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14 Apr 2017

AIF threshold ceiling to be lowered for bolstering start-ups

Narayana Murthy-led SEBI committee is set to propose lowering of investment threshold limit when it comes to Alternative Investment Funding (AIFs).

This move, if carried out, will bolster "Make In India" ventures by allowing more accredited investors to inject capital in start-ups.

Here is a brief overview of the proposals that might be suggested and how they can affect the start-up economy.

In context

Committee suggests AIF revisions to bolster start-up funding
Alternative Investment Policy Advisory Committee


Alternative Investment Policy Advisory Committee

The 18-member committee was initiated by SEBI in 2015 to seek and suggest reforms in uplifting the start-up eco-system in India and consisted of private equity industry heavyweights.

Chaired by Infosys co-founder NR Narayana Murthy, this committee would also suggest reforms that could be taken up with other regulators to develop alternative investment industry and to facilitate funding towards start-ups and young firms.

Third report

AIPAC third report probable suggestions

People privy to the matter have said that in its third leg of suggestions the committee put forward the need of lowering the investment threshold from R.s 1 crore to Rs. 25 lakh.

The committee at the end of April may also propose anonymized disclosure norms containing adequate potential investor information but would exclude details pertaining to the previous sale of investments.

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Alternative Investment Funding scenario in India


Alternative Investment Funding scenario in India

Alternative Investment Funding (AIFs) which mainly consist of private equity funds, hedge funds, venture capitalists and social impact funds, according to SEBI data, have raised around Rs. 33,383.86 crore till date from 2012.

2016 accounted for almost half of the funds raised till date by clocking Rs. 16, 142.79 crore in funding and Rs. 14,454.7 crore was invested by the AIFs the same year.


Three main categories of AIFs in India

Category I consists of firms that invest in sectors which are favoured by the government and cannot be leveraged or borrowed other than for daily operations.

Category II consists of multi-sector funds which also have the same restrictions as Category I.

Category III consists of hedge funds that make use of calculated trading mechanism and indulge in leveraging by making investments in derivatives.

AIPAC major suggestions in its second report

Second report

AIPAC major suggestions in its second report

AIPAC in its second report had suggested tax pass-through status for category III AIFs, which was already in place for I and II.

AIPAC also recommended that there shouldn't be any payable service tax on management fees by funds, to bring about a securities transaction tax and to apply capital gains tax when PE/VC funds initiated a sale of investments in unlisted firms.

Inaugural report

AIPAC major suggestions in its first report

In its inaugural report, the committee had suggested introducing the concept of "accredited investor" in India and also allowing religious and charitable trusts to make investments in AIFs.

AIPAC also suggested that amendments should be made in IT Act, 1961, which involves clarifying the Act's stance on "indirect transfer" provisions and to ensure proper bifurcation of losses at the end of a fund's tenure.

How does it benefit start-ups and young enterprises?


How does it benefit start-ups and young enterprises?

The central cabinet had allocated a Rs. 10,000crore fund-of-funds to be used by SEBI -registered AIFs but this fund has not made any significant investment as of yet.

It is up to the existing AIFs to pull up this lag and invest in ventures that don't need a massive investment or will not interest traditional investors, as the payoff may not be high enough.

A brief history of SEBI

SEBI stands for Securities and Exchange Board of India and was established in 1988 to replace its previous regulatory body, Controller of Capital Issues (CCI). It is the securities market regulator and has its headquarter in Mumbai.

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