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NISM Series XIX-C study materials
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NISM Series XIX-C practice questions

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Question 1Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which of the following is the correct definition of an Alternative Investment Fund?

  1. A privately pooled investment vehicle that collects funds from investors for investing in accordance with a defined investment policy for the benefit of its investors Correct answer.
  2. A publicly offered mutual fund scheme that pools money from retail investors for investment in securities
  3. An insurance company that underwrites risks and invests premium income in government securities
  4. A scheduled commercial bank that accepts deposits and lends to infrastructure projects

Explanation

The AIF Regulations define an AIF as a privately pooled investment vehicle that collects funds from investors, whether Indian or foreign, for investing in accordance with a defined investment policy for the benefit of its investors. Mutual funds, insurance companies and banks are regulated under separate statutes and are expressly outside the AIF framework.

Question 2Alternative Investment Funds (AIF) regulatory framework and fund structures

Which type of AIF is permitted to use leverage for the purpose of making investments, subject to conditions set by SEBI?

  1. Category III AIF Correct answer.
  2. Category I and Category II AIFs equally
  3. Category I AIF
  4. Category II AIF

Explanation

Category III AIFs, which employ complex trading strategies including leverage, are permitted to use leverage subject to SEBI-prescribed conditions. Category I and Category II funds generally may not use leverage for investment purposes except for meeting temporary funding requirements as permitted.

Question 3Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following funds belongs to Category I of AIFs?

  1. Debt fund
  2. Venture capital fund Correct answer.
  3. Private equity fund
  4. Hedge fund

Explanation

Category I AIFs include venture capital funds, SME funds, social venture funds, infrastructure funds and other funds SEBI may specify. Private equity and debt funds fall under Category II, while hedge funds using complex strategies fall under Category III.

Question 4Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following is expressly excluded from the definition of an Alternative Investment Fund under the SEBI AIF Regulations?

  1. A limited liability partnership registered as a Category I AIF
  2. A family trust that pools funds for investment in accordance with a defined investment policy
  3. Entities regulated by SEBI such as mutual funds or collective investment schemes, and entities regulated by other financial sector regulators Correct answer.
  4. A private limited company registered as a Category II AIF

Explanation

The AIF Regulations expressly exclude from the definition funds covered by SEBI regulations for mutual funds or collective investment schemes, and entities regulated by other financial sector regulators such as RBI, IRDAI or PFRDA. Family trusts and body corporate forms that do not fall in these excluded categories can be AIFs.

Question 5Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF may be established or constituted in which of the following forms?

  1. Only as a trust
  2. As a trust, a company, a limited liability partnership or a body corporate Correct answer.
  3. Only as a company
  4. Only as a partnership firm registered under the Indian Partnership Act

Explanation

The AIF Regulations permit an AIF to be constituted as a trust, a company, a limited liability partnership or a body corporate. A plain partnership firm under the Indian Partnership Act is not among the permitted forms.

Question 6Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the AIF Regulations, what is the minimum investment amount that a single investor must commit to an AIF?

  1. Rs. 10 lakh
  2. Rs. 1 crore Correct answer.
  3. Rs. 5 crore
  4. Rs. 50 lakh

Explanation

The AIF Regulations prescribe a minimum commitment of Rs. 1 crore per investor. This threshold ensures that AIFs remain vehicles for sophisticated investors rather than retail participants.

Question 7Alternative Investment Funds (AIF) regulatory framework and fund structures

Which category of AIF is eligible to receive an exemption from the requirement to register with SEBI?

  1. Category III AIF
  2. No AIF is exempt from registration under the AIF Regulations Correct answer.
  3. Category I AIF
  4. Category II AIF

Explanation

The AIF Regulations require every AIF to be registered with SEBI before it can start collecting funds. The regulations do not provide a category-based exemption from registration; all three categories must register.

Question 8Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF is proposing to launch a new scheme. Which of the following statements is correct regarding the scheme?

