AIFs in India - the Category III framework and regulatory context
What this domain tests
How Category III AIFs sit inside the SEBI (Alternative Investment Funds) Regulations, 2012: who may invest, how much, how much leverage is allowed, and what legal form the fund may take.
The three-category structure
- Category I: close-ended funds in venture capital, SME, infrastructure and social impact; no leverage except for hedging.
- Category II: close-ended funds such as private equity and private debt; no leverage except for hedging.
- Category III: funds that employ diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives. It is the only category that may be launched as open-ended; it may also be close-ended.
Numbers to carry into the exam
- Minimum corpus per scheme: Rs 20 crore.
- Minimum commitment per investor: Rs 1 crore (Rs 25 lakh for employees and directors of the AIF/manager).
- Maximum investors per scheme: 1000, raised by private placement only.
- Leverage ceiling: gross exposure not exceeding 2 times NAV.
- PPM filed with SEBI at least 30 days before scheme launch.
Worked example
A Category III scheme has NAV of Rs 100 crore and gross exposure (cash plus notional derivatives) of Rs 170 crore. Leverage = 170/100 = 1.7x, within the 2x ceiling, leaving headroom of Rs 30 crore. The manager then buys index futures with notional Rs 40 crore: exposure becomes Rs 210 crore = 2.1x, a breach. At least Rs 10 crore of notional exposure must be cut before the position can stand.
Traps
Assuming Category III leverage is unlimited; treating the Rs 20 crore corpus and the Rs 1 crore investor minimum as interchangeable; saying Category III must be close-ended; assuming Category III gets the section 115UB pass-through enjoyed by Categories I and II.