Overview
Alternative Investment Funds (AIFs) are privately pooled investment vehicles that collect funds from sophisticated investors for investing according to a defined investment policy. They are regulated by SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012 and the Master Circular for AIFs.
AIFs are classified as Category I (venture capital, angel, SME, social impact and infrastructure funds), Category II (private equity, private credit and other funds that do not use leverage beyond operational needs) and Category III (funds using complex or leveraged strategies, including hedge funds). Each category carries its own investment conditions, reporting and tax treatment.
Running an AIF means continuous compliance: first close timelines, sponsor commitment, investment concentration limits, investor reporting, PPM audit, compliance test reports and quarterly reporting to SEBI.
Who needs this service
Legal and regulatory framework
- SEBI (Alternative Investment Funds) Regulations, 2012
- SEBI Master Circular for AIFs and subsequent circulars
- Indian Trusts Act, 1882 / LLP Act, 2008 / Companies Act, 2013 (depending on the fund vehicle)
- Income-tax law: pass-through status for Category I and II AIFs
- FEMA regulations for foreign investors and overseas investments
Scope of services
Set-up and registration
- Choice of category and structure
- Review of the PPM and application documents from a compliance standpoint
- Coordination with legal advisers, trustees and merchant bankers
Ongoing SEBI compliance
- Compliance calendar and monitoring of investment conditions and concentration limits
- First close, minimum corpus, tenure and sponsor commitment tracking
- Material change and change-in-category processes
Reporting and Certification
- Quarterly reporting to SEBI
- Compliance Test Report (CTR) for the manager and trustee
- Certificates required under the regulations, including No Fund Raised certificates
- Investor reporting and NAV disclosures
PPM audit
- Annual audit of compliance with the terms of the PPM
- Review of fees, expenses, drawdowns and distribution waterfall
- Reporting of deviations and corrective action
Accounting, audit and tax
- Financial statements of the fund
- Statutory audit support
- Pass-through tax reporting, Forms for income distributed to investors
How the engagement works
- Understand the fundCategory, structure, PPM and investor base.
- Compliance mapAll obligations with owners and due dates.
- MonitoringPeriodic checks of investments, drawdowns and disclosures.
- Reporting and certificationSEBI reports, CTR, PPM audit and certificates.
- Regulatory queriesSupport on SEBI observations and trustee requests.
Documents typically required
Key forms and due dates
| Item | Timeline |
|---|---|
| First close | Within 12 months of SEBI's communication on the PPM |
| Quarterly report to SEBI | Within 15 days of the end of each quarter |
| Compliance Test Report | Annually, after the end of the financial year, as per SEBI circulars |
| PPM audit | Annually, for schemes not exempt from the requirement |
Deliverables
- Compliance calendar and monitoring reports
- SEBI quarterly reports
- Compliance Test Report
- PPM audit report
- Regulatory certificates
- Financial statements and tax reporting
The scope of each engagement is agreed in writing and depends on the nature, size and regulatory requirements of the entity.
Frequently asked questions
Who regulates AIFs in India?
SEBI, under the SEBI (Alternative Investment Funds) Regulations, 2012 and its circulars.
What is the minimum investment in an AIF?
₹1 crore per investor, and ₹25 lakh for employees or directors of the manager, with different rules for angel funds and accredited investors.
What is a PPM audit?
An annual audit of whether the AIF has complied with the terms of its Private Placement Memorandum. Certain schemes, such as angel funds and large value funds, are exempt.
What happens if the first close is not declared in time?
The scheme cannot proceed on the existing filing; it has to be relaunched with a fresh application and fee.
How are AIFs taxed?
Category I and II AIFs are pass-through vehicles: income other than business income is taxed in the hands of investors. Category III AIFs are taxed at the fund level.