Alternative Investment Fund in India — SEBI-registered pooled vehicles, not a startup's personal piggy bank
An Alternative Investment Fund (AIF) is a pooled investment vehicle that invests in assets other than listed equities and bonds, registered with SEBI under the Alternative Investment Funds Regulations, 2012. It is the legal structure behind venture capital funds, private equity funds, hedge funds, and infrastructure funds in India. Three categories, ₹20 crore minimum corpus, SEBI registration mandatory, and a specific tax regime under s.115UB. This page is the statute-cited version.
Short answer
An Alternative Investment Fund is any pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It covers venture capital funds (Cat I), private equity and debt funds (Cat II), and hedge funds and PIPE funds (Cat III). Minimum corpus ₹20 crore across all categories (Regulation 10(b)); angel funds ₹5 crore (Regulation 19A). SEBI registration mandatory, and the fund must be a company or LLP with a SEBI-registered investment manager. Choose it if you are raising capital from sophisticated investors; avoid if you are a startup founder looking for your own funding.
The four things that matter
Where this structure actually goes wrong.
Regulation 3 — who needs SEBI registration
Under Regulation 3 of the SEBI (AIF) Regulations, 2012, no person can act as an AIF or sponsor an AIF without SEBI registration. An AIF is defined as a privately pooled investment vehicle that collects funds from sophisticated investors (whether Indian or foreign) for investing in accordance with a defined investment policy. This covers venture capital funds, private equity funds, infrastructure funds, hedge funds, and PIPE funds — even if you call it a "syndicate" or "club deal".
Regulation 3 · SEBI registration mandatory · privately pooled vehicle · sophisticated investors
Three categories — Cat I, II, III
Category I (Regulation 3(a)): venture capital funds, angel funds, SME funds, infrastructure funds — the government/regulator wants to encourage these. Category II (Regulation 3(b)): private equity, debt, real estate funds — no specific government incentive, no leverage beyond operational needs. Category III (Regulation 3(c)): hedge funds, PIPE funds, open-ended trading funds — may employ complex strategies, use leverage, and list on a recognised stock exchange. Each category has different investor lock-in, reporting, and leverage rules.
Cat I (VC/angel/infra) · Cat II (PE/debt) · Cat III (hedge/trading) · different leverage and lock-in
₹20 crore minimum corpus — the hard floor
Regulation 10(b) requires a minimum corpus of ₹20 crore for all AIF categories (Cat I, II, and III alike). This is the fund's total commitments, not just the first close. Angel funds have a relaxed minimum of ₹5 crore (Regulation 19A, Chapter III-A). The fund cannot start investing until the minimum corpus is achieved and SEBI registration is obtained. An LLP or company is the usual fund vehicle, with a SEBI-registered investment manager.
₹20 crore (all categories, Reg 10(b)) · ₹5 crore (angel, Reg 19A) · minimum corpus before investing
Tax treatment — s.115UB pass-through
Section 115UB of the Income-tax Act provides a pass-through regime for AIFs: income is taxed in the hands of the investor, not the fund. Category I and II AIFs get pass-through on business income and capital gains. Category III AIFs are taxed at the fund level at the applicable rate (no pass-through for trading income). The key benefit is avoiding the cascading tax that would apply if the fund were a company. The investor pays tax at their applicable rate on the income attributed to them.
s.115UB · Cat I/II pass-through · Cat III taxed at fund level · investor-level taxation
Brutally honest
Where it wins. Where it hurts.
- ✓SEBI-recognised structure with regulatory credibility for institutional and HNI investors
- ✓Pass-through taxation for Cat I and Cat II (s.115UB) — no cascading tax
- ✓Three categories let you match the fund to the strategy (VC, PE, hedge, infrastructure)
- ✓Angel fund sub-category (Cat I) for early-stage investing with relaxed ₹5 crore minimum
- ✓Foreign investors can invest through the FDI/FPI route with SEBI approval
- ✗SEBI registration process takes 3–6 months and requires detailed fund documents (PPM, LPA, trust deed)
- ✗₹20 crore minimum corpus across all categories — not viable for small funds
- ✗Annual compliance: SEBI filing, audit, NAV reporting, and ₹1 lakh/year SEBI fee
- ✗Cat III AIFs are taxed at the fund level (no pass-through) — higher effective tax
- ✗Fund manager must be SEBI-registered; cannot self-manage without a separate regulated entity
Fund managers raising ₹20 crore+ from HNI and institutional investors for private equity, venture capital, or alternative strategies. If you are a startup founder raising money, the AIF is the investor's vehicle — not yours. If you are a family office deploying your own capital, you may not need SEBI registration (see Family Office page).
Small syndicate deals under ₹20 crore, founders raising their own seed round, or anyone who thinks an AIF is a tax-efficient structure for personal investments — it is a regulated fund vehicle with real compliance.
