SEBI (Alternative Investment Funds) Regulations
The SEBI (Alternative Investment Funds) Regulations 2012 govern the registration and regulation of AIFs in India under three categories — Category I (venture capital, SME, social venture, infrastructure), Category II (private equity, debt funds), and Category III (hedge funds, complex strategies) — with distinct regulatory treatment for each.
The SEBI AIF Regulations 2012 created a unified registration framework for privately pooled investment vehicles that were previously operating in an unregulated or partially regulated space. The three-category structure was designed to align regulatory oversight with the perceived systemic risk and social utility of each fund type.
Category I AIFs include venture capital funds, SME funds, social venture funds, and infrastructure funds. These are considered to have positive externalities (funding startups, infrastructure, social enterprises) and are eligible for certain government-notified concessional tax treatment and limited regulatory relaxations. Category I AIFs cannot borrow for investment purposes except for meeting shortfall in drawdowns.
Category II AIFs cover private equity funds, real estate funds, debt funds, and any funds not falling in Category I or III. Category II funds are the most common category in India. They operate without specific incentives or concessions but are also subject to standard restrictions on leverage (limited borrowing for operational needs). The minimum corpus is Rs 20 crore, and the minimum investment per investor is Rs 1 crore.
Category III AIFs employ complex or diverse trading strategies and may use leverage, including through derivatives. Hedge funds fall here. Category III funds face stricter oversight: SEBI regulates their leverage limits, mandates additional disclosures, and may prescribe periodic reporting. The higher regulatory intensity reflects the potential for systemic risk transmission.
All AIFs must have a minimum corpus of Rs 20 crore (Rs 10 crore for angel funds). The minimum investment by each investor is Rs 1 crore (Rs 25 lakh for employees and directors of the AIF). AIFs are close-ended structures with a minimum tenure of three years.
SEBI has progressively amended the AIF Regulations to allow AIFs to participate in the GIFT IFSC, issue units to foreign investors, and facilitate fund-of-fund structures. Tax pass-through status (where the AIF is not taxed at the fund level, with income attributed directly to unit holders) is available to Category I and II AIFs for most income streams.