIFs invest in securities of listed as well as unlisted investee companies, derivatives, complex or structured products, or other AIF units. The minimum ticket size for investing in Category III AIFs is Rs 1 crore. They can be open-ended or closed-ended funds. For a closed-ended fund, the minimum tenure is three years. The minimum ticket size for investing in Category III AIFs is Rs 1 crore. This category of AIFs is permitted to take leverage positions of up to two times the total fund corpus. The income earned by this fund is subject to taxation at the AIF level and depends on the structure of incorporation of the AIF as a trust, LLP, or company.