Investment Conditions & Restrictions
Chapter III. Investment Conditions & Restrictions
Regulation 9. Investment Strategy.
9(1).
Every Alternative Investment Fund (AIF) is required to disclose certain key information to prospective investors through its Placement Memorandum.
The Placement Memorandum must clearly state the fund's investment strategy.
The Placement Memorandum must also specify the fund's investment purpose.
In addition, the fund must disclose its investment methodology.
These disclosures enable investors to understand how the fund intends to invest and manage their capital.
The information must be provided before investors make an investment decision.
9(2).
Any material alteration to the fund strategy requires the consent of the investors.
The consent must be obtained from at least two-thirds of the unit holders by value of their investment in the Alternative Investment Fund.
The approval threshold is based on the value of investment held, and not merely the number of investors.
The fund cannot implement a material change in its strategy without obtaining the required investor approval.
Example:
Suppose Growth Fund I is a Category II AIF with a corpus of ₹100 crore.
The fund's Placement Memorandum states that it will invest exclusively in unlisted technology start-ups.
After a few years, the Manager decides to change the strategy and begin investing in distressed debt and stressed assets.
This would constitute a material alteration of the fund strategy because investors originally invested based on the technology-focused investment mandate.
Before implementing the change:
The fund must obtain the consent of at least two-thirds of the unit holders by value of investment.
Assume the investors hold the following interests:
Investor A – ₹40 crore
Investor B – ₹30 crore
Investor C – ₹20 crore
Investor D – ₹10 crore
The total investment value is ₹100 crore.
Therefore, approval must come from investors representing at least ₹66.67 crore (two-thirds of ₹100 crore).
If Investor A and Investor B approve the change, the approving value is ₹70 crore.
Since ₹70 crore exceeds the required ₹66.67 crore threshold, the fund may proceed with the strategy change.
However, if only Investor A and Investor C approve, the approving value is ₹60 crore.
Since ₹60 crore is less than ₹66.67 crore, the proposed change cannot be implemented.
Regulation 10. Investment in Alternative Investment Fund
All categories of Alternative Investment Funds are subject to certain investment conditions prescribed under the AIF Regulations.
These conditions apply irrespective of whether the fund is registered as a Category I, Category II, or Category III AIF.
The conditions are as follows:
(a). Raising Funds Through Issue of Units
An Alternative Investment Fund may raise funds by issuing units to investors.
The fund may raise capital from Indian investors
The fund may also raise capital from foreign investors.
In addition, the fund may raise capital from Non-Resident Indians (NRIs).
The investment is made through the subscription of units issued by the Alternative Investment Fund.
Accordingly, the AIF is permitted to access both domestic and overseas sources of capital, subject to applicable laws and regulatory requirements.
Issuance of Social Units by Social Impact Funds
Under circumstances it is a Social Impact Funds and schemes of Social Impact Funds then:
In addition to issuing regular units, a Social Impact Fund may issue social units.
A scheme of a Social Impact Fund may also issue social units.
Social units are issued to investors who agree to receive social returns or social benefits instead of financial returns.
Accordingly, investors subscribing to social units contribute capital with the objective of supporting social impact rather than earning profits or investment returns.
(aa). Issuance of Units in Dematerialised Form
An Alternative Investment Fund must issue its units in dematerialised (demat) form.
The units are therefore held electronically rather than through physical certificates.
The requirement applies to the units issued by the Alternative Investment Fund.
The issuance of units in demat form is subject to the conditions specified by the Board from time to time.
(b). Minimum Corpus Requirement
Each scheme of an Alternative Investment Fund must have a minimum corpus of ₹20 crore.
The requirement applies at the scheme level and not merely at the fund level.
Accordingly, every scheme launched by an AIF must satisfy the prescribed minimum corpus requirement.
Reduced Corpus Requirement for Social Impact Funds
If it is a Social Impact Fund then:
Each scheme of a Social Impact Fund must have a minimum corpus of ₹5 crore.
Accordingly, Social Impact Funds are permitted to operate with a lower corpus than other categories of AIFs.
(c). Minimum Investment per Investor
An Alternative Investment Fund shall not accept an investment from any investor of less than ₹1 crore.
Accordingly, each investor must invest at least ₹1 crore in the AIF.
The fund cannot accept subscriptions below the prescribed minimum amount.
Reduced Minimum Investment for Employees and Directors
There is an exception to the general minimum investment requirement of ₹1 crore.
