India-Alternative-Investments-Ppt-1.pptx

alternate investments basics as understood from pov of finance student

1. ALTERNATIVE INVESTMENTS INTRODUCTION TO ALTERNATIVE INVESTMENTS 7/22/2025 VENUGOPAL RAJAMANURI 1

2. CONCEPT Alternate investments are those investments other than traditional asset class. Traditional asset class are stocks, bonds, cash etc. Alternate investments are Two types – Tangible and Intangible 7/22/2025 VENUGOPAL RAJAMANURI 2

3. TYPES OF ALTERNATIVE ASSETS TANGIBLE ASSETS FINANCIAL ASSETS PRECIOUS METALS REAL ESTATE ( Direct real estate or REITS which are publicly traded), ARTWORK PRIVATE EQUITY ANTIQUES COMMODITIES COINS HEDGE FUNDS STAMPS CRYPTO CURRENCIES (Digital currency like bit coins), Art Funds, Wine Funds, Film funds 7/22/2025 VENUGOPAL RAJAMANURI 3

4. FEATURES OF ALTERNATIVE ASSETS Mostly held by HNIs and Institutional investors High ticket size Complex nature of investments Lack of transparency Less stringent disclosure requirements Less liquidity ( takes time to sell off at fair price, urgent sales are generally at a loss) Requires more specialized knowledge Less historical data available 7/22/2025 VENUGOPAL RAJAMANURI 4

5. WHY ALTERNATIVE INVESTMENTS? Low correlation with traditional asset class. Hence give benefit of risk diversification ( reduced risk) Can be used for strategic asset allocation. 7/22/2025 VENUGOPAL RAJAMANURI 5

6. REGULATION in India SEBI AIF(Alternate Investment Funds) Regulations, 2012 gives regulatory framework for the AIF funds in India. 7/22/2025 VENUGOPAL RAJAMANURI 6

7. REGULATION IN USA In USA Alternative Investments are privately pooled. They are not required to be licensed or registered. They are required to file appropriate organizational filing. They are regulated by SEC or State laws. Maximum beneficial owners are 100. No restrictions for number of investors. Fund size up to $150 million gives exemption for license/registration for private pooled and manged funds 7/22/2025 VENUGOPAL RAJAMANURI 7

8. Alternative Investment Funds must be sold in the U.S. on a private placement basis. The restriction on general solicitation and general advertising applies to any person acting on behalf of a fund, including any marketing or placement agent. The advertisement restriction is relaxed in 2016. They need to file Form D with SEC 15 days before advertisement. 7/22/2025 VENUGOPAL RAJAMANURI 8

9. the principal legal structures used for Alternative Investment Funds? - Privately offered alternative investment funds (“AIFs”) are established in the United States (U.S.) pursuant to U.S. state law. AIFs are most commonly organized under state law as a limited partnership (“LP”) or a limited liability company (“LLC”). In particular, sponsors primarily organize AIFs in the State of Delaware because this jurisdiction is deemed by many industry participants to have pro-management laws, a sophisticated Court of Chancery with respect to corporate matters, and a well-established related body of statutory and case law. 7/22/2025 VENUGOPAL RAJAMANURI 9

10. Development of AIFs in India 7/22/2025 VENUGOPAL RAJAMANURI 10 1996 2014 Enactment of VCF Regulations, 1996 2011 Concept paper for proposed AIF Regulations 2012 Enactment of AIF Regulations, 2012 2013 Rules for Angel Fund introduced Material Changes in the terms of AIF – Approval of 75% of Investors Exit option to investors dissenting for increase in fees/ expenses 2015 FDI in AIF through automatic route

11. 2018 2017 2016 CAT III AIF permitted to invest in commodities derivatives Online registration platform for AIFs introduced Guidelines for AIF in IFSC introduced Further relaxation of rules for Angel funds. Relaxation of rules for Angel funds. 7/22/2025 VENUGOPAL RAJAMANURI 11

