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NISM Series XIX-E (Cat III AIF) study materials
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NISM Series XIX-E (Cat III AIF) practice questions

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Question 1Alternative Investment Funds in India - Category III framework and regulatory context

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which category of AIF may employ leverage, including through borrowing and derivatives, subject to the conditions specified by SEBI?

  1. Category III AIF Correct answer.
  2. Category II AIF
  3. Category I AIF
  4. AIF schemes of all three categories alike

Explanation

Category III AIFs are the only category permitted to use leverage, including borrowing of funds and use of derivatives, subject to SEBI-specified limits and disclosure conditions. Category I and II funds are generally prohibited from borrowing except for meeting temporary shortfalls in drawdowns.

Question 2Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is the defining investment characteristic of a Category III AIF?

  1. It employs complex trading strategies and may use leverage, including investments in listed and unlisted derivatives Correct answer.
  2. It invests primarily in infrastructure projects with a fixed tenure
  3. It provides debt financing to thinly capitalised listed companies
  4. It invests only in unlisted securities of start-ups and early-stage ventures

Explanation

Category III AIFs are defined by their use of diverse or complex trading strategies, including leverage and derivative positions, in listed or unlisted securities. They are typically hedge-fund style vehicles with a shorter horizon than Category I or II funds.

Question 3Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF is being structured. Which scheme-level requirement applies to such a fund under the AIF Regulations?

  1. Each scheme must be close-ended with a fixed maturity
  2. The fund must be open-ended with a minimum corpus of Rs 20 crore
  3. Each scheme must have a minimum tenure of three years
  4. The fund may be open-ended or close-ended, and each scheme must have a minimum corpus of Rs 20 crore Correct answer.

Explanation

Category III AIFs may be launched as open-ended or close-ended schemes, and each scheme must raise a minimum corpus of Rs 20 crore. This contrasts with Category I and II funds, which must be close-ended with longer minimum tenures.

Question 4Alternative Investment Funds in India - Category III framework and regulatory context

An applicant seeking registration as a Category III AIF must satisfy which minimum corpus requirement at the scheme level?

  1. Rs 50 crore
  2. Rs 5 crore
  3. Rs 20 crore Correct answer.
  4. Rs 10 crore

Explanation

Each scheme of a Category III AIF must raise a minimum corpus of Rs 20 crore. The same threshold applies to Category I and II schemes, and the corpus must be disclosed in the placement memorandum.

Question 5Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF wants to accept an investment of Rs 50 lakh from a single investor. What is the minimum investment amount per investor for a Category III scheme?

  1. Rs 1 crore Correct answer.
  2. Rs 25 lakh
  3. Rs 50 lakh
  4. Rs 5 crore

Explanation

The minimum investment by an investor in any AIF scheme, including Category III, is Rs 1 crore. For employees and directors of the manager, the threshold is reduced to Rs 25 lakh.

Question 6Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's placement memorandum discloses that the fund will charge a performance fee. Under the AIF Regulations, which statement about performance-linked fees for Category III is accurate?

  1. Performance fees require prior approval of SEBI for each scheme
  2. Performance fees may be charged subject to disclosure in the placement memorandum and the terms agreed with investors Correct answer.
  3. Performance fees are prohibited for Category III AIFs
  4. Performance fees can only be charged on realised gains

Explanation

Category III AIFs may charge performance-linked fees, provided the fee structure is fully disclosed in the placement memorandum and reflected in the contribution agreement. SEBI does not approve fee structures scheme by scheme.

Question 7Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following best describes the regulatory treatment of leverage by a Category III AIF?

  1. Leverage is entirely prohibited
  2. Leverage is permitted without any limit
  3. Leverage is permitted only through borrowing from banks
  4. Leverage is permitted subject to conditions specified by SEBI, including disclosure and limits Correct answer.

Explanation

Category III AIFs may employ leverage, but SEBI prescribes conditions and limits, and the fund must disclose its leverage policy in the placement memorandum. The framework permits borrowing and derivatives exposure within those parameters.

Question 8Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF invests in derivatives for hedging and for taking directional positions. Which regulatory position applies to such derivative usage?

  1. Derivatives may be used only with prior investor consent in writing
  2. Derivatives are prohibited for all AIFs
  3. Derivatives may be used only for hedging, never for taking positions
  4. Derivatives may be used subject to the leverage and disclosure conditions specified by SEBI Correct answer.