The exception applies to:
Employees of the Alternative Investment Fund.
Directors of the Alternative Investment Fund.
Employees of the Manager.
Directors of the Manager.
For such persons, the minimum investment amount is ₹25 lakh.
Accordingly, these persons are not required to meet the general threshold of ₹1 crore applicable to other investors.
An AIF may therefore accept an investment of ₹25 lakh or more from eligible employees or directors.
Exception for Accredited Investors
The minimum investment threshold does not apply to an Accredited Investor.
Accordingly, an Accredited Investor is not required to invest the prescribed minimum amount of ₹1 crore.
The relaxation recognizes that Accredited Investors are financially sophisticated investors who meet the eligibility criteria specified under the regulatory framework.
Exception for Certain Social Impact Funds
There is a further exception to the general minimum investment requirement.
It applies to a Social Impact Fund that invests only in securities of Not-for-Profit Organisations (NPOs).
Such NPOs must be registered or listed on a Social Stock Exchange.
In these cases, the minimum investment amount for an individual investor is ₹1,000.
Accordingly, the general minimum investment requirement of ₹1 crore does not apply to such investors.
(d). Continuing Interest of the Manager or Sponsor
The Manager or Sponsor must maintain a continuing interest in the Alternative Investment Fund.
The continuing interest must be at least 2.5% of the corpus, or ₹5 crore, whichever is lower.
The continuing interest must be held in the form of an actual investment in the Alternative Investment Fund.
The continuing interest must be maintained throughout the life of the fund.
The requirement cannot be satisfied through a waiver of management fees.
Accordingly, merely foregoing or reducing management fees does not constitute the required continuing interest.
The Manager or Sponsor must make a genuine capital contribution to the fund.
Enhanced Continuing Interest Requirement for Category III AIFs
There is a higher continuing interest requirement for Category III Alternative Investment Funds.
In the case of a Category III AIF, the Manager or Sponsor must maintain a continuing interest of at least:
5% of the corpus, or ₹10 crore, whichever is lower.
This is a higher threshold than the general requirement applicable to Category I and Category II AIFs.
The continuing interest must be maintained in the form of an actual investment in the fund.
(e). Disclosure of Manager's or Sponsor's Investment
The Manager or Sponsor must disclose its investment in the Alternative Investment Fund to the investors.
The disclosure must inform investors about the amount of capital invested by the Manager or Sponsor in the fund.
(f). Maximum Number of Investors
No scheme of an Alternative Investment Fund may have more than 1,000 investors.
The limit applies at the scheme level.
Accordingly, each individual scheme must ensure that the number of investors does not exceed the prescribed threshold.
A scheme cannot admit additional investors once the limit of 1,000 investors has been reached.
This restriction is intended to preserve the private placement nature of Alternative Investment Funds.
Exclusion of Accredited Investors from Investor Count
When calculating the number of investors in a scheme of an Alternative Investment Fund:
Accredited Investors are excluded from the computation of the investor limit.
Accordingly, Accredited Investors are not counted for the purpose of determining whether a scheme has crossed the maximum limit of 1,000 investors.
Only investors other than Accredited Investors are considered while calculating the number of investors in the scheme.
This allows a scheme to admit Accredited Investors without affecting compliance with the 1,000-investor cap.
Example:
A scheme has: 950 regular investors and 200 Accredited Investors.
For the purpose of the 1,000-investor limit, only the 950 regular investors are counted.
The 200 Accredited Investors are excluded from the calculation.
Therefore, the scheme is treated as having 950 investors, not 1,150 investors.
Applicability of the Companies Act, 2013
If the Alternative Investment Fund is constituted as a company then:
In such cases, the provisions of the Companies Act, 2013 are applicable to the AIF.
Accordingly, the AIF must comply not only with the AIF Regulations but also with the requirements of the Companies Act, 2013.
The fund remains subject to all corporate law obligations applicable to companies, including those relating to governance, management, filings, accounts, audits, and shareholder matters.
The AIF Regulations do not exempt a company-form AIF from compliance with the Companies Act.
Therefore, a company incorporated as an AIF must comply with both regulatory frameworks simultaneously.
An AIF formed as a company is governed by the AIF Regulations as well as the Companies Act, 2013.
(g).
Fund Raising Only Through Private Placement
An Alternative Investment Fund shall raise funds only through private placement.
The fund shall not solicit funds from the public.