12. Regulatory Push behind AIF growth 7/22/2025 VENUGOPAL RAJAMANURI 12

13. REASONS FOR GROWTH Changes in structure, clarity on tax issues among reasons for growing investor interest Investment by alternative investment funds (AIFs) touched ₹2-lakh-crore mark during January-March, rising more than 30 per cent over the year-ago period despite the effect of the pandemic. According to latest data available with market regulator SEBI, the cumulative net investments made by AIFs at the end of March 2021 stood at ₹2-lakh crore against ₹1.53-lakh crore at the end of the previous fiscal. Commitments raised by AIF also jumped 22 per cent to ₹4.51-lakh crore as of March 2021 from ₹3.69-lakh crore in the year-ago period, while funds raised by AIF went up by 23 per cent to ₹2.30-lakh crore at the end of FY21. 7/22/2025 VENUGOPAL RAJAMANURI 13

14. LISTING Units of close ended Alternative Investment Fund may be listed on stock exchange subject to a minimum tradable lot of one crore rupees. Such listing shall be permitted only after final close of the fund or scheme. However, listing on stock Exchanges is purely voluntary. 7/22/2025 VENUGOPAL RAJAMANURI 14

15. Can NRIs, PIOs and OCI invest in AIFs? AIFs accept investments from all Indians, including NRIs, PIOs, and OCIs by issuing units. The fund may have restrictions in some geography as per the AMC compliance policy. 7/22/2025 VENUGOPAL RAJAMANURI 15

16. Taxation for AIFs in India For CAT I & CAT II, there is a pass-through status. Tax pass-through status means that the income or loss (other than business income) generated by the fund will be taxed at the hand of the investor and not by the fund business. So, if you invest in these two categories of the AIF, then you need to pay capital gain tax on the profit or loss you make from the fund within a given duration. The duration here is important to understand whether long-term capital gain tax or short-term capital gain tax would be applied. As per the recent s rules for LTCG, 20% is the rate of tax with indexation benefit. If the profits are taxed as STCG, then the rate would be 15%. There are surcharge, cess charges on and above the mentioned tax rates as well. Any income (except business income) distributed by investment fund is not liable for DDT and TDS of 10% has to be deducted by investment fund. 7/22/2025 VENUGOPAL RAJAMANURI 16

17. Nature of Income earned by the Fund Taxability Tax Rate Other than business income (for example: capital gains) Passed through – AIF doesn’t pay any tax. The unit holder pays the tax Rates applicable to the unit holder Business Income Taxed at AIF. Such income is not taxable for unit holders AIF formed as company or LLP. Taxed at the rates applicable to the company or the LLP. AIF formed as Trust: Taxed at Maximum Marginal Rate*. *Maximum Marginal Rate for business income as per the latest tax rates enacted as of 2020 is 42.744%. 7/22/2025 VENUGOPAL RAJAMANURI 17

18. CAT III: This category of funds is taxable at the fund level. This has no pass-through status. The highest rate of tax (as per the current tax slab) is charged on the profit made by this fund. A Category III AIF pays tax on the following four types of incomes: Short-term capital gains Long-term capital gains Business income  Dividend income 7/22/2025 VENUGOPAL RAJAMANURI 18

19. Tax type Short-Term Capital Gains Long-Term Capital Gains Business Income Dividend Income Basic tax 15% 10% 30% 30% Surcharge over tax 15% 15% 37% 37% Education Cess 4% 4% 4% 4% MMR 17.94% 11.96 42.74 42.74 7/22/2025 VENUGOPAL RAJAMANURI 19

20. What is AIF In India alternative investment funds (AIFs) are a relatively new concept and they have been described in detail in Regulation 2 (1) (b) SEBI (Alternative Investment Funds) Regulation, 2012. AIFs are a privately held and managed pool of investment fund of either domestic or foreign origin. AIFs, as per current regulations, are investments that are organised in the form of an LLP (limited liability partnership), corporate body, company or trust. Being a private investment fund , AIFs are not available through IPOs or other forms of public issue which are applicable to Collective Investment Schemes and  Mutual Funds   that are registered with SEBI. Thus AIF regulations are completely separate from other fund management regulations including but not limited to SEBI (Mutual Funds) Regulations, 1996 and SEBI (Collective Investment Schemes) Regulations, 1999. 7/22/2025 VENUGOPAL RAJAMANURI 20