Explanation

Category III AIFs are permitted to invest in derivatives, including for taking positions, but the activity is subject to SEBI-specified leverage conditions and disclosure. The strategy and risk profile must be described in the placement memorandum.

Question 9Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is a key regulatory difference between a Category III AIF and a Category II AIF?

  1. Category III may be open-ended and use leverage, while Category II must be close-ended and cannot use leverage Correct answer.
  2. Category III must invest only in unlisted securities, while Category II invests only in listed securities
  3. Category III has no minimum investment requirement, while Category II does
  4. Category III enjoys a tax pass-through, while Category II does not

Explanation

Category III AIFs may be launched as open-ended schemes and may employ leverage, whereas Category II funds must be close-ended and are generally barred from leverage. Both categories are subject to the same minimum investment threshold.

Question 10Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's manager is considering whether the fund can accept investments from persons resident outside India. Which statement is accurate?

  1. Foreign investors are prohibited from investing in Category III AIFs
  2. Foreign investment is permitted subject to the Foreign Exchange Management Act and SEBI conditions Correct answer.
  3. Foreign investment is permitted only with prior approval of SEBI for each investor
  4. Foreign investment is permitted only through the FDI route

Explanation

Foreign investment in Category III AIFs is permitted, but it must comply with FEMA and applicable SEBI conditions. The fund's placement memorandum and reporting must reflect such foreign investment.

Question 11Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme is being wound up. What is the general rule regarding distribution of proceeds to investors?

  1. Proceeds must first be offered to SEBI before distribution
  2. Proceeds must be retained by the manager until a new scheme is launched
  3. Proceeds must be distributed in proportion to the investors' contributions, after discharging liabilities Correct answer.
  4. Proceeds must be distributed within 30 days of the winding-up resolution

Explanation

On winding up, the scheme's assets are realised, liabilities discharged, and the net proceeds distributed to investors in proportion to their contributions. The distribution terms must be consistent with the placement memorandum and contribution agreement.

Question 12Alternative Investment Funds in India - Category III framework and regulatory context

Which entity is responsible for the day-to-day management and investment decisions of a Category III AIF?

  1. The sponsor
  2. The trustee
  3. The custodian
  4. The investment manager Correct answer.

Explanation

The investment manager is responsible for managing the scheme's investments and making investment decisions in accordance with the placement memorandum. The trustee provides oversight, while the custodian holds the assets.

Question 13Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme invests in listed equities and derivatives. Which of the following is required in the placement memorandum for such a fund?

  1. A fixed schedule of monthly distributions
  2. A full list of every trade the fund intends to execute
  3. Disclosure of the investment strategy, risk factors, and leverage policy Correct answer.
  4. A guarantee of minimum returns to investors

Explanation

The placement memorandum must disclose the fund's investment strategy, risk factors, fee structure, and leverage policy so that investors can make an informed decision. It must not contain guarantees of returns.

Question 14Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following statements about the tax treatment of a Category III AIF is generally correct?

  1. Category III AIFs are taxed only on realised gains
  2. Category III AIFs are exempt from all taxes
  3. Category III AIFs are treated as a separate taxable entity, and income is taxed at the fund level Correct answer.
  4. Category III AIFs enjoy the same pass-through status as Category I and II funds

Explanation

Category III AIFs are generally treated as separate taxable entities, with income taxed at the fund level, unlike Category I and II funds that enjoy pass-through status. The precise tax treatment depends on the nature of the income and the fund's structure.

Question 15Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's manager is required to report to investors. Which statement about investor reporting is accurate?

  1. The manager must provide periodic reports to investors on the scheme's performance and portfolio Correct answer.
  2. Reports must be filed only with SEBI, not with investors
  3. The manager is not required to report to investors
  4. The manager must publish daily net asset values to the public

Explanation

The manager must provide periodic reports to investors covering performance, portfolio composition, and other material information. This supports transparency and informed decision-making by investors.

Question 16Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is a permissible investment for a Category III AIF?

  1. Only real estate assets
  2. Only unlisted securities of venture capital undertakings
  3. Listed equities and derivatives Correct answer.
  4. Only government securities

Explanation

Category III AIFs may invest in listed equities, derivatives, and other securities in accordance with their disclosed strategy. They are not restricted to unlisted venture capital securities, government securities, or real estate.

Question 17Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF has a scheme whose strategy involves frequent trading. Which statement about the scheme's redemptions is accurate?