The fund shall not collect funds through any public offer or public invitation.
Capital may be raised only from identified investors through a private placement process.
The private placement must be carried out in accordance with the provisions of the AIF Regulations and other applicable laws.
Regulation 11. Placement Memorandum
11(1).
Fund Raising Through Information Memorandum or Placement Memorandum
An Alternative Investment Fund shall raise funds through private placement.
The private placement must be carried out through the issuance of an Information Memorandum or Placement Memorandum.
The document may be called by any name, provided it serves the purpose of disclosing information to prospective investors.
The memorandum is the primary document through which the fund offers its units to investors.
It contains the material information relating to the fund, its structure, strategy, risks, and other relevant disclosures.
Investors are invited to invest in the fund on the basis of the information contained in such memorandum.
11(2).
Contents of the Information Memorandum / Placement Memorandum
The Information Memorandum or Placement Memorandum shall contain, inter alia, the following disclosures:
Conditions or limits on redemption of units.
The Information Memorandum or Placement Memorandum shall contain, inter alia, the following disclosures:
All material information about the Alternative Investment Fund and the Manager.
Background of the key investment team of the Manager.
Targeted investors.
Fees and all other expenses proposed to be charged.
Tenure of the Alternative Investment Fund or its scheme.
Conditions or limits on redemption of units.
Investment strategy of the fund.
Risk management tools and parameters employed by the fund.
Details of the key service providers associated with the fund.
Terms of reference of the committee constituted for approving the decisions of the Alternative Investment Fund.
Details of conflicts of interest that may arise in relation to the fund.
Procedures adopted to identify and address conflicts of interest.
Disciplinary history of the fund, Manager, Sponsor, or other relevant persons, as applicable.
The terms and conditions on which the Manager offers investment services.
Details of the Manager's affiliations with other intermediaries.
The manner of winding up the Alternative Investment Fund or its scheme.
Any other information necessary to enable an investor to make an informed investment decision.
Regulation 12. Schemes
12(1).
An Alternative Investment Fund may launch one or more schemes.
However, the launch of a scheme is subject to compliance with the filing requirements prescribed under the AIF Regulations.
Before launching a scheme, the AIF must file the Placement Memorandum with the Board.
The Placement Memorandum contains the disclosures relating to the scheme and its proposed operations.
The filing requirement enables the Board to receive and review the relevant information concerning the scheme.
Accordingly, a scheme can be launched only after complying with the requirement of filing the Placement Memorandum with SEBI.
12(2).
Filing of Placement Memorandum Before Launch of Scheme
The Placement Memorandum must be filed with the Board through a Merchant Banker.
The filing must be made at least 30 days prior to the launch of the scheme.
The Placement Memorandum cannot be filed after the scheme has been launched.
The filing must be accompanied by the prescribed fee.
The amount of the fee is specified in the Second Schedule to the AIF Regulations.
Compliance with this filing requirement is a prerequisite for launching the scheme.
Exemption from Scheme Filing Fees for the First Scheme
There is an exception to the requirement of payment of scheme filing fees.
The exemption applies only to the first scheme launched by an Alternative Investment Fund.
Accordingly, an AIF is not required to pay the prescribed scheme fee when launching its first scheme.
However, the exemption is limited to the first scheme only.
Any subsequent scheme launched by the AIF will be subject to the applicable scheme filing fees prescribed under the regulations.
12(3).
SEBI Comments on the Placement Memorandum
After the Placement Memorandum is filed, the Board may review it and communicate its comments, if any, to the Merchant Banker.
Such comments may be communicated before the launch of the scheme.
The Merchant Banker is responsible for ensuring that the comments of the Board are duly incorporated in the Placement Memorandum.
The required modifications must be made before the scheme is launched.
The scheme should not be launched without incorporating the comments communicated by the Board.
Exemption for Large Value Funds for Accredited Investors
Under circumstances it is a Large Value Fund for Accredited Investors (LVF-AI), then:
Such funds are exempt from the requirements contained in 12(2) and 12(3).
Accordingly, the provisions relating to:
Filing the Placement Memorandum through a Merchant Banker at least 30 days before launch/
Incorporation of SEBI's comments in the Placement Memorandum before launch,
do not apply to a Large Value Fund for Accredited Investors.
The exemption recognizes that:
Such funds are offered exclusively to Accredited Investors who are considered financially sophisticated and capable of evaluating investment risks independently.
12(4).
