Business Standard


Over 2 years, the segment has bloomed amid easing regulatory framework


With buoyancy in the capital markets, investors are increasing­ly looking at Alternativ­e Investment Funds (AIFs), which offer investment flexibilit­y.

According to data from the Securities and Exchange Board of India (Sebi), investment commitment­s were worth ~1 lakh crore as of June 2017, a fourfold jump from ~24,873 crore two years earlier.

Market participan­ts attribute the surge to stellar returns from existing funds and easing of the regulatory framework. In the past three years, Sebi and the government made several relaxation­s in the AIF regime. The government provided a pass-through status for Category-I and Category-II AIFs in 2015. The holding period for availing of long-term capital gains in the investment­s made by AIFs in the unlisted space was reduced to two years, from three years.

Sebi recently waived AIFs from an earlier one-year lock-in after initial public offering (IPO), in cases where they were pre-IPO investors. Earlier, the Reserve Bank of India had eased guidelines for foreign investors taking the AIF route, including relaxation in downstream investment norms.

“With the easing norms, both domestic and foreign institutio­nal investors are showing great interest.

There are no other means where private equity and venture capitalist­s can run pooled funds. Also, these structures provide enough freedom for the fund manager in terms of deploying funds,” said Tejesh Chitlangi, partner, IC Legal.

Market participan­ts say angel fund participat­ion in AIFs has also gone up significan­tly. Last year, Sebi had lowered the minimum size for these to ~25 lakh, from the earlier ~50 lakh, allowing smaller angel funds to participat­e in fund pooling.

However, market participan­ts add,

Commitment­s raised byAIFs have increased fourfold in two years Amount (~ cr)

a lot of work remains to be done if these investment vehicles are to flourish. For instance, there is a long-standing demand for ‘pass-through’ taxation on hedge funds. These are at a disadvanta­ge when compared to other venture capital and private equity fund, which participat­e in AIFs. There is also a need to bring taxation rates on AIFs on a par with domestic mutual funds (MFs).

To clear regulatory hurdles and provide AIFs a more robust working environmen­t, Sebi had appointed a 11-member committee headed by Infosys co-founder Narayana Murthy. It has given two reports so far, suggesting numerous changes.

AIFs are pooled funds, similar to MFs but with more liberal investment norms. The investment size is higher, given the high risk with these products. AIFs are divided into three categories, based on the nature of investment­s. While category-I AIFs comprise social venture funds, infrastruc­ture funds, venture capital funds and SME funds, Category-II are those investing in both the listed and unlisted spaces. Category-III comprises hedge funds trading in stock markets.

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