The purpose of this research paper is to understand more about the development and performance of alternative investment funds in India. These funds were formally introduced in June 2012, and the author sought to understand how Indians felt about this new investment vehicle with a range of possibilities at the time.

Alternative investments are rapidly taking over many varied portfolios for tax exempt entities including hospitals, universities, public foundations, and healthcare facilities. With higher state reporting requirements, administrative costs, and potential for unrelated company revenue and fines (both civil and criminal), these investments also come with additional levels of risk.

Any investment instrument that is not a stock, bond, or cash is considered an alternative investment. Because of their complexity, lack of rules, and relative lack of liquidity, most alternative investment assets are owned by accredited, high-net-worth individuals or institutional investors. The results of this study are based on a variety of regression analyses that looked at how several factors that depend on one another sequentially interacted.

Introduction
Since its introduction in 2012, alternative investment funds (AIF) in India have experienced exponential development. Every day that goes by, there are more investors entering this market. This article will present some information about the expansion of alternative investment funds from an Indian viewpoint.

In India, alternative investment funds (AIFs) are defined in Regulation 2(1)(b)[1] of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012. It refers to any privately pooled investment fund, (whether from Indian or foreign or Non-Resident Indian Investors), established or incorporated in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP).

Which are neither presently covered by any regulation of SEBI governing fund management (like, Regulations governing Mutual Fund regulations,1996 or Collective Investment Scheme regulations, 1999 ) and any other regulations of the SEBI to regulate fund management activities, nor coming under the direct regulation of any other specific regulators in India like IRDA, PFRDA, RBI. Hence, in India, AIFs are private funds that are otherwise not coming under the jurisdiction of any other regulatory agency in India except SEBI.

Venture Capital Funds, hedge funds, private equity funds, equity related instruments, SME funds, social venture funds, commodities funds, debt funds, infrastructure funds, etc. are all included in the definition of AIFs. While it excludes mutual funds, collective investment schemes, family trusts (established under the Companies Act of 1956 for the benefit of relatives), employee stock purchase and option plans, employee welfare trusts, and gratuity trusts, as well as other specific purpose vehicles not created by fund managers, such as securitization trusts governed by a specific regulatory frame work, and funds managed by securitization company or reconstruction company that is registered with the RBI under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002[2] and it also exclude any such funds which is directly regulated by any other regulator6 in India.

Alternate Investment Fund

Regulation 2(b)[3] defines the terms 'Alternative Investment Funds' as any fund established or incorporated in India in the form of a trust or a company or a limited liability partnership or a body corporate which:

• Is a privately pooled investment vehicle which collects funds from investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors; and
• Is not covered under the SEBI (Mutual Funds) Regulations, 1996[4], SEBI (Collective Investment Schemes) Regulations, 1999[5] or any other regulations of the Board to regulate fund management activities.
   

Alternative investment funds refer to funds that include hedge funds, venture capital, private equity, angel funds, real estate, commodities, collectibles, structured products, etc. An alternative to traditional investing alternatives are alternative investment funds (stocks, bonds, and cash). For advantages and investment diversification, investors can purchase AIF funds. AIF funds are typically preferred by high net worth investors, retail investors, and individuals. However, unlike traditional assets, they are difficult to buy and sell. The government is attempting to increase the transparency of these alternative investment vehicles.

An Overview Of The Growth Of Alternative Investment Funds In Recent Years

According to the Global Limited Partner Survey conducted in 2017, our nation emerged in first place and was deemed the best platform for alternative investment. As a result, fresh capital has begun to rise and consumer protection is now more comprehensive.

Alternative investment funds are generating a lot of buzz in our country, where the stock market has seen a significant drop in investment following the decline of benchmark Sensex. Additionally, AIF offers the incorporation of hedging strategies, unlike mutual funds.

These factors suggest that alternative investment funds will improve their position over the coming years. According to SEBI, the number of registered funds for AIF has steadily increased every year, reaching 366 in 2018. About 470+ AIF have received funding as of September 2018, which has improved the effectiveness of this volatile secondary market. This indicates a rapid and significant growth in the Indian economy.[6]

Economic Benefits Of Alternative Investment Funds[7]:

General Economic Benefits: The positive effects of the emerging alternative fund on the economy are well documented and include better corporate governance through activists managers , greater liquidity in the markets, higher performance returns and free flow of capital for both small and large corporations. The industry has spurred job creation, financial growth as well as innovation in financial products.

