Launch Thresholds for a First-Time Manager
A first-time manager has net worth of Rs 1.6 crore and proposes a single 'hybrid' scheme that will invest in early-stage unlisted companies and in listed debt. The scheme's stated corpus is Rs 18 crore. The manager plans to accept minimum commitments of Rs 50 lakh from 400 individual investors and Rs 20 lakh from its own employees. It also wants to make an initial investment equal to 30% of the corpus in one portfolio company. The PPM says the scheme is 'Category I and II' and that the manager will charge fees only after deployment. The manager has no prior fund track record, but its directors are 'fit and proper'. The compliance officer asks whether the scheme can be registered and launched as structured.
1. Identify the regulatory thresholds the proposed scheme fails and the consequences.
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For a Category I/II AIF, the manager must have net worth of at least Rs 2 crore; Rs 1.6 crore fails. The minimum corpus is Rs 20 crore; Rs 18 crore fails. The minimum commitment from an investor other than an employee or director of the manager or AIF is Rs 1 crore; Rs 50 lakh from 400 outsiders fails. Employees and directors may commit Rs 25 lakh, so Rs 20 lakh from employees is also below the floor. The maximum number of investors per scheme is 1,000, so 400 is acceptable. The single-investee cap for Category I/II is 25% of corpus, so 30% fails. The scheme cannot be registered and launched as structured. SEBI may reject the application, or if the scheme is registered and later fails to meet the corpus or commitment requirements, it will be non-compliant and cannot make investments. The 25% cap applies at each investment and should be monitored on the committed corpus, not just on cash deployed.
2. Can the scheme be registered as both Category I and Category II? What should the manager do?
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No. An AIF scheme must be registered under one category. The category determines permissible investments, leverage, and investor profile. A 'hybrid' label is not a category. The manager must choose a Category I fund, such as a venture capital, SME, social impact, or infrastructure fund, or a Category II private equity or debt fund. If it wants early-stage equity and listed debt, listed debt is generally not a permitted Category I/II investment except for temporary parking in liquid funds within regulatory limits, and even then it cannot be the strategy. The PPM must state the category, strategy, and restrictions. The manager can set up two separate schemes, each with its own corpus and registration, but it cannot pool them in one scheme or use one to support the other. The compliance officer should require the PPM to be rewritten before filing.
3. What changes are needed before launch, and which are curable after registration?
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Before launch, the manager must increase net worth to at least Rs 2 crore through a genuine infusion, not borrowed funds; raise the corpus to at least Rs 20 crore; reset outside minimum commitments to at least Rs 1 crore; raise employee commitments to at least Rs 25 lakh; reduce the first investment to 25% or less of corpus; amend the PPM to a single category and permitted investments; and adopt a compliant fee and expense policy. These are curable by amending the structure before filing. What is not curable by disclosure is investing 30% in one company or accepting Rs 50 lakh from outsiders. If the manager registers first and then fails to meet the minimum corpus at final close, it must not make investments and may need to wind up and return commitments. Registration does not cure a shortfall, and the manager should not treat the first close as a substitute for meeting the regulatory thresholds.