Declaration of First Close
An Alternative Investment Fund must declare the first close of its scheme.
The declaration must be made in the manner specified by the Board from time to time.
The AIF is required to comply with any procedure, timeline, format, or reporting requirements prescribed by SEBI for such declaration
The first close marks the stage at which:
The scheme achieves the level of commitments or fund-raising necessary to commence operations, in accordance with the applicable regulatory framework.
Example:
Consider a fund: Green Horizon Growth Fund (a Category II AIF)
The fund sets a target corpus of ₹500 crore.
It begins fundraising and collects commitment letters from investors.
After several months, it has secured commitments worth ₹200 crore — enough to begin deploying capital per its investment strategy.
At this point, the fund formally declares its first close.
From this date, the fund can start making investments.
The fund continues fundraising toward its target corpus (subsequent closes may follow).
SEBI is notified of the first close in the prescribed format and timeline.
12(5).
Even though 12(2) contains a proviso exempting the first scheme of an AIF from payment of scheme filing fees.:
That fee exemption available for the first scheme will not protect the AIF if it fails to comply with the first-close requirement.
If the AIF does not declare the first close of the scheme in the manner specified by SEBI then:
The original scheme filing effectively loses its utility for launch purposes.
Consequently, the AIF must make a fresh application for the launch of that scheme.
The fresh application must be accompanied by the requisite scheme fee prescribed in the Second Schedule.
So, even if the scheme was originally entitled to the "First scheme fee exemption:
The AIF will have to pay the scheme fee when refiling due to its failure to properly declare the first close.
Regulation 13. Tenure
13(1).
Every Category I Alternative Investment Fund and Category II Alternative Investment Fund must be close-ended.
Accordingly, such funds cannot remain open for subscriptions and redemptions indefinitely.
The tenure of the fund or scheme must be determined at the time of making the application.
The proposed tenure must be disclosed upfront to SEBI and investors.
Once determined, the fund is expected to operate for that specified period, subject to the provisions of 13(2).
13(2).
Every Category I Alternative Investment Fund and Category II Alternative Investment Fund must have a minimum tenure of three years.
The requirement applies to both:
The fund itself; and
Any scheme launched by such fund.
Accordingly, a Category I or Category II AIF cannot be established with a tenure of less than three years.
The tenure specified in the application and Placement Memorandum must comply with this minimum requirement.
13(3).
Schemes of a Category III Alternative Investment Fund may be either open-ended or close-ended.
Unlike Category I and Category II AIFs, Category III AIF schemes are not required to be close-ended.
The fund may therefore structure its schemes according to its investment strategy and operational requirements.
An open-ended scheme permits investors to enter and exit the scheme in accordance with its terms and applicable regulations.
A close-ended scheme operates for a fixed tenure determined by the fund.
13(4).
Calculation and Modification of Tenure
This provision applies to close-ended schemes of Alternative Investment Funds.
The Board may specify the manner in which the tenure of a close-ended scheme is to be calculated.
The Board may also specify the manner in which the tenure of such a scheme may be modified.
Accordingly, AIFs must calculate and modify the tenure of their close-ended schemes in accordance with the framework prescribed by SEBI from time to time.
The method of calculating tenure and the procedure for extending, reducing, or otherwise modifying tenure are therefore governed by SEBI's directions and circulars.
13(5).
Extension of Tenure of a Close-Ended AIF
The tenure of a close-ended Alternative Investment Fund may be extended.
The extension may be granted for a period of up to two years.
Such extension is not automatic and requires investor approval.
The approval must be obtained from at least two-thirds of the unit holders by value of their investment in the Alternative Investment Fund.
The approval threshold is based on the value of investments held, and not merely the number of investors.
Without obtaining the required approval, the tenure of the fund cannot be extended.
Example:
A close-ended AIF has a tenure of 8 years and wishes to extend its tenure by 2 years.
The investors hold:
Investor A – ₹40 crore
Investor B – ₹30 crore
Investor C – ₹20 crore
Investor D – ₹10 crore
Total investment value = ₹100 crore.
Approval must be obtained from investors representing at least ₹66.67 crore of investment value.
If Investor A and Investor B approve the extension, the approving value is ₹70 crore.
Since ₹70 crore exceeds the required threshold, the tenure may be extended.
Extended Tenure Extension for Accredited Investors only Funds
There is an exception to the general rule that permits a tenure extension of only up to two years.
It applies specifically to an Accredited Investors Only Fund.
