AIF Market in India

Introduction:
In India, alternative investment funds (AIFs) are defined in Regulation 2(1) (b) of Securities and Exchange
Board of India (Alternative Investment Funds) Regulations, 2012. It refers to any privately pooled investment
fund, (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a
Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming
under the jurisdiction of any regulatory agency in India.

Categories of Alternative Investment Funds (AIFs) :
As per Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 Alternative
Investment Funds shall seek registration in one of the three categories
Category I: Mainly invests in start- ups, SME’s or any other sector which Govt. considers economically and
socially viable.
Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which
no specific incentives or concessions are given by the government or any other Regulator
Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make
short term returns or such other funds which are open ended and for which no specific incentives or concessions
are given by the government or any other Regulator.

Process and Documentation required for Listing and Trading Alternative Investment Fund

Size of AIF market:
Alternative investment funds (AIFs) have grown substantially – by 96% in the last financial year. The
commitments raised (roughly equivalent to AUM in MF parlance) increased from Rs.84,304 crore to Rs.1.65
lakh crore, shows the latest data by SEBI.
Investors continue to lap up category II funds such as private equity and debt funds, investing Rs.54,064 crore
in the category. These funds offer exposure to assets in which traditional mutual funds schemes do not invest.
Category III AIFs, which are essentially hedge funds, have also recorded an exponential increase, growing by
161% in the last one year. These funds deploy a variety of strategies like long and short strategy, IPO focussed
investments, running a concentrated portfolio to generate performance.

Category I funds meanwhile grew at a modest pace collecting Rs. 7,435 crore. The category consists of infrastructure funds, social venture funds, angel funds or VC funds.

Tax implication:
In India, the Category I and Category II AIFs registered with the SEBI have been accorded a pass through
status, with a requirement to subject any income credited or paid by the AIFs to a withholding tax of 10% for
resident investors and as per the “rates in force” for non-resident investors.
The Category III AIF has still not been accorded a pass through status, which means that income from such
funds will be taxed at the investment fund level and the tax obligation will not pass through to the unit- holders.
In cases where the income of the fund is characterized as income under the head “Profits or gains from business
or profession”, the investment fund would be taxed in respect to such income at the maximum marginal rate of
tax.

Ayush S.Mazumdar,

MBA-FA (2018-20)