  1. Redemptions require prior approval of SEBI
  2. Redemptions are prohibited for all Category III schemes
  3. Redemptions must be permitted daily without restriction
  4. Redemptions may be permitted as per the terms of the scheme, subject to conditions in the placement memorandum Correct answer.

Explanation

Because Category III schemes may be open-ended, redemptions may be permitted according to the terms disclosed in the placement memorandum, subject to any conditions such as lock-in or notice periods. SEBI does not approve redemptions individually.

Question 18Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is a requirement for obtaining registration as a Category III AIF?

  1. The applicant must have at least 100 investors before registration
  2. The applicant must have a minimum net worth specified by SEBI Correct answer.
  3. The applicant must be a listed company
  4. The applicant must be a bank

Explanation

An applicant for registration as an AIF, including Category III, must satisfy the net worth requirement specified by SEBI, along with fit-and-proper criteria for the manager and key personnel. Being a listed company, having 100 investors, or being a bank is not a requirement.

Question 19Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's manager wants to co-invest alongside the scheme in a portfolio company. Which statement is accurate?

  1. Co-investment requires prior approval of SEBI
  2. Co-investment is permitted subject to disclosure and management of conflicts of interest Correct answer.
  3. Co-investment by the manager is permitted without disclosure
  4. Co-investment is prohibited in all circumstances

Explanation

Co-investment by the manager or its associates is permitted, but it must be disclosed and conflicts of interest must be managed transparently. Investors should be informed of the arrangement in the placement memorandum or through periodic reporting.

Question 20Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is the principal regulator for Alternative Investment Funds in India?

  1. Reserve Bank of India
  2. Securities and Exchange Board of India Correct answer.
  3. Insurance Regulatory and Development Authority of India
  4. Ministry of Corporate Affairs

Explanation

SEBI is the principal regulator for AIFs in India, operating under the SEBI (Alternative Investment Funds) Regulations, 2012. Other regulators may have overlapping jurisdiction on specific matters, but SEBI is the primary authority.

Question 21Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme invests in units of another AIF. Which statement about such investment is accurate?

  1. Investment in another AIF is permitted subject to the scheme's disclosed strategy and any SEBI conditions Correct answer.
  2. Investment in another AIF requires prior approval of SEBI
  3. Investment in another AIF is permitted only if the investee is a Category I fund
  4. Investment in another AIF is prohibited for Category III

Explanation

Category III AIFs may invest in other AIFs if the strategy is disclosed and any SEBI conditions are met. The arrangement must be consistent with the fund's investment objectives and disclosure obligations.

Question 22Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following statements about the tenure of a Category III AIF scheme is accurate?

  1. The tenure may be open-ended or fixed, as disclosed in the placement memorandum Correct answer.
  2. Every scheme must have a tenure of at least three years
  3. The tenure must be exactly five years
  4. The tenure is determined by SEBI at the time of registration

Explanation

Category III schemes may be open-ended or close-ended, and the tenure must be disclosed in the placement memorandum. There is no fixed statutory tenure for Category III schemes.

Question 23Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme has a gross exposure exceeding its net asset value due to derivative positions. Which regulatory requirement is most relevant?

  1. The scheme must obtain prior approval of SEBI for each derivative trade
  2. The scheme must convert to a Category II fund
  3. The scheme must immediately liquidate all derivative positions
  4. The scheme must comply with the leverage conditions and disclosure specified by SEBI Correct answer.

Explanation

When a Category III scheme uses leverage, it must comply with the conditions and limits specified by SEBI and disclose its leverage policy to investors. The regulations do not require immediate liquidation or per-trade approval.

Question 24Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following best describes the role of the trustee in a Category III AIF structured as a trust?

  1. To make investment decisions on behalf of the fund
  2. To market the fund to prospective investors
  3. To oversee the manager and safeguard the interests of investors Correct answer.
  4. To hold the fund's assets in custody

Explanation

The trustee provides independent oversight of the manager and acts in the interests of investors. Investment decisions rest with the manager, while custody of assets is typically with the custodian.

Question 25Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF is considering investing in unlisted securities. Which statement is accurate?

  1. Category III AIFs are prohibited from investing in unlisted securities
  2. Category III AIFs may invest in unlisted securities only if they are also registered as Category I funds
  3. Category III AIFs may invest in unlisted securities as part of their disclosed strategy Correct answer.
  4. Category III AIFs may invest in unlisted securities only with prior SEBI approval

Explanation

Category III AIFs may invest in unlisted securities if such investment forms part of the strategy disclosed in the placement memorandum. There is no blanket prohibition or requirement of prior SEBI approval for each such investment.

