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Finance Ministry permits privately managed funds to invest in AIFs

We missed this earlier: Privately managed provident, superannuation, and gratuity funds can now invest 5% of their corpus in alternative investment funds (AIFs) such as venture capital funds, SME funds, infrastructure funds, and so on. The Finance Ministry permitted this through a gazette notification dated March 15, stating that non-government provident funds and others will be allowed in AIFs (of Category I and Category II) that have a minimum corpus of Rs 100 crore. The amendment will likely provide a new source of capital for startups in the country.

Under SEBI’s AIF regulations 2012, Category I AIFs are infrastructure funds, SME funds, venture capital funds, and social venture capital funds. Angel funds are a sub-category of VC funds and can presumably be invested in. Debt funds are also a kind of Category I fund. Real estate funds, private equity funds, funds for distressed assets, etc. are registered as Category II AIFs.

The government has imposed the following conditions for such investments:

  1. Investment in permitted in AIFs with a minimum corpus of Rs 100 crore
  2. For Category II AIFs, at least 51% of the AIF funds have to be invested in either infrastructure, SME, venture, capital, or social welfare entities.
  3. Exposure to a single AIF cannot exceed 10% of the AIF size. This limit will not apply to a government-sponsored AIF.
  4. Funds have to ensure that investments not be made, directly or indirectly, in securities of companies/funds incorporated or operated outside India
  5. The sponsor of the AIF should not be the promoter or promoter group in the Fund. A sponsor is any person who sets up the AIF, it includes promoter in case of a company and partner in case of a limited liability partnership.
  6. AIFs cannot be managed by an investment manager who is directly or indirectly controlled or managed by the Fund or the promoter group of the Fund

SEBI defines AIF as any fund established or incorporated in India, which is a privately pooled investment vehicle that collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

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