  1. The scheme may be launched immediately after filing the placement memorandum with SEBI
  2. The scheme must be launched only after obtaining registration from SEBI, and the scheme should be separately registered Correct answer.
  3. The scheme must be approved by the AIF's sponsor but need not be intimated to SEBI
  4. The scheme may be launched without any application to SEBI provided the AIF itself is registered

Explanation

The AIF Regulations require that each scheme of an AIF be launched only after obtaining registration from SEBI, and the scheme must be separately registered. Filing a placement memorandum does not substitute for registration.

Question 9Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following is a key eligibility condition for the sponsor or manager of an AIF under the SEBI AIF Regulations?

  1. The sponsor or manager must have adequate experience and a minimum net worth as specified by SEBI Correct answer.
  2. The sponsor or manager must be an individual resident of India
  3. The sponsor or manager must have a prior track record of at least ten years in mutual fund management
  4. The sponsor or manager must be a scheduled commercial bank

Explanation

SEBI requires the sponsor or manager of an AIF to have adequate experience, a professional qualification, and a minimum net worth prescribed in the regulations. There is no requirement that the sponsor be a bank, an individual, or have a ten-year mutual fund record.

Question 10Alternative Investment Funds (AIF) regulatory framework and fund structures

For Category III AIFs, the minimum corpus requirement under the AIF Regulations is:

  1. Rs. 5 crore
  2. Rs. 10 crore
  3. Rs. 1 crore
  4. Rs. 20 crore Correct answer.

Explanation

Category III AIFs are required to have a minimum corpus of Rs. 20 crore. This higher threshold reflects the complex trading strategies and leverage permitted to this category.

Question 11Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following is a permitted activity for a Category II AIF?

  1. Undertaking complex trading strategies including derivatives with leverage
  2. Investing primarily in venture capital undertakings that are not listed
  3. Investing primarily in unlisted securities of companies or in units of other AIFs Correct answer.
  4. Employing leverage for the purpose of making investments

Explanation

Category II AIFs include private equity funds and debt funds that invest in unlisted securities or units of other AIFs, and they do not undertake leverage or complex trading. Venture capital investment is characteristic of Category I, and leverage and complex strategies belong to Category III.

Question 12Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF manager is drafting the placement memorandum for a new scheme. Which of the following must the placement memorandum contain?

  1. Details of the fund's investment objective, strategy, risks, fees and expenses, and the terms on which investors may invest Correct answer.
  2. Only the registration certificate issued by SEBI
  3. Only the names of the investors and their commitments
  4. Only the audited financial statements of the manager for the past three years

Explanation

The placement memorandum must disclose material information including the investment objective and strategy, risk factors, fees and expenses, and the terms of investment so that investors can make an informed decision. It is not limited to investor names, financial statements or the registration certificate.

Question 13Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the AIF Regulations, an AIF may accept investments from which of the following?

  1. Only domestic institutional investors
  2. Resident Indians, foreign investors and non-resident Indians subject to applicable law Correct answer.
  3. Only foreign institutional investors registered with SEBI
  4. Only resident Indian individuals

Explanation

The AIF Regulations permit AIFs to accept funds from resident Indians, foreign investors and non-resident Indians, subject to applicable laws including FEMA. There is no restriction limiting investment to only individuals, domestic institutions or registered foreign institutional investors.

Question 14Alternative Investment Funds (AIF) regulatory framework and fund structures

A Category I AIF is raising funds from investors. Which of the following statements about the number of investors is correct?

  1. There is no limit on the number of investors for any AIF
  2. The number of investors is limited to 49 per scheme for all categories
  3. The number of investors is limited to 200 per scheme for all categories
  4. The number of investors in an AIF is limited to 1,000 per scheme, with certain exclusions Correct answer.

Explanation

The AIF Regulations cap the number of investors in each scheme at 1,000, excluding certain investors such as the sponsor, manager, employees and their relatives. This cap applies across categories rather than the lower numbers used for certain other pooled vehicles.

Question 15Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category I fund wishes to invest in a company. Which of the following restrictions applies to investments by AIFs?