Question 26Alternative Investment Funds in India - Category III framework and regulatory context

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which minimum investment amount applies to an investor in a Category III AIF scheme?

  1. ₹25 lakh
  2. ₹50 lakh
  3. ₹1 crore Correct answer.
  4. ₹5 crore

Explanation

The AIF Regulations set a uniform minimum investment threshold of ₹1 crore for investors across all three categories of AIFs, including Category III. This threshold applies per investor per scheme, although certain relaxations exist for employees and directors of the manager. The minimum is designed to ensure that AIF participation is limited to investors capable of bearing the risks of complex strategies.

Question 27Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF plans to launch a new scheme. Which document must be filed with SEBI before the scheme can be launched, and what is the filing requirement?

  1. An information memorandum must be filed with SEBI within 30 days after the scheme's first close.
  2. A placement memorandum must be filed with SEBI at least 30 days before launch, along with the prescribed fee. Correct answer.
  3. A statement of accounts must be filed with SEBI within 15 days of the scheme's launch.
  4. A private placement memorandum must be filed with SEBI at least 7 days before launch.

Explanation

For Category III AIFs, the placement memorandum must be filed with SEBI at least 30 days before the launch of the scheme, together with the applicable filing fee. This pre-launch filing allows SEBI to review the disclosures and ensures that investors receive adequate information before committing capital. The requirement applies to each scheme separately.

Question 28Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following statements accurately describes the permitted leverage for a Category III AIF under the AIF Regulations?

  1. Leverage is prohibited for all Category III AIFs regardless of disclosure.
  2. Leverage is permitted only if the scheme's placement memorandum discloses the maximum leverage and the fund complies with the prescribed limit. Correct answer.
  3. Leverage is permitted without any disclosure requirement because Category III funds are exempt from leverage rules.
  4. Leverage is permitted only for Category I AIFs, not Category III.

Explanation

Category III AIFs may employ leverage, but only when the scheme's placement memorandum discloses the maximum leverage and the fund operates within the limits prescribed by SEBI. The disclosure requirement ensures investors understand the risk profile of the strategy. Leverage is not unrestricted; it is a regulated feature subject to conditions.

Question 29Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme has a gross exposure of ₹250 crore against a net asset value of ₹100 crore. Which regulatory requirement is most directly engaged by this position?

  1. The scheme must immediately convert into a Category II AIF.
  2. The scheme must seek unitholder approval for every derivative trade.
  3. The scheme is exempt from reporting because gross exposure exceeds NAV.
  4. The scheme must comply with the maximum permissible leverage limit and disclose the leverage in its placement memorandum. Correct answer.

Explanation

A gross exposure of 2.5 times NAV indicates the scheme is using leverage through derivatives or borrowing. Category III AIFs may use leverage only within the limits prescribed by SEBI and must disclose the maximum leverage in the placement memorandum. Exceeding the limit would require corrective action, not conversion of category or per-trade unitholder approval.

Question 30Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's manager is evaluating whether the fund can invest in units of another AIF. Which statement is accurate under the AIF Regulations?

  1. Investment in units of another AIF is prohibited for all Category III AIFs.
  2. Investment in units of another AIF is permitted subject to the scheme's stated investment strategy and any applicable SEBI limits. Correct answer.
  3. Investment in units of another AIF is permitted only if the investee AIF is a Category I fund.
  4. Investment in units of another AIF is permitted without any disclosure or limit.

Explanation

A Category III AIF may invest in units of another AIF if such investment is consistent with its stated investment strategy and within any limits prescribed by SEBI. The placement memorandum should disclose the fund's approach to fund-of-funds or AIF unit investments. The permission is not unconditional and is not limited to Category I investee funds.

Question 31Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following best describes the eligibility criteria for a person to act as the manager of a Category III AIF?

  1. The manager must be a bank regulated by the Reserve Bank of India.
  2. The manager must be a foreign entity registered in a FATF-compliant jurisdiction only.
  3. The manager must be a company or LLP with a minimum net worth and relevant experience, and must be registered with SEBI. Correct answer.
  4. Any individual with a PAN card may act as manager without registration.