21. What is an AIF? 7/22/2025 VENUGOPAL RAJAMANURI 21 What is an Alternative Investment Fund? Are there any exemptions from registration? “Alternative Investment Fund” means any fund established or incorporated in India in the form of a trust or a company(Registered under Indian Companies Act,2013) or a limited liability partnership or a body corporate (all companies including companies incorporated outside India and statutory corporation) which, ( i ) is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and (ii) is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities. Exemptions: Family trusts ESOP trusts Employee welfare trusts Holding companies Securitization trusts

22. 7/22/2025 VENUGOPAL RAJAMANURI 22 Sponsor Trustee (In-house or third party) Investment Management Agreement AIF (Trust/LLP/Company ) Trust Deed (if set up as Trust) Portfolio entities Investment Manager Investors (Domestic & Offshore ) Contribution Agreements Investments in Securities Employees or Employee Benefit Trust Carry Units Carry distribution Continuing Interest (can also be put by IM) & Carry Units Typical AIF Structure

23. Choice of Structure CRITERIAL TRUST COMPNY LLP Compliance LOW HIGH MODERATE Client Confidentiality High Moderate Low Market Practice More than 95% of the AIFs are set up as Trusts Minimal Less than 5% AIFs are set up as LLP Accetability with Investors and distributors High Low Moderate Ease of operations High Low Moderate Mitigation of GST on management fee No No Yes 7/22/2025 VENUGOPAL RAJAMANURI 23

24. As per existing AIF regulations, these private investment funds have been divided into 3 unique categories – Category I, Category II and Category III and the minimum qualifying amount for these schemes is Rs . 20 crores. The only exception to this rule is angel funds that have lower qualifying criteria in terms of fund corpus .( Rs.5crores ) 7/22/2025 VENUGOPAL RAJAMANURI 24

25. 7/22/2025 VENUGOPAL RAJAMANURI 5 Criteria Category I AIF Category II AIF Category III AIF Categorization Angel Fund Venture Capital Funds; SME Funds; Social Venture Funds; and Infrastructure Funds. Private Equity Funds; Structured Credit Funds; Debt Funds; Real Estate Funds.   Long only Funds; Long-short Funds; Hedge Funds and any other Funds with diverse and complex trading strategies. SEBI Registration Fees Rs. 5,00,000 (Rs. 2,00,000 for Angel Fund) Rs. 10,00,000 Rs.15,00,000 Continuing Interest by Sponsor / Manager Lower of the following amounts: 2.5% of corpus; or Rs.5 crores (Rs. 50 lakhs for Angel Fund) Lower of the following amounts: 2.5% of corpus; or Rs.5 crores Lower of the following amounts: 5% of corpus; or Rs.10 crores Ability to invest in Listed Securities Limited ability for listed investments. Different norms across sub-categories. Upto 49.99% investments can technically be done in listed securities. Investments upto 100% can be made in listed securities. Overall restrictions/Compliances Moderate Low High Categories of AIF – Which one to Select ? Part -1

26. 7/22/2025 VENUGOPAL RAJAMANURI 26 Criteria Category I AIF Category II AIF Category III AIF QIB Status   Yes [Also, no lock in for investment made prior to IPO if held for at least one year] Yes [Also, no lock in for investment made prior to IPO if held for at least one year]   Yes Leverage  No No Yes (upto 2X leverage / 100% additional exposure permitted) Investment by DFIs, Insurance Companies, Banks Yes, subject to compliance with prescribed norms   Yes, subject to compliance with prescribed norms No Diversification Not more than 25% of the Investible Funds can be invested in a single Portfolio Entity.   Not more than 10% of the Investible Funds can be invested in a single Portfolio Entity. Close Ended/Open Ended Close Ended Close Ended Open or Close Ended Categories of AIF – Which one to Select ? Part - 2