Such a fund may extend its tenure by up to five years.
The extension is not automatic and requires investor approval.
The approval must be obtained from at least two-thirds of the unit holders by value of their investment in the Accredited Investors Only Fund.
The approval threshold is based on the value of investments held, and not on the number of investors.
Upon obtaining the required approval, the fund may extend its tenure for a period not exceeding five years.
Additional Conditions for Extension of Existing Accredited Investors only Fund Schemes
There are certain additional condition to the extension of tenure of an existing scheme of an Accredited Investors Only Fund.
Even where the required investor approval has been obtained, the extension remains subject to any conditions specified by the Board.
The Board may prescribe additional requirements, restrictions, procedures, disclosures, or compliance conditions relating to such extension.
The fund must comply with those conditions before or while extending its tenure.
The conditions may be specified by SEBI from time to time through regulations, circulars, guidelines, or other directions.
13(6).
Winding Up on Expiry of Tenure
With respect to a close-ended Alternative Investment Fund or its scheme:
If the required consent for extension of tenure is not obtained from the unit holders, the fund or scheme cannot continue beyond its original tenure.
Similarly, if the tenure has already been extended and the extended tenure expires, the fund or scheme cannot continue further.
In either case, the Alternative Investment Fund or the scheme must be wound up.
The winding up must be carried out in accordance with Regulation 29 of the AIF Regulations.
Regulation 14. Listing
14(1).
Listing of Units of Close-Ended AIFs
Units of a close-ended Alternative Investment Fund may be listed on a stock exchange.
Listing is optional and not mandatory.
The purpose of listing is to provide investors with a mechanism to transfer or trade their units before the expiry of the fund's tenure.
Such listing is subject to a minimum tradable lot of ₹1 crore.
Accordingly, trades on the stock exchange cannot be executed for a value below ₹1 crore.
The minimum tradable lot requirement restricts trading to large-value transactions consistent with the nature of AIF investments.
Example
An investor holds units of a close-ended AIF that are listed on a stock exchange.
The investor wishes to sell the units before the fund matures.
The units may be sold through the stock exchange, provided the trade value is at least ₹1 crore.
A trade for ₹50 lakh would not satisfy the minimum tradable lot requirement.
14(2).
Listing Permitted Only After Final Close
Units of an Alternative Investment Fund may be listed on a stock exchange only after the final close of the fund or scheme.
Listing is not permitted during the fund-raising period.
The fund or scheme must first complete its capital raising process and reach its final close.
Only after the final close has been achieved can the units be listed on a stock exchange.
Regulation 15. General Investment Conditions
15(1).
Investments by all categories of Alternative Investment Funds shall be subject to the following conditions:
(a).
Overseas Investments by AIFs
An Alternative Investment Fund may invest in securities of companies incorporated outside India.
The power to make overseas investments is subject to the applicable regulatory framework.
Such investments must comply with the conditions, limits, and guidelines prescribed by the Reserve Bank of India (RBI).
Such investments must also comply with the conditions, limits, and guidelines prescribed by SEBI.
The RBI and SEBI may issue or modify these conditions from time to time.
Accordingly, overseas investments by AIFs are permitted only to the extent allowed under the prevailing RBI and SEBI framework.
(b).
Omitted.
(c).
Investment Limit in a Single Investee Company
A Category I or Category II AIF shall not invest more than 25% of its investable funds in a single Investee Company.
The 25% limit is calculated with reference to the fund's investable funds.
The investment limit applies irrespective of whether the investment is made:
Directly in the Investee Company.
Indirectly through investment in the units of another Alternative Investment Fund.
Accordingly, the total exposure to a single Investee Company, whether direct or indirect, cannot exceed 25% of the investable funds.
Example 1 – Direct Investment
Investable Funds = ₹200 crore.
Maximum investment in one Investee Company = 25% of ₹200 crore = ₹50 crore.
If the AIF invests ₹45 crore in Company A , then such investment is permitted.
If the AIF invests ₹60 crore in Company A , then it exceeds the 50 Crore limit and is therefore not permitted.
Example 2 – Direct + Indirect Investment
Investable Funds = ₹200 crore.
The AIF:
Invests ₹30 crore directly in Company A.
Invests ₹25 crore in another AIF whose investment gives the AIF indirect exposure to Company A.
Total exposure to Company A = ₹55 crore.
Maximum permitted exposure = ₹50 crore.