Explanation

The manager of an AIF, including a Category III AIF, must be a company or limited liability partnership meeting SEBI's fit-and-proper, net worth, and experience criteria, and must be registered with SEBI. The manager is responsible for the fund's investment decisions and regulatory compliance. Individuals and unregistered entities cannot act as managers.

Question 32Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme is structured as a trust. Which statement accurately describes the trustee's role?

  1. The trustee makes all investment decisions and the manager only executes trades.
  2. The trustee is responsible for marketing the scheme to investors.
  3. The trustee holds the fund's assets in trust and oversees the manager's activities, while the manager makes investment decisions. Correct answer.
  4. The trustee may be the same entity as the manager without any restriction.

Explanation

In a trust-structured AIF, the trustee holds the assets for the benefit of investors and provides oversight of the manager's activities, including compliance with the trust deed and regulations. Investment decisions are made by the manager, not the trustee. The trustee and manager roles are distinct, and the trustee cannot simply be the manager without meeting regulatory conditions.

Question 33Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme invests primarily in listed equities and equity derivatives. Which of the following statements about its redemptions is accurate?

  1. Redemptions must be permitted daily without any restriction.
  2. The scheme may offer periodic redemptions as disclosed in the placement memorandum, subject to the terms of the scheme. Correct answer.
  3. Redemptions are permitted only after the scheme's tenure ends.
  4. Redemptions are prohibited for all Category III AIFs.

Explanation

Category III AIFs typically offer redemptions in accordance with the terms disclosed in the placement memorandum, which may provide for periodic or other redemption windows. The regulations do not impose a blanket prohibition or a daily redemption requirement. The scheme's terms, including any lock-in or notice period, govern redemption availability.

Question 34Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following is a permissible investment for a Category III AIF under the AIF Regulations?

  1. Only government securities and treasury bills.
  2. Complex structured products and derivatives for the purpose of hedging and taking directional positions. Correct answer.
  3. Only physical real estate assets.
  4. Only unlisted securities of start-up companies.

Explanation

Category III AIFs may employ diverse investment strategies, including complex structured products and derivatives, for both hedging and directional positions, subject to the scheme's disclosed strategy and SEBI limits. They are not confined to unlisted start-up securities, government securities, or physical real estate. The category is designed for sophisticated strategies that may use leverage and derivatives.

Question 35Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's manager is considering co-investing alongside the scheme in a portfolio company. Which statement is accurate?

  1. Co-investment by the manager is prohibited in all circumstances.
  2. Co-investment by the manager requires prior approval from every investor in the scheme.
  3. Co-investment by the manager is subject to the fund's conflict-of-interest policy and disclosure requirements, and must be conducted on arm's-length terms. Correct answer.
  4. Co-investment by the manager is permitted without any disclosure because the manager is a professional.

Explanation

Manager co-investment is not prohibited outright, but it must be managed through a conflict-of-interest policy, disclosed to investors, and conducted on arm's-length terms to prevent preferential treatment. The AIF Regulations and SEBI circulars emphasize transparency and fairness in such transactions. Unanimous investor approval for each co-investment is not a general requirement.

Question 36Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme invests in listed equities and derivatives. Which of the following is required in the placement memorandum?

  1. Disclosure of the investment strategy, risk factors, fees, and leverage, among other prescribed details. Correct answer.
  2. Only the fund's past performance, with no other disclosures.
  3. Only the names of the fund's auditors.
  4. Only the manager's remuneration, with no strategy disclosure.

Explanation

The placement memorandum for a Category III AIF must disclose the investment strategy, risk factors, fees, leverage, and other prescribed details so that investors can make an informed decision. Partial disclosure of only auditors, performance, or remuneration would not satisfy the regulatory requirements. The memorandum is a comprehensive disclosure document.

Question 37Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme is being wound up. Which of the following is the general rule regarding distribution of proceeds to investors?

  1. Proceeds are distributed equally among all investors regardless of their capital contributions.
  2. Proceeds are distributed to investors in accordance with the scheme's terms and applicable regulations after satisfying liabilities and expenses. Correct answer.
  3. Proceeds are distributed only to the trustee.
  4. Proceeds are retained by the manager as a performance fee.

Explanation

On winding up, the scheme's assets are used to satisfy liabilities and expenses, and the remaining proceeds are distributed to investors in accordance with the scheme's terms and the AIF Regulations. Equal distribution regardless of contribution would be inconsistent with the fund's capital structure. The manager and trustee do not simply retain the proceeds.

