Budget 2015: Government to allow foreign investment in Alternative Investment Funds

New Delhi: The government will allow foreign investment in Alternative Investment Funds (AIFs), a category of pooled-in investment vehicles for real estate, private equity and hedge funds, Finance Minister Arun Jaitley said on February 28.

While presenting the Budget for 2015-16 in the Lok Sabha, he said that the government would do away with different categories like Foreign Portfolio Investors (FPI) and Foreign Direct Investment (FDI) for such investments with a view to making it easier for overseas investors to invest in AIFs.

AIFs are basically funds established or incorporated in India for the purpose of pooling in capital from Indian investors for investing as per a pre-decided policy. Under Sebi guidelines, AIFs can operate broadly in three categories. The Sebi rules apply to all AIFs, including those operating as private equity funds, real estate funds and hedge funds, among others.

The regulator in May 2012, notified the guidelines for this new class of market intermediaries. The Category-I AIFs are those funds that get incentives from the government, Sebi or other regulators and include Social Venture Funds, Infrastructure Funds, Venture Capital Funds and SME Funds.

The Category-III AIFs are those trading with a view to making short-term returns and it includes hedge funds, among others. The Category-II AIFs can invest anywhere in any combination but are prohibited from raising debt, except for meeting their day-to-day operational requirements. These AIFs include private equity funds, debt funds or fund of funds, as also all others falling outside the ambit of two other categories.