So , the 50 Crore limited is breached and the investment limit is exceeded , making such investment not permissible.
Higher Investment Limit for Large Value Funds for Accredited Investors
Unlike ordinary Category I and Category II AIFs, these funds are permitted to invest up to 50% of their investable funds in a single Investee Company.
The 50% limit is calculated with reference to the fund's investable funds.
The investment may be made:
Directly in the Investee Company; or
Indirectly through investment in the units of another Alternative Investment Fund.
Accordingly, the total exposure to a single Investee Company, whether direct or indirect, cannot exceed 50% of the investable funds.
Example
Investable Funds = ₹200 crore.
So , the maximum investment in one Investee Company = 50% of ₹200 crore = ₹100 crore.
The fund:
Invests ₹70 crore directly in Company A.
Invests ₹20 crore through another AIF that has exposure to Company A.
Total exposure to Company A = ₹90 crore.
Since ₹90 crore is within the ₹100 crore limit , the investment is permitted.
(d).
Investment Concentration Limit for Category III AIFs
A Category III AIF shall not invest more than 10% of its investable funds in a single Investee Company.
The limit applies whether the investment is made:
Directly in the Investee Company.
Indirectly through investment in the units of other Alternative Investment Funds.
Higher Limit for Large Value Funds for Accredited Investors
There is an exception provided for Large Value Funds for Accredited Investors (LVF-AIs) belonging to Category III.
Such funds may invest up to 20% of their investable funds in a single Investee Company.
The investment may be made:
Directly in the Investee Company.
Indirectly through investment in the units of other Alternative Investment Funds.
Accordingly, the concentration limit for these funds is increased from 10% to 20%.
Example:
Assume Investable funds of a Category III AIF = ₹100 crore.
So the maximum investment in one Investee Company = 10% of 100 Crore = ₹10 crore.
If the fund is a Category III LVF-AI, the maximum investment in one Investee Company increases to ₹20 crore.
Special Rule for Investments in Listed Equity by Category III AIFs
With respect to investments in the listed equity of an Investee Company by a Category III AIF:
For such investments, the 10% concentration limit may be calculated with reference to either:
Investable funds; or
Net Asset Value (NAV) of the scheme.
The Category III AIF may use either of these bases for calculating the investment limit.
Similarly, in the case of a Large Value Fund for Accredited Investors (LVF-AI) under Category III, the 20% concentration limit may be calculated with reference to either:
Investable funds; or
Net Asset Value (NAV) of the scheme.
The flexibility to use investable funds or NAV is available only subject to the conditions specified by SEBI from time to time.
Accordingly, the fund must comply with any additional requirements or conditions prescribed by the Board.
Example
Assuming a Category III AIF has:
Investable Funds = ₹100 crore.
The Net Asset Value of the Scheme = ₹120 crore.
The fund may calculate the limit as: 10% of Investable Funds = ₹10 crore; or 10% of NAV = ₹12 crore, subject to SEBI's conditions.
Assuming a Category III Large Value Fund - Accredited Investors:
Investable Funds = ₹100 crore.
NAV of the Scheme = ₹120 crore.
The fund may calculate the limit as:
20% of Investable Funds = ₹20 crore; or
20% of NAV = ₹24 crore,
subject to SEBI's conditions.
(da).
Restriction on Fund-of-Funds Investing in Each Other
The following restriction applies to AlF’s that are authorized under their fund documents to invest in the units of other AIFs.
Such AIFs may invest in other AIFs, as permitted by their constitutive documents and investment strategy.
However, they shall not offer their own units for subscription to other Alternative Investment Funds.
Accordingly, an AIF that functions as a fund-of-funds cannot raise capital from another AIF.
The provision prevents layered or circular fund structures involving investments between AIFs.
Example
Fund A is authorized to invest in the units of other AIFs
Fund A may invest in the units of Fund B.
However, Fund A cannot offer its own units to Fund B for subscription.
Thus, while Fund A may be an investor in another AIF, it cannot simultaneously raise capital from another AIF.
(e).
Investments Requiring Prior Investor Approval
An Alternative Investment Fund shall not make certain specified investments without obtaining prior investor approval.
The approval must be obtained from at least 75% of the investors by value of their investment in the Alternative Investment Fund.
The approval threshold is based on the value of investments held, and not on the number of investors.
(a). Investment in Associates
The AIF cannot invest in its associates without obtaining the required approval.