  1. The AIF may invest in any company without any restriction
  2. The AIF may invest in a company only if the company is listed on a recognised stock exchange
  3. The AIF may invest in a company only if the investment is in accordance with the investment policy disclosed to investors, and subject to SEBI restrictions Correct answer.
  4. The AIF may invest only in government securities

Explanation

AIF investments must be in accordance with the investment policy disclosed in the placement memorandum and subject to any restrictions SEBI imposes, such as limits on concentration. There is no blanket requirement that investee companies be listed or that investments be confined to government securities.

Question 16Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following best describes a Category III AIF?

  1. A fund that invests primarily in venture capital undertakings and does not use leverage
  2. A fund that employs complex trading strategies, including leverage, and may invest in listed or unlisted securities Correct answer.
  3. A fund that invests only in units of other AIFs and does not trade in securities
  4. A fund that invests only in infrastructure projects and is sponsored by the government

Explanation

Category III AIFs employ complex trading strategies, including leverage, and may invest in listed or unlisted securities. Venture capital funds belong to Category I, and infrastructure funds are also a Category I sub-type.

Question 17Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's manager is considering whether it can accept an investment of Rs. 75 lakh from a new investor. Under the AIF Regulations, which statement is correct?

  1. The investment can be accepted because the minimum commitment does not apply to Category II AIFs
  2. The investment cannot be accepted because it is below the Rs. 1 crore minimum commitment for AIF investors Correct answer.
  3. The investment can be accepted because it exceeds Rs. 50 lakh
  4. The investment can be accepted if the investor is an accredited investor

Explanation

The AIF Regulations prescribe a minimum commitment of Rs. 1 crore per investor, and a commitment of Rs. 75 lakh falls below that floor. The minimum applies across categories, so the acceptance would breach the regulations.

Question 18Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following is a permitted form of contribution by an investor to an AIF?

  1. Only immovable property
  2. Only cash
  3. Only listed securities
  4. Cash or cash equivalents, and other assets as permitted by SEBI Correct answer.

Explanation

The AIF Regulations permit investors to contribute cash or cash equivalents, and SEBI may permit contributions in other assets in specified circumstances. Contributions are not restricted to cash alone, listed securities alone or immovable property alone.

Question 19Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered under the AIF Regulations wishes to launch a scheme that invests in units of another AIF. Which of the following statements is correct?

  1. An AIF may not invest in units of another AIF under any circumstances
  2. An AIF may invest in units of another AIF only with prior approval of the stock exchange
  3. An AIF may invest in units of another AIF only if the other AIF is a Category III fund
  4. An AIF may invest in units of another AIF subject to the investment policy and SEBI conditions, including restrictions on layering Correct answer.

Explanation

AIFs may invest in units of other AIFs in accordance with their disclosed investment policy and subject to SEBI conditions, including restrictions on multiple layering. The regulations do not impose a blanket prohibition or limit such investment to Category III funds.

Question 20Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following statements about the tenure of a close-ended AIF scheme is correct?

  1. A close-ended scheme has no minimum tenure requirement
  2. A close-ended scheme must have a minimum tenure of three years Correct answer.
  3. A close-ended scheme must have a tenure of exactly ten years
  4. A close-ended scheme must have a minimum tenure of five years

Explanation

The AIF Regulations require a close-ended scheme to have a minimum tenure of three years. The scheme may be extended beyond that period with the approval of investors as specified, but the floor is three years.

Question 21Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's scheme is open-ended. Which of the following is correct regarding redemptions?

  1. Open-ended schemes may permit redemptions at the option of investors subject to the terms disclosed in the placement memorandum and applicable SEBI conditions Correct answer.
  2. Open-ended schemes may not permit redemptions at all
  3. Open-ended schemes must permit daily redemptions at net asset value
  4. Open-ended schemes may permit redemptions only after the scheme's tenure ends

Explanation

Open-ended AIF schemes may allow investors to redeem their units in accordance with the terms disclosed in the placement memorandum and subject to SEBI conditions. There is no requirement of daily redemption, and a complete prohibition would defeat the open-ended character.

Question 22Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following best describes the role of a custodian in an AIF?

