The real estate sector has underperformed in the last few years, especially since it is sitting on a large inventory of incomplete or stalled projects. In order to resolve the situation, the government has proposed to create a Category II Alternative Investment Fund (AIF) to infuse some life into this sector, by investing Rs 10,000 crore in the fund. In addition, Rs 15,000 crore will be pooled in from domestic institutions including LIC and other investors in a phased manner.
While this is a welcome move for the realty sector, the challenge does lie in funding and implementation. Before that, let’s delve deeper and understand what AIF is:
By deﬁnition, Alternative Investment Funds are pooled investment funds that put money in venture capital, private equity, hedge funds, and managed futures. In a nutshell, an AIF is actually an investment that is different from traditional forms of investments such as stocks, debts, and securities.
These funds are described under Regulation 2 (1) (b) of the Regulation Act, 2012 of Securities and Exchange Board of India (SEBI). An AIF can be established in the form of a company/corporate body, trust or even a Limited Liability Partnership. These are private funds that are otherwise not under the jurisdiction of any other regulatory agency in India. Most times, high-net-worth individuals and institutions invest in these funds.
According to statistics, over 300 funds are registered under SEBI, since 2012.
According to SEBI Regulations, 2012, AIF shall seek registration in one of the three categories:
This category invests in startups, SMEs or any other sector considered as economically or socially viable by the government. The government promotes and incentivizes investment in these projects, especially since they cause a multiplier effect on the economy when it comes to growth and job creation.
These are included in Category I:
These invest in startups that have high growth potential but face an investment crunch in the initial phase and need funding to establish or expand their business.
The fund invests in the development of public assets such as road and rail infrastructure, airports, communication assets, etc.
This fund is a type of Venture Capital fund where fund managers pool money from numerous angel investors and invest in budding startups for their development.
This Fund typically invests in companies that have strong social backing and want to bring a real change in society.
Alternate investment funds containing private equity funds or debt funds are included in category II. There are no particular incentives or concessions given by the government or any other Regulator.
Most of the unlisted private companies move towards the PE funds for two simple reasons. One, they can’t tap capital simply by issuing any equity or debt instrument and secondly, how PE works is that they invest largely in the unlisted private companies and in return take a share in their ownership.
As the name suggests the debt funds invests in the debt instruments of companies that are listed as well as unlisted. Those companies that have low credit scores generally release high yield debt securities and come with high risk.
When we combine various Alternative Investment Funds, it creates a fund of funds. The strategy of the fund is to invest in a portfolio of other AIFs rather than making its own portfolio or deciding what speciﬁc sector to invest in.
Open-ended funds or funds which make short term returns or hedge funds are included in this category of AIF. These also have no speciﬁc incentives or concessions that are given by the government or any other Regulator.
A hedge fund pools capital from institutional and accredited investors -it invests in domestic as well as international markets to generate high returns.
Privately sourced funds which are specially earmarked for public equity investments to make a privately managed pool.
Investments in private equity, real estate, venture capital, licensed intellectual property innovation, and equity long and short strategies are for the most partAlternative ventures. Any investment that is not made in bonds, stocks and money might be viewed as an Alternative fund investment.
All over India, Alternative investments are divided into three classes. Investments made in SME Funds, Infrastructure Funds, Social Venture Funds, and Venture Capital Funds are ordered under Category 1, these are the more economically and socially desirable
ventures. Followed by Private Equity Funds and Debt Funds which fall under the second category. Alternative Investment Funds (AIFs). And any Alternative fund that cannot be clubbed in a category on and two falls under category three. Category 3 includes all the reserves that utilize unpredictable and differing investment methodologies that go out on a limb on more signiﬁcant levels of risk with an end goal to procure higher than normal returns. Today
there are more than 520 AIFs enlisted with SEBI. SEBI’s choice toward the end of last year to permitAIFs to work from International Finance Services Center (IFSC), Gift City is a push to bring theAIF business onshore from places like Mauritius and Singapore. The new stage for AIFs at IFSC enables private equity investors to dispatch assets at marginal costs. AIFs launch from IFSC will be dollar-based making them advantageous for Indians needing to make offshore investments.