In 2012 Securities and Exchange Board of India (SEBI) stepped forward to overtake the regulatory framework of domestic funds in India and hence introduced the Securities and Exchange Board of India AIF (Alternate Investment Funds) Regulations, 2012. They recognized Alternative Investment Funds (AIFs) as a distinct asset class in order to promote financing for start-ups and early-stage ventures, allow investment strategies in the secondary markets and to tie concessions and incentives to investment restrictions.
After relaxation of pricing rules for foreign direct investments, clarity in relation to put-call options, rationalization of the foreign portfolio investment regime and proposals for further liberalization of investment caps, the regulation regarding alternative investments has become more streamlined than earlier.
Following the introduction of the SEBI (Venture Capital Funds) Regulations i.e. VCF Regulations in 1996, the Venture Capital – Private Equity (VCPE) industry successfully bridge the gap between capital requirements of fast-growing companies and funding available from traditional sources such as banks, IPOs etc.
These AIFs can generally be classified under three categories:
1. Category I AIF- These funds have the strategies to invest in start-ups, early-stage companies, Small-medium sized enterprises or infrastructure or other government regulated areas that are considered as socially or economically desirable. As per the AIF Regulations, the following funds are designated as sub-categories of Category I AIFs – venture capital funds, Small-Medium Enterprises funds, social venture funds, infrastructure funds and other specified AIFs. AIFs having positive effects on the economy may be provided incentives or concessions by SEBI, Govt. of India or other regulators.
2. Category II AIFs- These funds has been categorized as Category I AIFs or Category III AIFs
Category III AIFs- These are funds which employs diverse trading strategies and may involve leverage including through investments in listed or unlisted derivatives, such as hedge funds. Category III AIFs includes the trade to make short-term returns or funds which are open-ended having no specific incentives or concessions are provided by the Government of India or any other regulator.