ANALYSIS OF SEBI’S DENIAL OF WAIVER OF RIGHTS BY INVESTORS OF AIF
Updated: Nov 9, 2020
This post is authored by Anurag Shah, a B.A.LL.B candidate at School of Law, Christ University.
In its interpretative letter dated September 17th, 2020, the Securities and Exchange Board of India (SEBI) provided informal guidance to Lets Venture Advisors LLP (LV Angel Funds). The guidance was related to the SEBI (Alternative Investments Funds) Regulations, 2012 (AIF Regulations). LV Angel Funds is a trust which is registered with SEBI as a category I AIF. As per Regulation 3(4) (a) of the AIF Regulations, a category I AIF can invest in start-ups or early-stage ventures or social ventures or small and medium-sized enterprises (SMEs). Through a request for interpretation under SEBI (Informal Guidance) Scheme, 2003, LV Angel funds had sought certain clarifications related to the AIF Regulations.
The main objective of the AIF Regulations was to bring all the funds established in India or to be established in India under one omnibus regime. AIFs are divided into three broad categories on the basis of the kind of investments they undertake. An AIF which invests in start-ups and new businesses with high growth potentials is known as Category I AIF. Funds that invest in equity and debt securities are known as Category II AIF, while the funds that employ various complex and diverse trading strategies to achieve short term capital gains are known as Category III AIFs. Each of these categories has a minimum requirement that the fund must meet before it is recognized as an AIF. As per Regulation 19A(2) of the AIF Regulations, to be registered as an Angel fund under Category I AIF, two requirements must be met: firstly the body corporate must have a minimum net worth of Rs. Ten Crores, and secondly, the individual investors constituting such body corporate must have net tangible assets of at least Rs. Two Crores excluding the principal residence.