Economic benefits to Institutional Investors: Alternative investments funds provide economic benefits to institutional investors such as pension funds. The economic benefits derive from a combination of good returns, lower correlation to traditional asset classes such as bonds and equities, and low volatility. Consequently, institutional investors have been steadily increasing their allocations to alternatives.

No significant risk to financial markets: It is believed that the alternative investment funds market is based on lack of transparency to investors, to regulators as well as tax evasion. However, if the situation of crises is analysed then it can be seen that the alternative investments funds were not the reason for global crises.

Top Alternative Investment Funds In India[8]

1. Hedge funds:
   Hedge funds are a class of alternative investment funds that raise money from investors to invest in local and international debt as well as extremely hazardous equities markets.[9] Hedge funds provide significant returns to investors because they employ an aggressive investing approach. Hedge fund managers demand a hefty management fee of between 2% and 20% of the total yearly returns. Hedge funds are often preferred by authorised investors with high net worth.
    
2. Private Equity:
   Private equity firms make investments in businesses that are not publicly traded. Private businesses are unable to raise public financing since they are not listed on public markets. So, they use private equity funds to raise money.[10] The investing horizon is rather broad. In India, private equity funds have raised about $100 billion over the last 13 years. As a result, they are crucial to the growth of small and medium businesses.
    
3. Commodity:
   Oil, grain, agricultural products, energy, metals, and other commodities are examples of commodities. These are attainable through trade. Investing in commodities is a wonderful strategy to hedge against inflation because when inflation rises, the price of commodities rises along with the price of other things. However, the macroeconomic forces that influence the commodities markets make them vulnerable to market volatility. Investors should thus think about these considerations before making a commodity market investment.
    
4. Real estate:
   Prior to the introduction of REITs (real estate investment trusts), investors could only participate in real estate if they had a sizeable sum of money, often between a few lakhs and a few crores. Now, however, investors may invest in real estate with as little as 5000 to 10,000 rupees. With the use of platforms like Strata, Prop Share, and others, investors may purchase real estate, such as offices and commercial buildings, for a little investment. Investors can own a portion of grade A properties like offices, warehouses, and commercial buildings. These properties already have a tenant who pays rent each month, ensuring a steady flow of money for the property owner.
    
5. Venture capital:
   Venture capital funds are the kinds of funds that invest in young, fledgling businesses that require money to grow and improve their operations. After the US and China, India has one of the largest startup ecosystems worldwide. As a result, startup business owners can obtain funding from venture capital funds. Based on the qualities, stage of product development, and asset size of the organisation, venture capital funds invest in small enterprises and startup companies. The primary goal of venture capital is to aid in the expansion of goods and services while also assisting in business scaling. Depending on the companies that a venture capital fund has invested in, investors may get rewards.[11]
    
6. Peer-to-peer lending:
   Traditionally, P2P lending included people depositing money in a bank to earn interest and then lending that same money to borrowers who agreed to pay the bank a certain amount of interest. The bank holds the difference between the interest that the borrower pays and the interest that the depositors earn. In contrast to banks, which have restrictions on who may borrow money, how much they can borrow, and at what interest, modern P2P lending does not use banks, allowing both lenders and borrowers to earn higher interest rates. P2P lending is permitted on several P2P lending platforms, including Faircent, Lendbox, Liquid Loans, and others.
   
   These platforms allow lenders to select their borrowers based on loan criteria, location, profile, reason for the loan, loan tenure, and rate of interest. Currently, they offer 18-22% net returns. However, P2P lending is associated with risk as there is always a chance of the borrower defaulting. So, investors should do their research before investing in it.[12]
    
7. Angel funds:
   Angel funds are a form of alternative investment fund that aggregate the money of many investors who are eager to put money into start-up companies in their early stages. Investors receive dividends after the new enterprises turn a profit. Angel investors support the expansion and profitability of enterprises.

Outlook On Alternate Investments Funds And Its Various Categories[13]

Conceptual Framework

AIFs are primarily divided into three groups depending on their effects on the economy and the regulatory framework intended for them while also taking into account the exposure, risk, and other effects on the economy.

The Alternative Investment Funds (AIF), in contrast to conventional investment strategies, are exempt from the regulations set forth by SEBI for financial institutions. When contrasted to stocks, bonds, etc., they have different identities. Additionally, they are often seen as private investment possibilities.

The classes into which these monies are divided are as follows:

• Category I
  Such funds typically invest in start-ups, early stage ventures, social ventures, SMEs, infrastructure, or other sectors or areas that the government or regulators consider to be socially or economically desirable. AIFs are those AIFs with positive spillover effects on the economy, for which SEBI or the Government of India may consider certain incentives or concessions.
  