27. AIF Registration 7/22/2025 VENUGOPAL RAJAMANURI 27 Eligibility Criteria for AIF Registration: MOA/Trust Deed/Partnership Deed permits carrying on the activity of AIF Trust Deed/Partnership Deed to be registered under respective governing laws MOA/Trust Deed/Partnership Deed to prohibit making an invitation to the public to subscribe its securities The Applicant, Sponsor and Manager are “fit and proper” based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 The key investment team of the investment manager of the AIF should have adequate experience with at least 1 (one) key personnel having not less than 5 years of relevant experience Manager & Sponsor has the necessary infrastructure and manpower to discharge its activities The Applicant to clearly describe investment objective, investment strategy, proposed corpus, tenure and target investors Process of registration: Self-registration on SEBI online portal and online payment of Rs. 1 lakh application fee On receipt of login and password, uploading of Form A on SEBI portal along with final PPM and copy of executed Trust Deed and requisite declarations/undertakings The entire registration process generally takes 2 to 3 months

28. Certain thresholds under AIF Regulations 7/22/2025 VENUGOPAL RAJAMANURI 28 Each AIF Scheme should have a corpus of at least Rs. 20 crores (Rs. 5 crores for Angel Fund) Each investor in AIF should commit to invest at least Rs. 1 crore (Rs. 25 lakhs for Angel Fund) An employee or director of the Manager of AIF can invest Rs. 25 lakhs or more An employee of the Manager participating in the profits/carry of the AIF need not make any investment Following can invest jointly in an AIF, wherein each joint investor contributes and aggregate investment is at least Rs. 1 crore Investor and his/her spouse Investor and his/her parent Investor and his/her daughter/son No AIF Scheme can have more than 1,000 investors (200 investors for Angel Fund) Cat-I AIF & Cat-II AIF shall have minimum tenue of 3 years (maximum 5 years for Angel Fund)

29. AIF Governance related – Part 2 7/22/2025 VENUGOPAL RAJAMANURI 29 To appoint a custodian if corpus is more than Rs. 500 crores – compulsory for Cat-IIIAIF Disclosure of any fees charged to the AIF or any investee company by an associate of the Manager or Sponsor Disclosure within 180 days of end of the year in respect of financial information about portfolio entities and material risks and how such risks are managed Cat-I AIF and Cat-II AIF to undertake valuation of their investments, at least once in every six months, by an independent valuer. Cat-III is required to disclose NAV for each quarter for closed-end fund and monthly for open-end fund. Reporting to SEBI Cat-I AIF, Cat-II AIF and Cat-III AIF (that do not undertake leverage) are required to file quarterly report with SEBI within 7 days of end of quarter. Cat-III AIF that undertakes leverage is required to file report with SEBI monthly. All reports to be filed electronically through SEBI portal. Compliance Test Report to be submitted by the Manager with Trustee within 30 days of end of the financial year and Trustee/Sponsor to report to SEBI any non-compliance observed.

30. Foreign Investments in AIFs – Key Considerations & Recent Trends 100% FDI is permitted under automatic route in all the Categories of AIFs. * As a special condition, a Category III AIF with any foreign investment shall make portfolio investment in only those securities or instruments in which a FPI is allowed to invest under the FEMA20 Regulations. 7/22/2025 VENUGOPAL RAJAMANURI 30

31. AIF process Creation of AIF entity Form of Trust / Co / LLP (majority trust) Private Pooling of funds ; ( PMS Regulations allow to accept fund or securities) Signing of Contribution agreements & KYC Each scheme should have corpus of at least Rs. 20 Crore Each Scheme – Maximum 1000 Investors Investment less than Rs. 1 crore (employees / directors of AMC – 25 lacs). PE industry generally operates on inv commitments; 7/22/2025 VENUGOPAL RAJAMANURI 31

32. Fund raising terms IN pe Hurdle Rate: A minimum rate of return (e.g., 8–12%), which must be achieved before the fund manager can receive any carried interest payments. Carried Interest: A share of the profits of the fund's investments (typically up to 20%), paid to Fund Manager, as a performance incentive Catch Up: If Carried Interest is with Catch up – Investment Manager will get atleast X % above hurdle rate Initial Closing: The first closing after which units will be accepted at Premium 7/22/2025 VENUGOPAL RAJAMANURI 32