Question 38Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following best describes the regulatory position on a Category III AIF investing in unlisted securities?

  1. Investment in unlisted securities is permitted without any limit or disclosure.
  2. Investment in unlisted securities is permitted only to the extent consistent with the scheme's stated strategy and any SEBI-prescribed limits. Correct answer.
  3. Investment in unlisted securities is prohibited for all Category III AIFs.
  4. Investment in unlisted securities is permitted only if the securities are listed within one year.

Explanation

Category III AIFs may invest in unlisted securities if such investment is consistent with the scheme's stated investment strategy and within any limits prescribed by SEBI. The permission is not unconditional, and the placement memorandum should disclose the fund's approach. A blanket prohibition or an unlimited permission would both be inaccurate.

Question 39Alternative Investment Funds in India - Category III framework and regulatory context

Which of the following statements about investor reporting by a Category III AIF is accurate?

  1. Investor reporting is limited to disclosing the manager's personal remuneration.
  2. Investor reporting is optional and may be discontinued at the manager's discretion.
  3. The manager must provide investors with periodic reports, including information on the scheme's performance and portfolio, as prescribed by SEBI. Correct answer.
  4. Investor reporting is required only at the time of the scheme's launch.

Explanation

Category III AIFs are subject to periodic investor reporting requirements, including disclosure of performance, portfolio, and other prescribed information. Reporting is not limited to launch or to the manager's remuneration, and it is not optional. These disclosures enable investors to monitor the scheme's activities and risks.

Question 40Alternative Investment Funds in India - Category III framework and regulatory context

A Category III AIF's scheme charges a performance-linked fee calculated on gains, and the manager proposes to crystallise it every quarter without any hurdle rate. Which statement best reflects the AIF Regulations' position on performance-linked fees for Category III schemes?

  1. Performance fees are permitted only when calculated on the scheme's net investment gains, with no requirement of a hurdle rate but with adequate disclosure in the placement memorandum Correct answer.
  2. Performance fees are permitted only if the scheme is closed ended and the fee is crystallised solely at final winding up
  3. Performance fees may be charged on gross trading turnover rather than on gains, provided the trustee approves the methodology
  4. Performance fees are prohibited for Category III schemes and only fixed management fees may be charged

Explanation

Category III schemes may charge performance-linked fees, but the AIF Regulations require that such fees be based on the net realised gains of the scheme and that the basis of computation, including any hurdle or high-water-mark arrangement, be clearly disclosed in the placement memorandum. There is no bar on quarterly crystallisation as such, provided the computation is on net gains and disclosed transparently.

Question 41Category III AIF managers - eligibility, registration and compliance obligations

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which minimum corpus must a Category III AIF scheme raise before it can commence operations?

  1. INR 10 crore
  2. INR 50 crore
  3. INR 20 crore Correct answer.
  4. INR 5 crore

Explanation

Regulation 9 prescribes a minimum corpus of INR 20 crore for every AIF scheme, and this threshold applies equally to Category III schemes. A scheme may be launched only after the corpus is raised, so the INR 20 crore figure is the operative gate for commencement.

Question 42Category III AIF managers - eligibility, registration and compliance obligations

What is the minimum investment commitment required from each individual investor in a Category III AIF?

  1. INR 1 crore Correct answer.
  2. INR 50 lakh
  3. INR 2 crore
  4. INR 25 lakh

Explanation

Regulation 10 requires each investor in an AIF to commit at least INR 1 crore, and the same threshold applies to Category III schemes. Certain categories of investors such as employees of the manager may receive relaxation, but the baseline for an individual investor remains INR 1 crore.

Question 43Category III AIF managers - eligibility, registration and compliance obligations

A Category III AIF manager wishes to launch a new scheme. Which approval must the manager obtain before the scheme is opened for subscription?

  1. Intimation to SEBI with the scheme particulars and trustee or board approval as applicable Correct answer.
  2. Fresh registration of the scheme with SEBI
  3. Approval of the scheme by the designated stock exchange
  4. Prior consent of every existing investor in other schemes of the fund

Explanation

Category III AIFs are not required to file a scheme document for SEBI approval; instead the manager informs SEBI of the scheme launch with the requisite particulars. The scheme terms must also be approved in accordance with the fund's governance structure before subscription opens.

Question 44Category III AIF managers - eligibility, registration and compliance obligations

Which regulatory framework primarily governs the registration and operational obligations of a Category III AIF?

