ALTERNATIVE INVESTMENT FUND - ECONOMY
News: RBI tightens norms for AIF investments
What’s in the news?
● The Reserve Bank of India (RBI) has tightened norms for Regulated Entities (RE) like Banks and Non-Banking Financial Companies (NBFCs) to prevent evergreening of loans via investments in Alternative Investment Funds (AIFs).
Alternative Investment Funds:
● AIF is any fund established in India which is a privately pooled investment vehicle that collects funds from sophisticated investors, both Indian or foreign, for investing.
Features:
● It pools funds from investors and invests them under different categories of investments as specified by the SEBI for the benefit of investors.
● These investment vehicles adhere to the SEBI (Alternative Investment Funds) Regulations, 2012.
● AIFs can be formed as a company, Limited Liability Partnership (LLP), trust, etc.
● It is an investment option for high rollers, including domestic and foreign investors in India.
Types:
● AIFs are classified into three categories by the Securities and Exchange Board of India:
Category 1 AIF:
● These funds are invested in start-ups, small and medium firms and other businesses that are new or have the potential to grow financially.
● The government encourages investments in these businesses because they benefit the economy by increasing output and creating jobs.
● Examples of this category are as follows:
○ Infrastructure Funds
○ Angel Funds
○ Venture Capital Funds
○ Social Venture Funds
Category 2 AIF:
● Funds that are invested in both equities and debt instruments are included in this category.
● Funds that aren't already classified as Category 1 or 3 are also included.
● The government does not offer any tax breaks for investments in this category.
● Examples of this category are as follows:
○ Fund of Funds
○ Debt Funds
○ Private Equity Funds
Category 3 AIF:
● AIFs in category 3 are those that provide returns in a short period of time.
● To achieve their objectives, these funds employ a variety of complex and diversified trading strategies.
● The government has made no known concessions or incentives in relation to these funds.
● Examples of this category are as follows:
○ Hedge Funds
○ Private Investment in Public Equity Funds
○ Venture Capital Funds
○ Social Venture Funds
Benefits of Alternative Investment Funds:
● Because their performance is not based on the ups and downs of the stock market, alternative investments may assist to reduce the volatility that is typically associated with traditional investments.
● Alternative investments can also provide compelling tax benefits.
● Diversification of market techniques and investment types is aided by these.
● The investor gets the direct ownership due to the investment in AIFs. So, investors retain that ownership in the mortgage and the rights as a lender to the property whatever be the scenario.
● AIFs provide a source of secondary income.
● AIFs can be treated as passive investments, many a time, AIFs don’t require active management and one can leverage teams to look after the funds.
Drawbacks of Alternative Investment Funds:
● Alternative investment funds require investors to be accredited, i.e. a high net worth investor.
○ A large initial investment is required for AIFs.
● AIFs are out of reach for small-scale investors.
● Alternative investment funds are complicated and doing your homework before investing in them is essential.
● Another roadblock for investors looking to get into AIFs is liquidity. There is a long long-up period, usually, 3-10 years, before one can take the initial profit.