AIF Regulatory Architecture and Fund Categorisation
What the exam tests
This domain tests the legal skeleton of an Alternative Investment Fund: what an AIF is, how SEBI classifies it, and what registration and structural rules apply before a scheme can accept money. Questions often turn on category boundaries and on the consequences of getting the classification wrong.
Definition and registration
Under the SEBI (AIF) Regulations, 2012, an AIF is a privately pooled investment vehicle that collects funds from investors for investment according to a defined policy. It is not a mutual fund, a collective investment scheme, a family trust or a holding company. Registration with SEBI is mandatory before launching any scheme; there is no de-minimis corpus exemption.
The three categories
- Category I: venture capital funds, SME funds, social impact funds and infrastructure funds. These invest in startups, early-stage ventures, SMEs, the social sector or infrastructure.
- Category II: private equity funds and debt funds that do not fit Category I or III and do not employ leverage except as permitted.
- Category III: hedge funds and funds using complex strategies, including leverage.
Structural terms
A sponsor establishes the fund; a manager runs the investment programme; a trustee (in trust structures) holds assets; a custodian may safekeep securities. A fund can have multiple schemes, each with its own corpus, investors and strategy. Minimum commitment is Rs 1 crore per investor, with a Rs 25 lakh exception for employees and directors of the fund or manager.
Worked example
A manager plans an LLP that will invest Rs 200 crore in early-stage technology startups and will not use leverage. The strategy is venture capital, so this is a Category I AIF. SEBI registration is required; the manager cannot advertise in a newspaper or on social media; each outside investor must commit at least Rs 1 crore unless the employee/director exception applies.
Traps that cost marks
Do not say Category II may leverage freely; do not confuse fund registration with scheme-level compliance; do not assume a small corpus escapes registration; do not treat an AIF as a retail mutual fund.