This restriction is intended to address potential conflicts of interest that may arise from related-party investments.
(b). Investment in Certain Other AIFs
The AIF cannot invest in units of another AIF that is:
Managed by its Manager.
Sponsored by its Sponsor.
Managed by an associate of its Manager.
Sponsored by an associate of its Sponsor.
unless the required investor approval is obtained.
(ea).
A scheme of an Alternative Investment Fund shall not buy or sell investments from or to specified persons without prior investor approval.
The approval must be obtained from at least 75% of the investors by value of their investment in the scheme.
The approval threshold is calculated with reference to the value of investments in the scheme, and not the number of investors.
Such transactions must also comply with any conditions specified by SEBI from time to time.
The restriction applies to transactions with the following persons:
(a). Associates
The scheme shall not buy investments from, or sell investments to, its associates without the required approval.
(b). Related AIF Schemes
The scheme shall not buy investments from, or sell investments to, schemes of AIFs that are:
Managed by its Manager.
Sponsored by its Sponsor.
Managed by an associate of its Manager.
Sponsored by an associate of its Sponsor.
without the required approval.
(c). Significant Investors
The scheme shall not buy investments from, or sell investments to, an investor who has committed to:
Invest at least 50% of the corpus of the scheme without the required approval.
Example:
Transaction with a Significant Investor
Growth Fund I has a scheme corpus of ₹100 crore.
The investors in the scheme are:
Investor A – ₹60 crore.
Investor B – ₹25 crore.
Investor C – ₹15 crore
In this case , Investor A has committed 60% of the corpus.
Since Investor A has committed more than 50% of the corpus, Investor A is a significant investor for the purposes of this provision.
Proposed Transaction
Investor A owns shares of XYZ Pvt. Ltd.
The scheme proposes to purchase those shares directly from Investor A.
Regulatory Requirement
Before purchasing the shares, the scheme must obtain approval from investors representing at least 75% of the value of investments in the scheme.
Because Investor A is both:
The investor holding more than 50% of the corpus; and
The seller in the proposed transaction.
Investor A must be excluded from the voting process.
Therefore, only Investors B and C participate in the approval process.
Note:
Investor A is the counterparty to the transaction and is therefore excluded from voting.
So the 75 % is calculated based on the remaining eligible voting pool:
Investor B = ₹25 crore
Investor C = ₹15 crore
Total eligible voting value = ₹40 crore
Required approval = 75% of ₹40 crore = ₹30 crore.
So:
If Investors B and C both approve:
Approval obtained = ₹40 crore
Required approval = ₹30 crore
Transaction may proceed.
If only Investor B approves:
Approval obtained = ₹25 crore
Required approval = ₹30 crore
Transaction cannot proceed.
Exclusion of Certain Investors from Voting
When seeking investor approval for a transaction covered under clause (c), special rules apply where an investor:
Has committed to invest at least 50% of the corpus of the scheme; and
Is proposing to buy an investment from the AIF or sell an investment to the AIF.
Such an investor is considered an interested party in the proposed transaction.
While seeking investor approval for the transaction, that investor must be excluded from the voting process.
Accordingly, the investor:
Cannot vote in favour of the transaction.
Cannot vote against the transaction.
Cannot be counted for the purpose of determining the voting outcome.
The approval must therefore be obtained solely from the remaining eligible investors.
(f). Temporary Investment of Unutilized Funds
An Alternative Investment Fund may temporarily invest the un-invested portion of its investable funds in specified liquid assets.
An Alternative Investment Fund may also temporarily invest divestment proceeds pending distribution to investors in such liquid assets.
This temporary investment is permitted until:
The funds are deployed in accordance with the fund's investment objective; or
The funds are distributed to investors in accordance with the fund documents.
The permitted liquid assets include:
Liquid Mutual Funds.
Bank Deposits.
Treasury Bills (T-Bills).
Triparty Repo Dealing and Settlement (TREPS).
Commercial Papers (CPs).
Certificates of Deposit (CDs).
Other high-quality liquid assets.
The purpose of the provision is to allow idle funds to be parked in safe and liquid instruments instead of remaining unutilized.
(g). AIF as a Nominated Investor
An Alternative Investment Fund may act as a Nominated Investor.
The appointment as a Nominated Investor must be in accordance with Regulation 106N(1)(b) of the SEBI (ICDR) Regulations, 2009.
Accordingly, an AIF is permitted to undertake the role and responsibilities assigned to a Nominated Investor under the ICDR framework.
