Overview - AIF License
Alternative Investment Funds (AIFs) have emerged as a significant avenue for pooling private capital to invest in diverse asset classes beyond traditional stocks and bonds. In India, the Securities and Exchange Board of India (SEBI) regulates AIFs, ensuring transparency and investor protection.
What is Alternative Investment Funds (AIFs)?
An AIF is a privately pooled investment vehicle that collects funds from sophisticated investors, both Indian and foreign, for investing in accordance with a defined investment policy. These funds cater to high-net-worth individuals and institutions seeking exposure to alternative asset classes such as private equity, venture capital, real estate, and hedge funds.
AIFs play a significant role in alternative asset investment by allocating funds to sectors such as private equity, venture capital, hedge funds, start-ups, pre-IPO and post-IPO investments, real estate, commodities, and even rare collectibles. Due to their potential for high returns, AIFs have become a preferred choice among family offices and affluent investors.
AIF Registration and Classification in India
In India, AIFs operate under the regulatory framework set by the Securities and Exchange Board of India (SEBI) through the SEBI (Alternative Investment Funds) Regulations, 2012. These regulations are designed to promote transparency, protect investor interests, and ensure that AIFs comply with financial governance norms.
AIFs are classified into three categories based on their investment focus and risk appetite. Selecting the appropriate category is crucial when registering an AIF, as each category comes with specific guidelines and compliance obligations. While most AIFs are structured as Trusts, some fund managers opt for Limited Liability Partnerships (LLPs) as their preferred registration structure.
Types of Alternative Investment Funds (AIFs) in India
AIFs are classified into three categories, each offering investment opportunities in non-traditional assets like start-ups, private equity, hedge funds, pre-IPO & post-IPO investments, real estate, and commodities.
- Category I AIF– Encouraging Early-Stage Investments
Category I AIFs focus on investing in start-ups, SMEs, infrastructure, and social ventures. Includes Venture Capital Funds, Angel Funds, Social Venture Funds, Infrastructure Funds, and SME Funds.
- Minimum Corpus: ₹10 crore
- Sponsor/Manager Contribution: 2.5% or ₹50 lakh, whichever is lower
- Angel Fund Restriction: Cannot be publicly traded
- Category II AIF – Private Equity and Debt-Focused Funds
Includes private equity funds, debt funds, and funds of funds. Focuses on growth capital without leveraging investments.
- Minimum Corpus: ₹10 crore
- Sponsor Contribution: 2.5% or ₹5 crore, whichever is lower
- Category III AIF – Hedge Funds & High-Risk Strategies
Category III AIFs are structured to generate short-term gains using advanced trading strategies. These funds actively engage in leverage, arbitrage, derivatives trading, and hedge fund strategies to maximize returns.
- Minimum Corpus: ₹20 crore
- Sponsor Contribution: 5% or ₹10 crore, whichever is lower
Taxation Methods for AIF Registration
The taxation of Alternative Investment Funds (AIFs) in India varies based on their category. While Category I and II AIFs follow a pass through taxation model—where investors are taxed directly—Category III AIFs are taxed at the fund level. Below is a breakdown of taxation methods for each category:
Taxation for Category I & II AIFs
- Long-term capital gains (holding period >1 year) are taxed at standard long-term capital gain rates.
- Unlisted shares and other assets attract a 20% tax.
- Listed shares are taxed at 20%, while short-term capital gains (holding <1 year) are generally taxed at 15%.
Taxation for Category III AIFs
Unlike the other categories, Category III AIFs are taxed at the fund level, making them less tax-efficient. The applicable tax rates are:
Eligibility Criteria for Getting AIF License
Registering an Alternative Investment Fund (AIF) in India requires adherence to specific eligibility criteria set by the Securities and Exchange Board of India (SEBI). Key requirements include:
- Legal Structure:
The AIF must be established as a trust, company, limited liability partnership (LLP), or body corporate.
- Minimum Corpus:
A minimum corpus is mandated based on the AIF category:
- Category I AIFs: ₹10 crore.
- Category II AIFs: ₹10 crore.
- Category III AIFs: ₹20 crore.
- Angel Funds: ₹5 crore.
- Sponsor/Manager Commitment:
The sponsor or manager must invest a minimum amount in the AIF
- Category I & II AIFs: 2.5% of the corpus or ₹5 crore, whichever is lower.
- Category III AIFs: 5% of the corpus or ₹10 crore, whichever is lower.
- Angel Funds: 2.5% of the corpus or ₹50 lakh, whichever is lower.
- Investor Contribution:
Each investor is required to invest a minimum of ₹1 crore. For angel investors in Angel Funds, the minimum investment is ₹25 lakh. Employees or directors of the AIF's manager can invest a minimum of ₹25 lakh.
- Number of Investors:
Each AIF scheme, excluding Angel Funds, is limited to a maximum of 1,000 investors. Angel Funds are restricted to 49 investors per scheme.
- Investment Team Qualifications:
The key investment team of the AIF's manager should possess adequate experience, with at least one member having:
- A minimum of five years' experience in managing pools of capital or in the securities business.
- A professional qualification in finance, accountancy, business management, commerce, economics, capital markets, or banking.
- Restrictions on Public Solicitation:
AIFs are prohibited from making public solicitations to raise funds. They must raise funds through private placements only.
