In this article, we will discuss the process of hedge fund Registration in India i.e. alternative investment fund in India with securities and exchange Board of India (SEBI)

Securities And Exchange Board Of India (Alternative Investment Funds) Regulations, 2012 mainly regulate the Hedge funds in India.

Meaning of Hedge fund  and Alternative Investment Fund : 

Hedge fund

“Hedge fund” means an Alternative Investment Fund which employs diverse or complex trading strategies and invests and trades in securities having diverse risks or complex products including listed and unlisted derivatives

Alternative Investment Fund: 

As per SEBI (Alternative Investment Funds) Regulations, 2012 : 

“Alternative Investment Fund” means any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which,-

1. Is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and
2. Is not covered under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999 or any other regulations of the Board to regulate fund management activities:

Provided that the following shall not be considered as Alternative Investment Fund for the purpose of these regulations,- 

1. family trusts set up for the benefit of ‘relatives’ as defined under Companies Act, 2013;
2. ESOP Trusts set up under the Securities and Exchange Board of India (Share Based Employee Benefits) Regulations, 2014 or as permitted under Companies Act, 2013;
3. employee welfare trusts or gratuity trusts set up for the benefit of employees; 
4. ’holding companies’ as defined under sub-section 46 of section 2 of Companies Act, 2013;
5. other special-purpose vehicles not established by fund managers, including securitization trusts, regulated under a specific regulatory framework;
6. funds managed by securitisation company or reconstruction company which is registered with the Reserve Bank of India under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; and 
7. Any such pool of funds which is directly regulated by any other regulator in India; 

How to Register Hedge Fund or Alternative Investment Fund with SEBI

Choosing Category for Hedge Fund or Alternative Investment Fund with SEBI

SEBI under alternative investment funds regulations has prescribed the three types of the categories for the alternative investment fund for hedge funds registration under which they can seek registration depending upon the activities of the fund

Categories for Hedge Funds or Alternative Investment Funds 

• “Category I Alternative Investment Fund” which invests in start-up or early stage ventures or social ventures or SMEs or infrastructure or other sectors or areas which the government or regulators consider as socially or economically desirable and shall include venture capital funds, SME Funds, social venture funds, infrastructure funds.

Explanation.─ For the purpose of this clause, Alternative Investment Funds which are generally perceived to have positive spillover effects on economy and for which the Board or Government of India or other regulators in India might consider providing incentives or concessions shall be included and such funds which are formed as trusts or companies shall be construed as “venture capital company” or “venture capital fund” as specified under sub-section (23FB) of Section 10 of the Income Tax Act, 1961

• “Category II Alternative Investment Fund” which does not fall in Category I and III and which does not undertake leverage or borrowing other than to meet day-today operational requirements and as permitted

Explanation.─ For the purpose of this clause, Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator shall be included

• “Category III Alternative Investment Fund” which employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. Explanation.─ For the purpose of this clause, Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator shall be included

Choosing and Setting up Structure of Hedge Fund or AIF: 

Which Fund Investment funds can be formed either of the following: 

• Trust 
• Partnership
• Limited Liability Partnership
• Private Limited Company

Eligibility Criteria for Hedge Fund Registration in India

• The memorandum of association in case of a company; or the Trust Deed in case of a Trust; or the Partnership deed in case of a limited liability partnership permits it to carry on the activity of an Alternative Investment Fund
• The applicant is prohibited by its memorandum and articles of association or trust deed or partnership deed from making an invitation to the public to subscribe to its securities
• In case the applicant is a Trust, the instrument of trust is in the form of a deed and has been duly registered under the provisions of the Registration Act, 1908
• In case the applicant is a limited liability partnership, the partnership is duly incorporated and the partnership deed has been duly filed with the Registrar under the provisions of the Limited Liability Partnership Act, 2008
• In case the applicant is a body corporate, it is set up or established under the laws of the Central or State Legislature and is permitted to carry on the activities of an Alternative Investment Fund
• The applicant, Sponsor and Manager are fit and proper persons based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
• The key investment team of the Manager of Alternative Investment Fund has adequate experience, with at least one key personnel having not less than five years experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets and has a relevant professional qualification
• The Manager or Sponsor has the necessary infrastructure and manpower to effectively discharge its activities
• The applicant has clearly described at the time of registration the investment objective, the targeted investors, proposed corpus, investment style or strategy, and proposed tenure of the fund or scheme
• Whether the applicant or any entity established by the Sponsor or Manger has earlier been refused registration by the Board

Information Required for Making Application for Hedge Fund Registration in India

1. In case the applicant is a Trust: 

1. Write-up on the activities of the applicant 

2. Whether the Trust Deed is registered under the provisions of the Registration Act, 1908. (Enclose relevant extract of the Registered Trust Deed) 

3. Whether the Trust Deed permits the carrying on of the activity of an Alternative Investment Fund 

4. Whether the applicant is prohibited by its trust deed from making an invitation to the public to subscribe to its units; 

5. Provide details of Trustees/ Trustee Company as below: 

a. Whether Trustee is an individual or a Trustee company. 

b. Name, registered office address, telephone number(s) and fax number(s) of the Trustees/ Trustee Company. 

c. Name, direct line number, mobile number and e-mail of the contact person(s). 

d. Identity and Address proof of Trustees/ Directors of the Trustee Company 

e. Whether the Trustee Company is registered with Board, Reserve Bank of India or any other regulatory authority in any capacity along with the details of its registration. 

f. Brief write up on the activities of the Trustee Company/ Profile of Trustees. 