While acting as a Nominated Investor, the AIF must comply with the applicable requirements prescribed under the ICDR Regulations and any other relevant SEBI regulations.
(h). Treatment of Investments in Entities Listed on the Institutional Trading Platform
The following applies to Category I AIFs and Category II AIFs.
It covers investments made in the shares of entities that are listed on the Institutional Trading Platform (ITP).
It applies only to investments made after the commencement of the SEBI (ICDR)(Fourth Amendment) Regulations, 2015.
Ordinarily, shares that are listed on a stock exchange platform are regarded as listed securities.
However, this provision creates a special rule for Category I and Category II AIFs.
Under this special rule, shares of entities listed on the Institutional Trading Platform are deemed to be unlisted securities for the purposes of the AIF Regulations.
The phrase "deemed to be" creates a legal fiction.
This means that even though the shares are actually listed on the ITP, the AIF Regulations require them to be treated as if they were unlisted.
As a result, an investment in such shares will be regarded as an investment in unlisted securities whenever compliance under the AIF Regulations is being assessed.
This treatment is particularly relevant because many Category I and Category II AIFs are expected to invest primarily in unlisted companies and early-stage businesses.
Example
Before Applying the Provision:
Growth Fund I (a Category II AIF) invests ₹20 crore in Startup X.
Startup X is listed on the Institutional Trading Platform.
Normally, because the shares are listed, the investment would be regarded as an investment in listed securities.
After Applying the Provision:
The AIF Regulations deem the shares of Startup X to be unlisted securities.
So , Growth Fund I may treat the ₹20 crore investment as an investment in unlisted securities for the purposes of complying with the AIF Regulations.
(i). Holding of Investments in Dematerialised Form
Every Alternative Investment Fund is required to hold its investments in dematerialised (demat) form.
Accordingly, the investments of the AIF should be maintained electronically rather than through physical certificates or paper instruments.
The requirement applies to the investments held by the AIF as part of its portfolio.
Holding investments in demat form promotes:
Greater transparency.
Easier transfer and settlement of securities.
Better record keeping.
Reduced risk of loss, theft, forgery, or damage to physical certificates.
The requirement is not absolute and is subject to the conditions specified by SEBI from time to time.
SEBI may prescribe:
The categories of investments covered.
The timelines for dematerialisation.
Exemptions or transitional arrangements.
Other operational requirements relating to holding investments in demat form.
Accordingly, an AIF must comply with:
The requirement to hold investments in dematerialised form but also with any conditions, exemptions, or procedural requirements prescribed by SEBI.
Example:
An AIF acquires equity shares of a private company.
Instead of holding physical share certificates, the shares are credited to the AIF's demat account.
Exceptions to the Requirement of Holding Investments in Dematerialised Form
There are certain exceptions to the requirement that an Alternative Investment Fund must hold its investments in dematerialised form.
Accordingly, the dematerialisation requirement does not apply in the following cases:
(a). Instruments Not Eligible for Dematerialisation
The requirement does not apply to investments in instruments that are not capable of being held in demat form.
If the nature of the instrument does not permit dematerialisation, the AIF is not required to hold such investment in a demat account.
(b). Investments Held by a Liquidation Scheme
The requirement does not apply to investments held by a liquidation scheme of an AIF where such investments are not available in dematerialised form.
A liquidation scheme may therefore continue to hold such investments in their existing form while carrying out the liquidation process.
(c). Other Investments or Schemes Specified by SEBI
SEBI may specify additional categories of Investments or Schemes of AIFs that are exempt from the dematerialisation requirement.
Such exemptions may be granted through regulations, circulars, guidelines, or other directions issued by SEBI from time to time.
15(2).
Power of SEBI to Prescribe Additional Requirements
SEBI's power under this provision operates in addition to, and may override or supplement, the conditions already specified in 15(1).
The conditions contained in 15(1) are therefore not exhaustive.
SEBI may prescribe additional requirements for Alternative Investment Funds.
SEBI may also prescribe additional eligibility criteria, compliance requirements, investment conditions, disclosure obligations, or operational requirements.
Such additional requirements may apply:
To all Alternative Investment Funds.
To a specific category of Alternative Investment Funds.
Accordingly, different requirements may be prescribed for:
Category I, Category II, Category III, Social Impact Funds, Angel Funds, Large Value Funds for Accredited Investors, or any other category specified by SEBI.