  1. The custodian determines the net asset value of the AIF's units
  2. The custodian markets the AIF's units to investors
  3. The custodian safeguards the assets of the AIF and performs functions such as settlement and record-keeping as specified by SEBI Correct answer.
  4. The custodian manages the investment decisions of the AIF

Explanation

A custodian safeguards the AIF's assets and carries out functions such as settlement of transactions and record-keeping in accordance with SEBI requirements. Investment decisions rest with the manager, marketing is a distribution function, and NAV determination is typically the manager's responsibility.

Question 23Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category I fund is considering appointing a custodian. Under the AIF Regulations, which statement is correct?

  1. A custodian is required only for Category II AIFs
  2. A custodian is required for a Category III AIF and may be required for other AIFs in specified circumstances Correct answer.
  3. A custodian is not required for any AIF
  4. A custodian is mandatory for all AIFs regardless of category

Explanation

The AIF Regulations require a Category III AIF to appoint a custodian, and a custodian may also be required for other AIFs in specified circumstances. The requirement is not universal across all AIFs nor confined to Category II.

Question 24Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the AIF Regulations, which of the following is a responsibility of the AIF's manager?

  1. Underwriting the losses of the AIF's investee companies
  2. Making investment decisions and managing the scheme in accordance with the placement memorandum and applicable regulations Correct answer.
  3. Approving the registration of the AIF with SEBI
  4. Guaranteeing a minimum return to investors

Explanation

The manager is responsible for making investment decisions and managing the scheme in accordance with the disclosed investment policy and applicable regulations. An AIF manager cannot guarantee returns, underwrite investee losses, or approve its own SEBI registration.

Question 25Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following statements about the fees and expenses charged by an AIF is correct?

  1. The AIF must disclose its fees and expenses in the placement memorandum, and fees must be in accordance with the terms disclosed to investors Correct answer.
  2. The AIF may charge fees only after the scheme's tenure ends
  3. The AIF may charge any fee without disclosure to investors
  4. The AIF may charge performance fees only if it is a Category III AIF

Explanation

The AIF Regulations require the AIF to disclose its fees and expenses in the placement memorandum, and fees must be charged in accordance with the terms disclosed to investors. There is no rule limiting performance fees to Category III or requiring fees only at the end of tenure.

Question 26Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which of the following is a defining characteristic of a Category I AIF?

  1. It invests primarily in publicly traded equity shares and uses hedging strategies to generate short-term returns.
  2. It invests primarily in complex financial products and employs leverage, including through borrowing and derivatives.
  3. It invests primarily in real estate and does not undertake any other investment activity.
  4. It invests primarily in start-ups, early-stage ventures, SMEs, infrastructure, or other sectors that the government or regulators consider economically and socially desirable. Correct answer.

Explanation

Category I AIFs are those that invest in start-ups, early-stage ventures, SMEs, infrastructure, or other sectors that the government or regulators consider economically and socially desirable. They are further sub-categorized into venture capital funds, SME funds, infrastructure funds, and special situation funds. This definition distinguishes them from Category II and III funds.

Question 27Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following statements about the registration of an AIF with SEBI is correct?

  1. An AIF must obtain a certificate of registration from SEBI before launching any scheme or accepting any investment. Correct answer.
  2. An AIF must register with SEBI only after it has raised its minimum corpus from investors.
  3. An AIF may launch a scheme and accept investments while its application for registration is pending with SEBI.
  4. An AIF is exempt from registration if it raises funds only from accredited investors.

Explanation

The AIF Regulations require every AIF to obtain a certificate of registration from SEBI before commencing operations, which includes launching any scheme or accepting investments. Registration is a precondition, not a post-fundraising formality. There is no exemption for accredited investors.

Question 28Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category II fund is considering making an investment. Which of the following activities is it permitted to undertake?

  1. Accepting investments from any person, including those who are not residents of India, without any limit on the number of investors.
  2. Investing in derivatives for the primary purpose of hedging and portfolio management.
  3. Investing in unlisted securities of companies across various sectors, subject to the conditions specified in the regulations. Correct answer.
  4. Borrowing funds for the purpose of making investments, subject to a maximum of 10% of the corpus.

