AIF Category I/II/III
Investment Fund Tiers
SEBI's three-tier classification of pooled investment vehicles in India. Determines tax pass-through, leverage limits, and permitted investments.
Alternative Investment Funds (AIFs) are pooled investment vehicles registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012. They are India's regulated structure for VC, PE, hedge, and other non-traditional investing.
Category I AIF — invests in socially or economically desirable sectors. Includes Venture Capital Funds, Angel Funds, SME Funds, Social Venture Funds, and Infrastructure Funds. Receives government incentives. Tax pass-through under Section 115UB of the Income Tax Act for income other than business income.
Category II AIF — funds that do not fall under I or III and do not employ leverage other than for day-to-day operations. Most Indian PE funds and debt funds sit here. Also receives pass-through status under Section 115UB.
Category III AIF — employs diverse or complex trading strategies, may use leverage. Hedge funds, PIPE funds, long-short funds. No pass-through — taxed at the fund level (currently at the maximum marginal rate for non-corporate AIFs unless specifically structured).
Key constraints:
- Minimum corpus: ₹20 crore (₹10 crore for Angel Funds).
- Minimum investor commitment: ₹1 crore (₹25 lakh for Angel Funds; ₹25 lakh from employees/directors of the fund manager).
- Maximum investors: 1,000 per scheme (49 for Angel Funds).
- Fund tenure: Cat I & II are close-ended, minimum 3 years. Cat III can be open- or close-ended.
Common pitfalls: First-time GPs often default to Cat II without modelling whether Cat I sub-categories (e.g., VCF) might unlock better LP economics or government co-investment. Also, GIFT City IFSC AIFs operate under a separate framework with attractive tax regimes — worth evaluating for global LPs.
The fund manager — sponsors, raises, deploys, and exits the fund. In Indian AIFs, structured as Investment Manager + Sponsor + Trustee triangle.
Fund investor providing capital. In Indian AIFs, structurally a 'Contributor' under the Indian Trusts Act framework — ₹1 crore minimum commitment.
GP's performance share of fund profits, typically 20% above an 8% preferred return hurdle. Recent SEBI rules tighten attribution and disclosure.
Formal notice from a fund's GP to its LPs to fund a portion of their committed capital. Indian AIFs typically issue drawdowns 10–15 business days in advance.
Statutory regulator of Indian securities markets. Oversees listed companies, AIFs, mutual funds, intermediaries, takeovers, and insider-trading regimes.