At a glance
The decision table.
| Formation cost | SEBI registration fee ₹5 lakh + legal structuring (fund documents, PPM, LPA) typically ₹5–15 lakh; state stamp duty on the trust deed or LLP deedSEBI (AIF) Regulations 2012, Regulation 4; SEBI (Registration Fees) Regulations 2007 |
|---|---|
| Annual compliance | Annual compliance certificate to SEBI, NAV reporting, annual audit, Form AIF-III annual return, and SEBI fee ₹1 lakh/yearRegulation 22, 23, 24 SEBI (AIF) Regulations 2012 |
| Personal liability | None — fund is a separate vehicle (trust, company, or LLP); sponsor and manager liability per SEBI exposure normsRegulation 4(2) SEBI (AIF) Regulations 2012 |
| Investor-ready | Yes — this IS the investment vehicle; Cat I for early-stage, Cat II for PE/growth, Cat III for trading/hedgingSEBI (AIF) Regulations 2012 |
| Conversion path | No statutory conversion; Cat I/II cannot trade on exchanges; Cat III can but is not convertible to a listed fundSEBI (AIF) Regulations 2012 |
What we actually do
Five tracks, start to finish.
- 01AIF structuring & SEBI applicationOne-time (3–6 months)
Fund vehicle selection (trust, LLP, company), PPM and LPA drafting, SEBI registration application with Category I/II/III classification.
- 02Fundraising & first closeOne-time
Investor onboarding, minimum corpus achievement of ₹20 crore (or ₹5 crore for an angel fund), and first-close compliance with SEBI regulations.
- 03Investment management & reportingOngoing
Portfolio deployment, NAV computation, valuation policy compliance, and SEBI quarterly/annual reporting.
- 04Annual SEBI complianceAnnual
Annual compliance certificate (Regulation 22), Form AIF-III annual return, statutory audit, and SEBI fee payment.
- 05Wind-down & exitEnd of fund life
Fund term expiry, extension mechanics, final NAV, distribution waterfall, and SEBI de-registration filing.
Common questions
Statute-cited answers.
What is an Alternative Investment Fund?+
An AIF is a privately pooled investment vehicle registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. It collects funds from sophisticated investors (HNI and institutional) and invests in assets other than listed equities and bonds — including venture capital, private equity, debt, real estate, hedge-fund strategies, and infrastructure. Three categories exist: Cat I (VC, angel, SME, infrastructure), Cat II (PE, debt, real estate), and Cat III (hedge, PIPE, trading).
What is the minimum investment required for an AIF?+
SEBI requires a minimum corpus of ₹20 crore for Category I, Category II, and Category III AIFs under Regulation 10(b). For an individual investor, the minimum ticket is ₹1 crore under Regulation 10(c). Angel funds have a relaxed minimum corpus of ₹5 crore and a minimum investor ticket of ₹25 lakh under the angel-fund provisions in Chapter III-A (including Regulation 19A and related provisions).
How is an AIF taxed in India?+
Under s.115UB of the Income-tax Act, Category I and Category II AIFs enjoy pass-through taxation — income is attributed to and taxed in the hands of the investor, not the fund. Category III AIFs are taxed at the fund level at the applicable rate (no pass-through). Capital gains follow the investor's applicable rate. This pass-through benefit is one of the main reasons to use an AIF over a company for PE and VC investing.
Who can set up an AIF in India?+
Any person can apply for SEBI AIF registration (Regulation 3), but the investment manager must be a SEBI-registered entity. The fund must be established as a trust, company, or LLP. Typically, a fund management company (the sponsor) establishes the AIF as a separate vehicle. SEBI registration takes 3–6 months and requires detailed offering documents (PPM), legal agreements (LPA/trust deed), and a compliance framework.
What is the difference between Cat I, Cat II, and Cat III AIFs?+
Category I (Regulation 3(a)) is for funds that the government or SEBI wants to encourage — venture capital, angel, SME, and infrastructure funds — with pass-through taxation and lower compliance. Category II (Regulation 3(b)) covers private equity, debt, and real estate funds with pass-through but no specific government incentive. Category III (Regulation 3(c)) includes hedge funds and trading strategies — may use leverage, can list on exchanges, but are taxed at the fund level without pass-through.
Decisions involving this structure
Compare AIF with…
Setting up a fund? The category choice and PPM structure determine your tax and compliance load.
We structure AIFs across all three categories, draft the PPM and LPA, handle SEBI registration, and set up the ongoing compliance framework so the fund is built right from day one.
Fund set up? The SEBI compliance calendar starts now.
Annual compliance certificate (Regulation 22), Form AIF-III, NAV reporting, and SEBI fee — the ongoing obligations that keep the registration alive.
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