33. REGULATIONS Category I – Venture Capital (Start Ups) / SME / Social / Infra Category II – * Private equity or debt funds * Primarily Unlisted; * Cannot employ leverage – only for temporary funding requirements; * Sponsor Commitment / Seed Capital – 2.5% or 5 Crore (less) * Can only be closed ended–min 3 years tenure–extend upto 2 yrs (3/4 majority) Category III – * which employs diverse or complex trading strategies * Sponsor Commitment / Seed Capital – 5% or 10 Crore (less) * Can only be open ended or close ended: * Can undertake leverage 7/22/2025 VENUGOPAL RAJAMANURI 33

34. REGULATIONS Private Placement Memorandum prepared Filed before 30 days of launch on the Scheme Catg I & Catg II – Max Inv 25% in a single company (on commitment amt ) Catg III – Max Inv 10% in a single company (on commitment amt) Co-Investment by Manager of Sponsor shall not be on terms more favourable then to the Fund Invest In Associates – approval of 75% of unitholders Report leverage report to Custodian daily; 7/22/2025 VENUGOPAL RAJAMANURI 34

35. REGULATIONS Appoint a Custodian if Fund size is more than Rs. 500 Crore Catg I & Catg II AIF – Undertake valuation of Inv every six months Category III – NAV quarterly for Cl. Ended and Monthly for Open Ended Marketing Materials can be distributed on Private Placement Basis only; 7/22/2025 VENUGOPAL RAJAMANURI 35

36. FOREIGN INV IN / BY AIF’S RBI has introduced Schedule 11 permitting foreign Investments; Downstream investment shall be regarded as foreign investment if either the Sponsor / Investment Manager is not Indian ‘owned and controlled’ & need to follow FDI Policy norms; Catg III AIF having foreign investment need to follow FPI norms; FPI’s can only invest in Catg III AIF’s ( upto 25% stake in AIF) AIF’s can invest in equity of offshore unlisted Company which has presence in India, subject to SEBI approval (no RBI approval required), upto 25% of Investible Funds; 7/22/2025 VENUGOPAL RAJAMANURI 36

37. Foreign Investments in AIFs – Key Considerations & Recent Trends 100% FDI is permitted under automatic route in all the Categories of AIFs. In terms of FEMA20 Regulations, if the Sponsor and Manager (both) are “Owned and Controlled” by Indian resident citizens, then the AIF does not need to follow FDI downstream investment norms. The extent of foreign investment in the corpus of the AIF will not be a factor to determine as to whether downstream investment by the AIF is foreign investment or not.* Downstream investment by an AIF that is reckoned as foreign investment shall have to conform to the sectoral caps and conditions / restrictions, if any, as applicable to the company in which the downstream investment is made. * As a special condition, a Category III AIF with any foreign investment shall make portfolio investment in only those securities or instruments in which a FPI is allowed to invest under the FEMA20 Regulations. 7/22/2025 VENUGOPAL RAJAMANURI 37

38. 7/22/2025 VENUGOPAL RAJAMANURI 38 Contributor Giveback; Indemnity; Removal of the Investment Manager for “Cause” or “without Cause”; “Most Favoured Nation” Rights; Information Rights for the Contributors; Right to appoint member on IC/Advisory Board Distribution Waterfall, Clawback mechanisms; Quantum of Fees/Expenses and manner of charging the same.  Key Man Clause Co-Investment Rights Key Contractual Provisions in Structuring AIF Documents - Part 1

39. 7/22/2025 VENUGOPAL RAJAMANURI 39 Conflict of Interest policy Investment Guidelines: Environmental, Social and Governance ( ESG) Policy and Anti-Corruption Valuation Methodology Follow-on investment Legal Opinion on Enforceability Compensatory Contribution or Premium v. NAV based subscriptions Whether Warehoused Investments to be transferred to Fund at Cost or FMV – Whether issuance of units in lieu of warehoused Investments possible Investments in Associate Entities – Approval to be taken at the time of each Investment ? Whether deemed or specific? Ability of launch successor fund Key Contractual Provisions in Structuring AIF Documents - Part 2

40. 7/22/2025 VENUGOPAL RAJAMANURI 40

41. DUE DILIGENCE IN ALTERNATIVE INVESTMENTS 7/22/2025 VENUGOPAL RAJAMANURI 41