Alternative Investment Funds in India

1From venture capital funds to AIFs

• 1980s: early venture capital came from state development corporations, financial institutions and public sector banks.
• 1996: the SEBI (Venture Capital Funds) Regulations created a framework for domestic VC funds. Foreign VC investors were later covered separately.
• Late 1990s–2000s: the dotcom boom brought technology-focused VC funds. Private equity then spread to manufacturing, real estate, infrastructure and services.
• 2012: SEBI notified the SEBI (Alternative Investment Funds) Regulations, 2012, which replaced the VCF Regulations for new funds and brought private pools of capital (VC, PE, debt, hedge funds and others) under one framework.
• Since then the industry has grown rapidly. Commitments raised by AIFs run into lakhs of crores, with Category II (private equity and debt) the largest category.
• Funds can also be set up in the International Financial Services Centre (GIFT City), regulated by IFSCA rather than SEBI.

Remember

• VCF Regulations 1996 → AIF Regulations 2012.
• GIFT City funds are regulated by IFSCA, not SEBI.

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2What an AIF is

Under the 2012 Regulations, an AIF is a fund established in India as a trust, company, LLP or body corporate that is a privately pooled investment vehicle. It collects funds from sophisticated investors (Indian or foreign) for investing under a defined investment policy for the benefit of its investors.

It is not a mutual fund, collective investment scheme, family trust, ESOP trust, employee welfare trust or a fund for holding company securities. Those are covered by other rules.

• Privately pooled: money is raised only by private placement to selected investors, never by public invitation.
• Most AIFs in India are set up as trusts, with a trustee, a sponsor and an investment manager.

Remember

• AIF = privately pooled vehicle, private placement only, defined investment policy.
• Most are trusts.

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3Categories and sub-categories

• Category I and II AIFs are close-ended, with a minimum tenure of three years.
• Category III AIFs may be open-ended or close-ended.
• Angel funds are Category I funds that raise money from accredited investors only (under SEBI's revised framework of September 2025) and invest small amounts in start-ups.
• A special situation fund invests in stressed assets and may act as a resolution applicant under the Insolvency and Bankruptcy Code.

Exam trap Private equity and debt AIFs are Category II, not Category I. Hedge funds are Category III.

Remember

• Cat I: VC, angel, SME, social impact, infrastructure, special situations.
• Cat II: PE, debt, fund of funds. Cat III: hedge funds.
• Cat I and II: close-ended, minimum three years.

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4Who should invest in Category I and II AIFs

These AIFs suit investors who:

• can invest at least the minimum ticket of ₹1 crore (lower for certain employees and accredited investors);
• can lock money away for many years, as these funds are close-ended and units are hard to sell;
• can tolerate high risk, including the possible loss of capital in individual investments;
• have enough liquid wealth elsewhere and allocate only a part of their portfolio to alternatives;
• understand the fees, structure and risks described in the private placement memorandum.

They are unsuitable for investors who need regular income, may need the money soon, or cannot bear losses.

Remember

• Suitability: high minimum, long lock-in, high risk, part of a larger portfolio.

Practise this concept (3 questions)