Development of Alternative Investment Funds in an Indian Outlook

Development of Alternative Investment Funds
Karan Singh
| Updated: Jul 16, 2021 | Category: AIF

Rapid growth and development of Alternative Investment Funds are observing in India since their beginning in the year 2012. The number of investors in this area is increasing every passing day. In this write-up, we would clarify some facts concerning the development of Alternative Investment Funds from India’s point of view.

Development of Alternative Investment Funds in Current Years

In the perspective of the Global Limited Partner Survey held in the year 2017, our nation protected top in ranking and became the most favoured platform for alternative investment. This has activated the growth of new capital and expanded the scope of customer protection.

Where the stock market has observed a significant decrease in investment with the fall of standard Sensex, AIFs (Alternative Investment Funds) are making a great buzz in our nation. Moreover, unlike mutual funds, Alternative Investment Fund (AIF) provides inculcation of hedging plans.

Owing to such reasons, Alternative Investment Funds are likely to enhance their position in the future. According to the SEBI (Securities and Exchange Board of India), the registered funds are regularly thriving for AIF every year and have reached 366 in the year 2018. Till September 2018, around 470+ AIFs have attained funds that have resulted in boosting the efficacy of this infringes secondary market. This marks a significant increase in the Indian Economy at a quicker pace.

An Overview of Development of Alternative Investment Funds and its Different Categories

Unlike conventional investment methods, the AIFs reside outside the structure of regulation of SEBI[1] meant for investment institutions. They tolerate unique identities when compared with bonds, stocks, etc. Also, they are noticed as private investment opportunities in general. Such funds are classified into three different classes, and you can check the same below:

Development of Alternative Investment Funds
  1. Category I AIF: It surrounds a class of the funds subject to the investment in economically/socially ventures like Social Venture Funds, SME Funds, Infrastructure Funds, and Venture Capital Funds.
  2. Category II AIF: It includes funds that aren’t part of Category I and III AIF. This investment is depending on the investment consent, such as Private Equity Funds and Debt Funds.
  3. Category III AIF: It combines all the funds that have complicated and flexible investment plans to make a sure decent return, either by investment in Hedge Funds or by leverage use.

Reasons Relating to the Sustainable Development of Alternative Investment Funds in India

There are broad arrays of aspects that affect the development of Alternative Investment Funds in our nation; some of them are mentioned below:

  1. The increasing Real Estate Sector has led to an enormous hike in the AIFs in our nation. In 2017, this sector was considered to be the second most vigorous sector in India.  The development of the National Infrastructure Investment Fund (NIIF) of Rs 20,000 crores by the Indian Government is one of the famous factors due to the increase of AIFs.
  2. Since November 2015, the RBI has also carried out a notification for the AIFs overseas investment under the automatic route. These are two different things: first, there will be an FDI limitation applicable for AFIs if the person who regulates the fund is from the Indian Territory. Second, if most of the AIF contains foreign capital, it would be considered local funds.
  3. Investors are more apt towards Category III as they are permitted to invest in commodity derivatives until 10% of the investible funds. Not only this but they are also allowed for taking benefits up to 2 times.
  4. Deploying pass-through tax structure for the Category I and II funds. This way, investors will be accountable to address tax liabilities under such categories and can easily avoid the trouble concerning double taxation.

Possible Strategies to Make Sure Substantial in Alternative Investment Funds in India Growth in AIFs also performs as a Key Performance Indicator (KPI) for the Indian Economy. Hence, it is mandatory to ease the loopholes by choosing suitable reforms so that there can be a legal change in the structure of AIFs in India. The following section shows the appropriate measures that should be deemed to makes sure stable cash investment:

  • Collecting Local Institutional Investors for the Investment in AIFs: At present, our nation is more dependent on the foreign market for funds. If there was an upsurge in local institutional investors, you would observe positive consequences in the development of Alternative Investment Funds in India.
  • Vital Changes to the Goods & Services Tax Structure: The present GST structure should be incorporated with two changes, which are as follows:
  1. GST should be applied on foreign investments that exceed 50% in AIFs as all the services that the AIFs receive should be considered as an export of services.
  2. For all investors who raise their funds in VC and PE funds, 5% of tax ought to be levied on services furnished to these funds.
  • Growth-Related Taxation Reforms: Present tax reforms for AIF sectors are not encouraging as they should be. Following are vital measures to cater to such a problem:
  1. If the AIF finished unprofitable, it should be set off against the investor’s income rather than the business profits of the AIFs;
  2. For the Category III AIF, there should be a pass-through framework;
  3. The transaction-related unlisted securities & profits shouldn’t be perceived as business gains;
  4. Deployment of a United-based Taxation Approach should be done before the arrival of AIFs under the stock exchange platform, like mutual funds.
  • Alternative for Leverage on Category III FOF(Fund of Funds): FOF in India is an early stage of growth when contrasted with the worldwide scenario. Henceforth, it is essential to provide an alternative for taking leverage at the FOF or person portfolio level.
  • Mandatory Disclosure of Fund-Based Information: Vital details concerning the fund performance should be shared with the investor. Besides, there should be set up an Investment Advisory Committee. That shall play an essential role in performing all the funds concerning conflicts in a good way. All the vital reforms mentioned above will undoubtedly ensure the viable and long-term growth of AIFs in India. The AIFs are still in the rising stage with such reforms in place; they will undoubtedly arrive at a decent position in the future.

Conclusion

The development Of Alternative Investment Funds will have a viable future in the upcoming years. You will observe the increase in the number of investors, which in turn results in inspiring the growth of the Economy in India. An enormous transformation is its way that will make sure to cut the change in the AIF sector very soon.

Read our article:SEBI Changes Rules of Alternative Investment Fund

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Karan Singh

A legal writing enthusiast, a wanderer, and a zealous reader. After gaining a lot of knowledge about the diverse legal topics and developing research skills, Karan joined the league of legal content writers to deliver quality-rich blogs.

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