The securities market watchdog, Securities and Exchange Board of India (SEBI), met on August 6, 2021 to make amends to regulations governing — Alternative Investment Funds (AIFs). The regulatory changes are said to ease compliance for AIFs while streamlining regulatory practices and enhancing flexibility in investing.
Before we deep-dive into the key highlights of the recent amendments, let’s look at what AIFs are and why we should be paying close attention to them — especially now!
AIFs are vastly different from traditional investments like debt securities and public equities. These funds are privately collected and further invested in infrastructure projects, private equity, venture capitals, hedge funds, etc.
AIFs are typically categorised into three kinds: Category I includes social impact, SME and infrastructure funds; Category II encompasses private equity, venture capital and debt funds; and Category III involves public markets. As of 2021 there are close to 700 AIFs that have maintained a steady growth rate of 15x since 2015 with a whooping INR 4.5 trillion in investments.
Why is this relevant?
The Indian investment landscape has been in overdrive despite the pandemic. The VC funding ecosystem has seen $3 billion in fundraising — a solid 40% more than 2019. Not surprisingly, 2021 witnessed 12 companies achieve unicorn status and several IPO- ready startups. Bottom line: with the robust venture ecosystem of today, AIFs are bound to thrive!
SEBI’s recent regulatory changes could not have been timed better. Let’s take a look.
- For starters, AIFs will have to invest 75% of investable funds in enlisted equity shares and equity-linked avenues of venture capital undertakings/in companies listed/proposed to be listed on a SME exchange/SME segment of an exchange. Additionally, restrictions on investments in the remaining investable venture capital funds have been waived off.
- Secondly, SEBI has maintained that the minimum grant amount of INR 25 lakhs for Category I AIFs (dealing with social venture funds) shall not apply to grants received from accredited investors.
- Thirdly, AIFs can now give away partly paid investment units to represent a part of the total capital committed. Lastly, SEBI requires AIF to file Private Placement Memorandums (PPMs) with registered merchant banks. Simply put, AIFs will have to share particulars like: terms of the offering, investment risks, and details about the company selling securities.
The larger picture looks promising!
According to data collected by SEBI in 2021 AIFs held commitments worth INR 82,228 crores. The prime objective of investors has been to diversify their portfolio and make the most of rapid expansion of tech start-ups and digital transformations triggered by the pandemic.