Explanation

Category II AIFs may invest in unlisted securities of companies across sectors, subject to conditions such as those relating to investment in associates and the sponsor's contribution. They are not permitted to borrow for investment purposes, except for temporary funding needs as allowed, and they do not primarily use derivatives for hedging. The number of investors is capped.

Question 29Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the AIF Regulations, which of the following is a condition for an AIF to be eligible for the exemption from the requirement to register with SEBI?

  1. The AIF must be a family trust or a private trust that invests only the funds of its beneficiaries and does not raise funds from external investors. Correct answer.
  2. The AIF must be a sub-scheme of a registered AIF that invests only in unlisted securities of start-ups.
  3. The AIF must be an angel fund that raises funds from accredited investors and is registered with SEBI under the AIF Regulations.
  4. The AIF must be a Category III fund that uses complex trading strategies and employs leverage.

Explanation

The AIF Regulations exempt certain entities from registration, including family trusts or private trusts that invest only the funds of their beneficiaries and do not raise external capital. Angel funds are a sub-category of Category I AIFs and must be registered. Therefore, only the trust investing own funds qualifies for the exemption.

Question 30Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF is planning to launch a new scheme. Which of the following statements is correct regarding the launch of a scheme by a registered AIF?

  1. The AIF must obtain a separate certificate of registration for each scheme from SEBI.
  2. The AIF may launch the scheme immediately after informing SEBI, without waiting for any approval or intimation.
  3. The AIF must file the scheme particulars with SEBI and may launch the scheme only after SEBI has taken them on record. Correct answer.
  4. The AIF is not required to file any scheme particulars with SEBI if the scheme is open-ended.

Explanation

A registered AIF must file the scheme particulars with SEBI, and the scheme can be launched only after SEBI has taken the particulars on record. This is a disclosure and regulatory oversight mechanism. Separate registration per scheme is not required, and open-ended schemes are not exempt from filing.

Question 31Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category I fund wishes to invest in a company. Which of the following restrictions applies to investments by Category I AIFs?

  1. A Category I AIF may invest up to 50% of its investable funds in a single company without any restriction on associate companies.
  2. A Category I AIF must invest at least 75% of its investable funds in start-ups or early-stage ventures.
  3. A Category I AIF shall not invest more than 25% of its investable funds in a single company, and shall not invest in an associate company beyond permissible limits. Correct answer.
  4. A Category I AIF is prohibited from investing in any company that is listed on a stock exchange.

Explanation

Category I AIFs are subject to investment concentration limits, such as not investing more than 25% of investable funds in a single company, and restrictions on investments in associates. These limits promote diversification and prevent excessive exposure. There is no prohibition on investing in listed companies, but the focus is on unlisted or specified sectors.

Question 32Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's manager is considering whether it can accept an investment of Rs. 75 lakh from a new investor. Under the AIF Regulations, what is the minimum investment amount per investor for an AIF (other than an angel fund)?

  1. Rs. 25 lakh
  2. Rs. 75 lakh
  3. Rs. 1 crore Correct answer.
  4. Rs. 50 lakh

Explanation

The AIF Regulations prescribe a minimum investment of Rs. 1 crore per investor for AIFs, except for angel funds which have a lower threshold of Rs. 25 lakh. Therefore, an investment of Rs. 75 lakh would fall short of the minimum for a regular AIF. The manager cannot accept it unless the investor is investing in an angel fund or meets an exception.

Question 33Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF is considering making an investment in a company that is an associate of the AIF's sponsor. Which of the following is correct under the AIF Regulations?

  1. The AIF may invest in an associate company without any investor approval, provided the investment is disclosed in the placement memorandum.
  2. The AIF may invest in an associate company only with the approval of at least 75% of the investors by value, and such investment is subject to additional disclosure requirements. Correct answer.
  3. The AIF may invest in an associate company only if the investment is less than 5% of the AIF's corpus.
  4. The AIF is prohibited from investing in any associate company under all circumstances.

Explanation

Investments by an AIF in associates require the approval of at least 75% of the investors by value, and additional disclosures must be made. This safeguards against conflicts of interest. There is no blanket prohibition, and investor approval is mandatory regardless of the investment size.