  1. SEBI (Mutual Funds) Regulations, 1996
  2. SEBI (Alternative Investment Funds) Regulations, 2012 Correct answer.
  3. SEBI (Foreign Portfolio Investors) Regulations, 2019
  4. SEBI (Portfolio Managers) Regulations, 2020

Explanation

Category III AIFs fall squarely within the SEBI (Alternative Investment Funds) Regulations, 2012, which set out eligibility, registration and ongoing compliance. The other regulations govern different intermediary or product classes and do not apply to an AIF's registration.

Question 45Category III AIF managers - eligibility, registration and compliance obligations

A Category III AIF intends to employ leverage. Which condition must be satisfied under the AIF Regulations?

  1. Leverage requires prior written approval of the stock exchange on which the fund is listed
  2. Leverage is permitted without any disclosure because Category III funds may use complex strategies
  3. Leverage is permitted only if the scheme document provides for it and the fund discloses the maximum leverage to investors Correct answer.
  4. Leverage is prohibited entirely for Category III AIFs

Explanation

Category III AIFs may employ leverage, including through derivatives, but the scheme document must disclose the intent and the maximum leverage available. Investors must be informed of these terms, and the manager must operate within the disclosed limits.

Question 46Category III AIF managers - eligibility, registration and compliance obligations

Which of the following best describes the investor base restriction that applies to a Category III AIF?

  1. Only investors resident in India may invest
  2. Only accredited institutional investors may invest
  3. Any resident or non-resident investor meeting the minimum commitment, subject to applicable law Correct answer.
  4. Only banks and insurance companies may invest

Explanation

Category III AIFs may accept investments from a broad range of investors, including resident and non-resident persons, provided the minimum commitment is met and any applicable foreign exchange or sectoral rules are satisfied. There is no blanket institutional-only restriction.

Question 47Category III AIF managers - eligibility, registration and compliance obligations

A Category III AIF manager must ensure that the fund's key investment team has relevant experience. Which of the following is a registration eligibility condition concerning the manager's personnel?

  1. The manager must be a listed company
  2. The manager must employ at least ten chartered accountants
  3. The key personnel must have professional experience in the relevant field, and the manager must meet the fit and proper criteria Correct answer.
  4. The manager must have a minimum paid-up capital of INR 50 crore

Explanation

Eligibility for an AIF manager rests on fit and proper criteria, relevant professional experience of key personnel, and the absence of disqualifying regulatory history. There is no requirement of a listing, a specific headcount of chartered accountants, or a very large paid-up capital.

Question 48Category III AIF managers - eligibility, registration and compliance obligations

Which of the following is a distinguishing feature of a Category III AIF compared with Category I and Category II AIFs?

  1. It must invest primarily in infrastructure or SME sectors
  2. It must invest primarily in start-ups and early-stage ventures
  3. It may employ complex trading strategies and leverage, including through derivatives Correct answer.
  4. It is prohibited from accepting foreign investment

Explanation

Category III AIFs are distinguished by their ability to use complex trading strategies, leverage and derivatives, and to trade with the intent of generating short-term returns. Category I funds focus on start-ups, SMEs, infrastructure and similar areas, while Category II funds are private equity and debt funds without leverage.

Question 49Category III AIF managers - eligibility, registration and compliance obligations

A Category III AIF manager is reviewing its obligations regarding investor reporting. Which statement is most accurate?

  1. The manager need not report to investors because Category III funds are exempt from transparency requirements
  2. The manager must provide periodic reports to investors, including performance and portfolio information, as specified in the scheme documents and regulations Correct answer.
  3. The manager must publish performance on a public website only
  4. The manager must report only to SEBI and never to investors

Explanation

Category III AIFs are subject to substantial transparency obligations, and the manager must furnish periodic performance and portfolio reports to investors as required by the regulations and the scheme documents. Reporting to SEBI does not displace the duty to report to investors.

Question 50Category III AIF managers - eligibility, registration and compliance obligations

What is the prescribed frequency for reporting of the AIF's activities and compliance to SEBI through the AIF reporting portal?

  1. Quarterly, with additional event-based reporting as prescribed Correct answer.
  2. Only upon the closure of the scheme
  3. Once every three years
  4. Only on an annual basis

Explanation

AIFs are required to report to SEBI on a quarterly basis through the prescribed portal, along with event-based filings for specified changes. Annual or one-time reporting would not satisfy the ongoing surveillance framework.