Alternative investment funds gain traction, draw Rs 1 lakh cr

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 Rs 1 lakh crore as of June 2017, a fourfold jump from Rs 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 Rs 25 lakh, from the earlier Rs 50 lakh, allowing smaller angel funds to participate in fund pooling.

However, market participants add, 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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