Question 34Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the AIF Regulations, what is the maximum permissible leverage for a Category III AIF?

  1. Category III AIFs may employ leverage up to 5 times the NAV of the scheme.
  2. Category III AIFs may employ leverage up to 1 time the NAV of the scheme.
  3. Category III AIFs may employ leverage up to 2 times the net asset value (NAV) of the scheme, subject to certain conditions and disclosures. Correct answer.
  4. Category III AIFs are prohibited from employing any leverage.

Explanation

Category III AIFs are permitted to employ leverage up to 2 times the NAV of the scheme, subject to conditions such as disclosure and risk management. This allows them to enhance returns but also increases risk. Leverage beyond 2 times is not permitted, and it is not prohibited entirely.

Question 35Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF is required to maintain records of its activities. Which of the following statements about record-keeping under the AIF Regulations is correct?

  1. The AIF must maintain records for a period of one year only.
  2. The AIF must maintain records for a period of five years from the date of the relevant transaction or the date of the scheme's winding up, whichever is later. Correct answer.
  3. The AIF must maintain records for a period of ten years from the date of the relevant transaction.
  4. The AIF is not required to maintain any records if it is a Category III fund.

Explanation

The AIF Regulations require the AIF to maintain records for at least five years from the date of the transaction or the date of the scheme's winding up, whichever is later. This ensures traceability and regulatory oversight. One year is too short, and ten years is not the prescribed minimum.

Question 36Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following statements about the winding up of an AIF scheme is correct?

  1. Upon winding up, the AIF's assets must be transferred to the sponsor without distributing to investors.
  2. An AIF scheme may continue indefinitely beyond its stated tenure without any requirement to wind up.
  3. The AIF manager may unilaterally extend the scheme's tenure without investor approval.
  4. A close-ended scheme must be wound up at the end of its tenure, and the proceeds must be distributed to investors within a specified period after the final redemption. Correct answer.

Explanation

A close-ended scheme must be wound up at the end of its tenure, and the proceeds must be distributed to investors within the prescribed time after the final redemption. Extensions require investor approval, and assets cannot be appropriated by the sponsor. Indefinite continuation is not permitted for close-ended schemes.

Question 37Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category II fund is planning to invest in a start-up company. Which of the following statements is correct regarding the investment?

  1. The investment is prohibited because Category II AIFs cannot invest in start-ups.
  2. The investment is permitted, but the AIF must comply with the investment concentration limits and cannot invest more than 25% of its investable funds in a single start-up. Correct answer.
  3. The investment is permitted only if the start-up is listed on a recognized stock exchange.
  4. The investment is permitted without any limits, as Category II AIFs are exempt from investment restrictions.

Explanation

Category II AIFs may invest in start-ups, but they are subject to investment concentration limits, such as not investing more than 25% of investable funds in a single company. They are not prohibited from investing in start-ups, nor are they exempt from limits. Start-ups are typically unlisted, so a listing requirement would be contrary to the nature of such investments.

Question 38Alternative Investment Funds (AIF) regulatory framework and fund structures

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which investor class must an AIF's scheme admit if the fund intends to accept commitments from a person who is not a resident of India and is not a citizen of India?

  1. The scheme must admit the person as a sponsor-cum-investor with a special waiver
  2. The scheme must admit the person only as a domestic investor after conversion of residency
  3. The scheme must admit the person as a foreign investor under the foreign investor category Correct answer.
  4. The scheme must admit the person only after SEBI grants a separate scheme-level license

Explanation

The AIF framework recognises three investor categories: domestic investors, foreign investors and sponsor-cum-investors. A non-resident person who is not an Indian citizen falls in the foreign investor category, subject to FEMA and other applicable rules. The scheme therefore admits such a person as a foreign investor rather than reclassifying residency.

Question 39Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered under the AIF Regulations proposes to launch a scheme whose investment objective is to invest primarily in companies that are listed or proposed to be listed on a recognised stock exchange. Which statement about the permissibility of such a scheme is correct?