How to Apply for AIF Registration
Registering an Alternative Investment Fund (AIF) with the Securities and Exchange Board of India (SEBI) requires following a structured application process. Below is a step-by-step guide:
Choose the Right AIF Category
- Category I AIF: Focuses on startups, SMEs, infrastructure, and other socially beneficial investments.
- Category II AIF - Includes private equity funds, debt funds, and funds of funds.
- Category III AIF - Engages in hedge funds and complex trading strategies for short-term returns.
Establish the Legal Entity
- The AIF must be registered as a trust, company, LLP, or body corporate before proceeding with SEBI registration.
- Draft the AIF trust deed or LLP/company incorporation documents as per regulatory norms.
Appoint a Fund Manager & Sponsor
- The fund must have an experienced investment manager and a sponsor who will contribute to the corpus.
- The sponsor must invest a minimum amount as per SEBI's regulations.
Prepare the AIF Registration Application
- Submit Form A along with the prescribed fees to SEBI.
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Provide necessary documents, including:
- Investment strategy and objectives
- Details of the fund manager and key personnel
- Legal structure documents (Trust Deed, LLP Agreement, or Articles of Association)
- Compliance and risk management policies
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Advantages of Securing an AIF License
Obtaining an Alternative Investment Fund (AIF) license opens up exclusive investment opportunities and offers numerous advantages for investors and fund managers. Here’s why registering an AIF is a smart move:
- Access to Private & High-Growth Investments
AIFs provide investors with exclusive opportunities to invest in private equity, venture capital, real estate, hedge funds, and distressed assets—sectors that are typically inaccessible to retail investors. This exposure to high-growth markets can result in superior long-term returns.
- Customizable Investment Strategies
Unlike traditional investment vehicles, AIFs allow fund managers to adopt tailored investment strategies based on market conditions, risk appetite, and investor preferences. This flexibility enhances potential returns while maintaining a structured approach to risk management.
- Professional Fund Management & Expertise
AIFs are managed by experienced professionals who utilize market insights, research, and strategic investment approaches to maximize returns. Their expertise ensures capital is allocated efficiently across diverse asset classes for optimized performance.
- Higher Return Potential with Alternative Assets
Since AIFs invest in non-traditional assets like unlisted shares, infrastructure projects, and structured debt instruments, they offer higher return potential compared to conventional mutual funds or stock market investments.
- Better Risk Allocation & Hedging
AIFs use advanced risk management techniques such as hedging, derivatives, arbitrage, and leverage to minimize risk exposure. This structured approach helps investors mitigate financial uncertainties while enhancing capital preservation.
- Market Credibility
Securing an AIF license from SEBI enhances the fund’s credibility, making it more attractive to high-net-worth individuals (HNIs), institutional investors, and global investors. Regulatory oversight also ensures transparency and investor protection.
- Expanding Investment Horizons Beyond Public Markets
Unlike traditional funds that focus on stocks and bonds, AIFs enable investors to explore highly specialized asset classes such as collectibles, commodities, and distressed assets. This diversification reduces dependence on public market fluctuations.
Compliance & Regulatory Requirements for AIFs
AIFs must adhere to SEBI regulations to ensure transparency, investor protection, and operational integrity. Key compliance requirements include:
- Annual Audit: Mandatory financial audits by a qualified auditor.
- Quarterly SEBI Reporting: Updates on portfolio performance, valuation, and strategy changes.
- Investment Valuation: Category I & II AIFs require valuations every six months (extendable to one year with investor approval). Category III AIFs must disclose Net Asset Value (NAV) quarterly.
- Investor Communication: Regular updates on fund performance and significant developments.
- Conflict of Interest Disclosure: AIFs must report any conflicts to SEBI and investors.
- Key Personnel Changes: SEBI must be informed of any fund management changes.
- Investment Limits – Compliance with SEBI-imposed restrictions on sectors, borrowing, and leverage.
- Custodian Appointment – Required for AIFs with ₹500+ crore corpus; mandatory for Category III AIFs.
- Record Maintenance – Detailed records of transactions and investor communications for regulatory review
- Regulatory Filings – Submission of annual returns and SEBI-mandated documents
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Some FAQs That GenZCFO Often Get Asked
AIFs are privately pooled investment funds that invest in non-traditional assets like private equity, hedge funds, venture capital, and real estate. They are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012.
AIFs are classified into three categories:
- Category I – Invests in start-ups, SMEs, infrastructure, and socially beneficial sectors.
- Category II – Includes private equity and debt funds without leverage.
- Category III – Employs complex trading strategies, such as hedge funds and derivatives.
- Category I & II AIFs: ₹10 crore (₹20 crore for Angel Funds).
- Category III AIFs: ₹20 crore.
The SEBI AIF registration process typically takes 3–6 months, depending on documentation accuracy and regulatory approvals.
- Annual audits of financial statements.
- Quarterly reporting to SEBI Investment valuations (every six months for Category I & II, quarterly NAV disclosure for Category III).
- Regulatory filings, including annual returns and investor reports.
Yes, custodians are mandatory for:
- All Category III AIFs
- AIFs with a corpus exceeding ₹500 crore
Only close-ended AIFs in Category I & II can list on stock exchanges, subject to SEBI guidelines. Category III AIFs cannot be listed.
AIF registration involves complex SEBI compliance, documentation, and regulatory filings. Our experts ensure a smooth end-to-end AIF registration process with 100% compliance.