II. In case applicant is a Company: 

1. Write-up on the activities of the applicant 

2. Shareholding pattern and profile of the directors (Enclose Identity proof and address proof of the directors) 

3. Whether the Memorandum of Association permits carrying on of the activity of an Alternative Investment Fund (Enclose relevant extract of the Memorandum of Association) 

4. Whether the applicant is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;

 III. In case applicant is a limited liability partnership: 

1. Write-up on the activities of the applicant 

2. Beneficial ownership pattern and profile of the partners (Enclose Identity proof and address proof of the partners) 

3. Whether the partnership deed is duly filed under the provisions of the Limited Liability Partnership Act, 2008 and permits carrying on of the activity of an Alternative Investment Fund (Enclose relevant extract of the Partnership Deed) 

4. Whether the applicant is prohibited by its partnership deed from making an invitation to the public to subscribe to its securities;

 IV. In case applicant is a Body Corporate 

1. Write-up on the activities of the applicant 

2. Shareholding pattern and profile of the directors (Enclose Identity proof and address proof of the directors)

3. Whether the applicant is set up or established under the laws of the Central or State Legislature

4. Whether the applicant is permitted carrying on of the activity of an Alternative Investment Fund (Enclose relevant extract of the relevant Statute/Act) 

5. Whether the applicant is prohibited by its memorandum and articles of association from making an invitation to the public to subscribe to its securities;

Details of Sponsor and Manager of Fund :

• Name, address of registered office, address for correspondence and principal place of business, telephone number(s), fax number(s), e-mail address of the sponsor.
• Name, direct line number, mobile number and e-mail of the contact person(s)
• Legal status of the sponsor (whether sponsor(s) is/are individual/company/limited liability partnership/body corporate) and date and place of incorporation/ establishment, wherever applicable. 
• In case of Sponsor being individual(s), provide a brief profile of the Sponsor including professional qualification. In case of Sponsor(s) being other than individual, write up on shareholding pattern/ Partnership interests and profile of the directors/partners including their professional qualification. 
• Identity proof and address proof of the Sponsor (if sponsor is an individual)/ directors of Sponsor(is sponsor is a company)/ partners of the Sponsor (if sponsor is an limited liability partnership). 
• Whether the Sponsor or its director(s)/ partner(s) is/are registered with the Board.
• Details of past experience of the Sponsor(s) in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets. 
• Copies of the financial statements for the previous financial year (i) Whether the Sponsor has floated any Alternative Investment Funds/ Venture Capital Funds previously, which are registered with the Board. If yes, details of the same.

Meaning of Sponsor : 

“sponsor” means any person or persons who set up the Alternative Investment Fund and includes promoter in case of a company and designated partner in case of a limited liability partnership

Meaning of Manager : 

“manager” means any person or entity who is appointed by the Alternative Investment Fund to manage its investments by whatever name called and may also be same as the sponsor of the Fund

Details Of Business Plan And Investment Strategy for Hedge Fund Registration in India

• Investment objective and investment style/ strategy of the fund.
• The target investors 
• The target industries/ sectors, if any 
• Proposed corpus 
• Proposed fees to the Sponsor and Manager 
• Tenure of the fund or scheme 
• Details of proposed use of leverage in case of Category III Alternative Investment Fund

Amount To Be Paid As Fees for Hedge Fund Registration in India

• Application fee Rs.1,00,000 
• Registration fee for Category I Alternative Investment Funds other than Angel Funds Rs. 5,00,000 
• Registration fee for Category II Alternative Investment Funds other than Angel Funds Rs.10,00,000 
• Registration fee for Category III Alternative Investment Funds other than Angel Funds Rs.15,00,000 
• Scheme Fee for Alternative Investment Funds other than Angel Funds `1,00,000 Re-registration Fee Rs.1,00,000 
• Registration Fee for Angel Funds Rs.2,00,000

The fees specified above shall be payable by way of direct credit in the bank account through NEFT/RTGS/IMPS or any other mode allowed by RBI or by bank draft in favour of “The Securities and Exchange Board of India” at Mumbai

Investment Conditions And Restrictions for Hedge Fund in India

Investment in all categories of Alternative Investment Funds shall be subject to the following conditions:- 

• The alternative investment fund may raise funds from any investor whether Indian, foreign or non-resident Indians by way of issue of units;
• Each scheme of the alternative investment fund shall have a corpus of at least twenty crore rupees;
• The alternative investment fund shall not accept from an investor, an investment of value less than one crore rupees
• In the case of investors who are employees or directors of the alternative investment fund or employees or directors of the manager, the minimum value of investment shall be twenty-five lakh rupees. 
• the manager or sponsor shall have a continuing interest in the alternative investment fund of not less than two and a half percent of the corpus or five crore rupees, whichever is lower,
• In the form of investment in the alternative investment fund and such interest shall not be through the waiver of management fees
• For category iii alternative investment fund, the continuing interest shall be not less than five percent of the corpus or ten crore rupees, whichever is lower. 
• The manager or sponsor shall disclose their investment in the alternative investment fund to the investors of the alternative investment fund;
• No scheme of the alternative investment fund shall have more than one thousand investors
• provisions of the companies act, 2013 shall apply to the alternative investment fund, if it is formed as a company

Application to SEBI for Hedge Fund Registration in India

The Application for Registration is required to be made in Form A to SEBI along with the Required application Fee and documents

Consideration of Application by SEBI

Once the proper Application is submitted to SEBI, SEBI will examine the Application and may ask for further information and if deems fit will approve or reject the Application

Certification of Registration for Hedge Fund by SEBI

Once the applicant is approved and applicant has deposited necessary fee , SEBI will grant Certificate to Applicant to carry on Activities of Hedge Fund or Alternative Investment Fund.