  1. It is permitted only if the scheme is registered as a Category III fund and uses leverage
  2. It is not permitted, because AIF schemes are barred from investing in listed securities
  3. It is permitted for any category provided the scheme discloses the strategy in the placement memorandum Correct answer.
  4. It is permitted only if the scheme is registered as a Category I fund with a minimum tenure of five years

Explanation

The AIF Regulations do not bar schemes from investing in listed securities as a matter of category prohibition; the scheme's strategy and category must simply be consistent and disclosed. Category III funds in particular may use complex strategies and may invest in listed securities. The placement memorandum must set out the investment strategy and objective.

Question 40Alternative Investment Funds (AIF) regulatory framework and fund structures

An investor has committed Rs. 1 crore to a close-ended Category II AIF scheme. The fund's private placement memorandum states that the scheme will draw down commitments as investments are identified. Which statement about the investor's obligation is correct?

  1. The investor may refuse a drawdown if the investment is in an unlisted company
  2. The investor is bound by the commitment and must fund drawdowns as called by the manager Correct answer.
  3. The investor's liability is capped at the amount already drawn down
  4. The investor may reduce the commitment at any time before the drawdown is made

Explanation

A commitment is a contractual obligation to contribute capital when the manager calls it, in accordance with the terms of the scheme documents. The investor cannot unilaterally reduce or refuse a drawdown that conforms to the agreed terms. Only the scheme documents and applicable law govern default consequences.

Question 41Alternative Investment Funds (AIF) regulatory framework and fund structures

A Category III AIF intends to borrow funds for its trading strategy. Under the AIF Regulations, which condition applies to such borrowing?

  1. Borrowing is permitted only for meeting temporary shortfalls and must be within the leverage limits disclosed to investors Correct answer.
  2. Borrowing is permitted only if the fund is close-ended and does not use derivatives
  3. Borrowing is permitted without limit provided the custodian consents
  4. Borrowing is prohibited entirely for Category III funds

Explanation

Category III funds may employ leverage, including borrowing, within the limits and conditions set out in the AIF Regulations and disclosed to investors. The framework permits borrowing for specified purposes such as meeting temporary shortfalls rather than for open-ended, unlimited gearing. The scheme's disclosed leverage position must remain within the permitted ceiling.

Question 42Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's sponsor wishes to hold a stake in the AIF itself. Under the AIF Regulations, which statement about the sponsor's contribution is correct?

  1. The sponsor must contribute at least 2.5% of the corpus or Rs. 5 crore, whichever is lower, and the contribution is locked in Correct answer.
  2. The sponsor's contribution is optional and carries no lock-in
  3. The sponsor must contribute at least 10% of the corpus with no lock-in
  4. The sponsor may not hold any interest in the AIF beyond its role as manager

Explanation

The AIF Regulations require the sponsor or manager to have a continuing interest in the AIF through a minimum contribution. The prescribed minimum is the lower of 2.5% of the corpus or Rs. 5 crore, and this contribution is subject to a lock-in. This aligns the sponsor's interest with that of investors.

Question 43Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF scheme is being wound up. Which statement correctly describes the order in which the scheme's assets are applied on winding up?

  1. Investors are paid first, then creditors, with any surplus retained by the manager
  2. The assets are applied first in discharge of liabilities and expenses of the scheme, with the residual distributed to investors Correct answer.
  3. The assets are distributed equally among investors irrespective of their capital accounts
  4. The manager's fees are paid first, then investors, then creditors

Explanation

On winding up, the scheme's liabilities and winding-up expenses are discharged from the assets before any distribution to investors. The residual is then distributed to investors in accordance with their capital accounts and the scheme documents. The manager cannot prefer its own fees ahead of scheme liabilities.

Question 44Alternative Investment Funds (AIF) regulatory framework and fund structures

Which body is responsible for granting registration to an Alternative Investment Fund under the SEBI (Alternative Investment Funds) Regulations, 2012?

  1. The Reserve Bank of India
  2. The Ministry of Corporate Affairs
  3. The recognised stock exchanges
  4. The Securities and Exchange Board of India Correct answer.

Explanation

The AIF Regulations are framed by SEBI, and SEBI grants registration to AIFs and approves their schemes. The RBI and the Ministry of Corporate Affairs have other regulatory roles but do not register AIFs. Stock exchanges do not grant AIF registration.

