What is an Alternative Investment Fund (AIF)?
The AIF is a pooled private equity vehicle that raises funds from investors, whether Indian or foreign, to invest in accordance with a defined investment policy for the benefit of its investors. An AIF may take the form of a trust, a corporation, a limited liability partnership or a corporation.
The AIF regulation seeks to extend the scope of regulation to unregulated funds in order to achieve systemic stability, increase market efficiency, foster new capital formation and protect consumers.
Who are not covered
At present, the AIF Regulation does not apply to mutual funds, mutual funds, family trusts, ESOPs and other employee welfare trusts, holding companies, special purpose entities, funds managed by securitization or reconstruction companies and any pool of funds directly regulated by any other regulator in India.
An AIF should seek to fit broadly into one of three categories –
Category I: The following are covered by Category I
1. Funds investing in start-up or start-ups, social enterprises, SMEs or infrastructure
2. Other sectors or areas that the government or regulators consider socially or economically desirable, including venture capital funds
3. AIF having positive effects on the economy, for which certain incentives or concessions could be considered by SEBI, the Indian government or other Indian regulators
Category II AIF: The following categories are covered by category II
1. AIF for which no specific incentive or concession has been granted by the government or other regulatory body
2. Who shall use no means other than meeting the daily operational requirements of this Regulation
3. Which includes private equity funds, debt funds, funds of funds and other funds not classified in categories I or III
Category III Alternative Funds: The following persons are covered by Category III
1. AIFs, including hedge funds, that trade to generate short-term returns;
2. Who use various or complex trading strategies
3. Who can use leverage, including investing in listed or unlisted derivatives
Applicability of the AIF regulations to real estate funds
After understanding what an AIF is and its broad categories, we examine whether the AIF regulation is applicable to real estate funds.
First, AIF must apply for registration under their implementing regulations in one of the three categories mentioned above. Therefore, if a Fund does not fall into any of the above three categories, it will not apply to SEBI.
If we look at Category 1, registration is required for funds that invest in start-up or start-ups, social enterprises, SMEs or infrastructure
If we look at the definition of infrastructure, the explanation of rule 2 (m) states that the infrastructure must be as defined by the Indian government from time to time.
And in everyday language, the term usually refers to the technical structures that support a society, such as roads, water supply, sewers, electrical networks, and so on.
telecommunications, etc., and can be defined as "the physical components of interdependent systems providing essential products and services to enable, maintain or improve the living conditions of society.
As a result, the infrastructure does not include real estate activities or construction activities, as these activities involve investing in land, developing it through the construction of apartments, townships and others. residential and commercial projects.
But if the Real Estate Fund conducts some projects for social purposes, such as buying land for charitable purposes, etc. the fund can then be covered by social venture capital funds.
The clause further states that "or other areas or areas that the government or regulators consider to be socially or economically desirable and other alternative investment funds as specified;"
The AIF regulation was notified a few days ago to date and no other AIF funds have been specified in Category 1 by the government. Moreover, what the government or regulators consider socially and economically viable is a very broad concept. However, until the government publishes specific inclusions in category 1; a real estate fund will not be covered by category 1 and will therefore not require registration.
In addition, the clause also states that – Alternative investment funds that are generally perceived as having positive spinoffs on the economy and for which the Board of Directors or the Government of India or the United States. other regulators in India might consider providing incentives or concessions will be included
By adding these lines to category 1, SEBI has made Category 1 very vague and subject to litigation and litigation since its intention with positive spin-offs on the economy is unclear and unclear. Different people or organizations may have a different opinion about this, which would result in unnecessary litigation and difficulties for business owners. However, until clarification is provided, business owners should exercise caution when deciding to apply for registration under the AIF regulations.
Category II Alternative Fund
We now examine whether a real estate fund falls under the Class II Notice
If we look at the funds covered by category II above, they
1. Do not enter categories I and III
2. must not borrow or borrow other than to meet the daily operational needs and conditions permitted by this by-law;
3. Should be financed such as private equity funds or debt funds for which no specific incentive or concession is given by the government or another regulator.
For Class I real estate funds, we note that at present they do not fall under category I and do not fall under category III as they are essentially hedge funds. In addition, the government does not provide incentives or concessions specific to the real estate sector. Therefore, if we examine the applicability of real estate funds in category II, these funds may qualify for Category II hedge funds if they do not use financial leverage or do not borrow, except for short-term needs.
Impact of alternative funds on real estate funds
Under these regulations, the minimum investment amount must be 1 crore of Rs per investor. As a result, attracting investor funds would become difficult for real estate funds, which used to raise less than 1 million INR from investors. Now, they would need to find high-value investors, although this is not the only challenge for those who form national corpora. They must now also invest 2.5% of the corpus or 5 billion rupees, whichever is less, to ensure the alignment of the risk of the management company with that of the investor. In addition, a single investment in a company or project can not exceed 25% of the entire corpus.
In addition, a real estate fund registered in the form of a SENC would also be covered by the FIA Regulations. In an LLP structure, since investors are also partners, the risk of misuse of investor rights is very low. Consequently, the application of the AIF Regulation to the LLP structure would reduce the flexibility offered by such a structure.
If we look at the AIF regulation from a short-term perspective, given the challenging fundraising environment today, the higher size of investor notes could pose some problems and limit some asset class growth, but in the long run, these regulations appear to have an element of maturity to play a central role in developing and shaping the future of alternative asset classes in India. It is also clear that alternative investments are more sophisticated and risky than equity and debt investments and that, as long as the market is not mature, it is recommended that only HNIs and well-informed investors make an investment. investment in this asset class and once the market is mature, it is open. to all. In the long run, we could see more investments in the alternative asset class (in terms of quantity and maturity) because of the increased investor confidence in these funds.