Question 45Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category I fund wants to launch a scheme that invests in early-stage venture capital undertakings. Which statement about the scheme's permitted investments is correct?

  1. The scheme may invest only in listed securities
  2. The scheme may invest only in money-market instruments
  3. The scheme may invest only in real estate projects
  4. The scheme may invest in unlisted venture capital undertakings and in units of other AIFs subject to limits Correct answer.

Explanation

Category I AIFs, including venture capital funds, invest primarily in unlisted securities of early-stage or start-up undertakings. The regulations permit investments in units of other AIFs within specified limits and subject to conditions. They are not restricted to listed securities or money-market instruments.

Question 46Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's manager wants to charge a performance-linked fee to investors in a scheme. Under the AIF Regulations, which condition must be satisfied for such a fee?

  1. The fee may be charged at the manager's discretion without disclosure
  2. The fee must be approved by the custodian and disclosed only to the sponsor
  3. The fee must be disclosed in the placement memorandum and charged in accordance with the scheme documents Correct answer.
  4. The fee may be charged only if the scheme is open-ended

Explanation

Fees and expenses, including performance-linked fees, must be disclosed to investors in the placement memorandum and charged in accordance with the scheme documents. The manager cannot levy undisclosed or discretionary charges. Transparency in fee disclosure is a core investor-protection requirement.

Question 47Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category II fund holds investments in unlisted securities. Which statement about the valuation of these investments is correct?

  1. Unlisted securities may be valued at cost indefinitely without review
  2. Unlisted securities must be valued in accordance with a valuation procedure that is disclosed and consistently applied Correct answer.
  3. Unlisted securities must be valued at the last traded price on a recognised stock exchange
  4. Unlisted securities are exempt from valuation because they are not publicly traded

Explanation

AIFs must value their investments using a disclosed and consistently applied valuation procedure, which for unlisted securities typically involves independent or manager-determined fair value. Cost may be a starting point but cannot be used indefinitely without review. There is no last traded price for unlisted securities.

Question 48Alternative Investment Funds (AIF) regulatory framework and fund structures

Which of the following correctly describes the placement memorandum that an AIF must issue to prospective investors?

  1. A document containing the scheme's strategy, risks, fees, and material terms for investors Correct answer.
  2. A document that replaces the scheme's legal agreements
  3. A document filed only with the stock exchange
  4. A marketing brochure that need not disclose risks

Explanation

The placement memorandum is the principal disclosure document for an AIF scheme. It must set out the investment strategy, risks, fees, expenses and other material terms so that investors can make an informed decision. It supplements, but does not replace, the scheme's legal agreements.

Question 49Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF's scheme intends to invest in a company in which the AIF's manager holds a significant interest. Which statement about such an investment is correct?

  1. The investment must be disclosed and dealt with in accordance with the scheme documents and applicable conflict-of-interest rules Correct answer.
  2. The investment is permitted only if the custodian approves it
  3. The investment is permitted without any disclosure because the manager is not the investor
  4. The investment is prohibited in all circumstances

Explanation

Investments involving conflicts of interest, such as those connected with the manager or sponsor, must be disclosed to investors and handled in accordance with the scheme documents and applicable regulatory requirements. The framework seeks transparency rather than an absolute bar. Custodian approval is not the governing mechanism.

Question 50Alternative Investment Funds (AIF) regulatory framework and fund structures

An AIF registered as a Category II fund is considering whether it may accept an investment from an investor whose commitment is below the minimum threshold prescribed for AIF investors. Which statement is correct?

  1. The threshold applies only to open-ended schemes
  2. The threshold applies only to foreign investors
  3. The minimum commitment threshold applies to investors and the manager cannot waive it Correct answer.
  4. The minimum commitment threshold may be waived by the manager at its discretion

Explanation

The AIF Regulations prescribe a minimum commitment per investor, and the manager cannot waive this requirement at its discretion. The threshold protects the framework by ensuring investors meet the prescribed size criteria. It applies generally to investors, not only to foreign investors or particular scheme types.