  They are prohibited from using leverage other than to satisfy short-term finance needs for no longer than 30 days, no more than four times annually, and no more than 10% of the corpus, for example. Infrastructure Funds, Social Venture Funds, SME Funds, and Venture Capital Funds.
  
  The SEBI authorised a framework for the registration and regulation of angel pools under a sub-category named "Angel Funds" under Category I-Venture Capital Funds in June 2013 to give effect to the Union Finance Minister's pronouncement about angel investor pools in the Union Budget 2013-14. Funds of Category I Alternative Investment Funds may invest in units of the same subcategory of Category I Alternative Investment Funds as long as they do not invest in units of any other Fund of Funds.
   
• Category II
  AIF are those AIFs for which no specific incentives or concessions are given and not fall in Category I and Category III. They are prohibited from using leverage other than to cover short-term funding requirements for a maximum of thirty days, a maximum of four times per year, and a maximum of ten percent of the corpus, as described for Category I AIFs.
  
  Private equity or debt funds, for instance, would be included if the government or any other regulator did not specifically offer them any incentives or concessions. If a Fund of Category II Alternative Investment Funds does not invest in units of other Fund of Funds, they may invest in units of Category I or Category II Alternative Investment Funds.
   
• Category III
  AIFs are open-ended or closed-ended funds that are thought to have some potential negative externalities in certain circumstances and that heavily rely on leverage. These funds trade with the goal of generating short-term returns and don't receive any special incentives or concessions from the government or any other regulator. For instance, hedge funds (which employ a variety of trading strategies, invest in and trade securities of listed or unlisted investee companies, and have a variety of risks or complex products, such as listed and unlisted derivatives) use a variety of trading strategies.
  
  Category III Alternative Investment Funds may use leverage or borrow with the consent of the fund's investors and up to a maximum limit that may be established by the SEBI, provided that the funds disclose the amount of leverage used overall, the amount of leverage resulting from borrowing cash, the amount of leverage resulting from positions held in derivatives or other complex products, and the primary source of leverage in their investments.
   

These funds may also invest in Category I and III AIFs as long as they do so only in those units and not in any other Fund of Funds' units. The regulation of Category III Alternative Investment Funds would involve the issue of directives addressing matters including operational standards, business conduct regulations, prudential requirements, redemption limits, and conflicts of interest, as determined by the SEBI.

Investment limitations and AIF requirements Any material change to the fund strategy must be supported by two-thirds of unit holders, measured by the value of their investment in the alternative investment fund (AIF), and must be disclosed in the placement memorandum to investors. Alternative investment funds may raise money from any investor, whether they are Indian, foreign, or non-resident Indians, by issuing units.

• AIFs must accept investments of at least Rs. 1 crore from investors in order to raise money through private placement. (Provided that the minimum amount of investment must only be 25 lakh rupees in the event of investors who are employees or directors of the Alternative Investment Fund or employees or directors of the Manager.)
   
• A maximum of 1000 investors may participate in any one fund plan, and each scheme must have a minimum capital of Rs. 20 crore. An ongoing stake in the AIF of at least 2.5% of the corpus, or Rs. 5 crore, whichever is lower, must belong to the manager or sponsor of the AIF. (This continuing interest shouldn't involve the waiver of management fees; rather, it should take the form of an investment in the Alternative Investment Fund.), Provided that in case of Category III Alternative Investment Fund, the continuing interest should not be less than 5% of the corpus or 10 Crore rupees, whichever is lower and the Manager or Sponsor shall disclose their investment in the Alternative Investment Fund to the investors of the Alternative Investment Fund in all Categories.
   
• The AIFs in categories I and II are closed-ended, and the schemes they launch must have a minimum tenure of three years. They may also extend the tenure of the closed-ended AIFs. AIFs of Category I and II are not permitted to invest more than 25% of the investible funds in one Investee Company while it is 10% for Category III AIFs, and category III AIFs can be open ended or closed ended. Alternative Investment Funds may be permitted up to two years subject to approval of two-thirds of the unit holders by value of their investment in the Alternative Investment Fund. In the absence of consent of unit holders, the Alternative Investment Fund shall fully liquidate within one year following expiration of the fund tenure or extended tenure.
   
• AIFs may invest in associates (in which the Manager or Sponsor holds, either individually or collectively, more than 15% of its paid-up equity share capital or partnership interest) with the consent of 75% of investors measured by the value of their investment in the Alternative Investment Fund.[14]
   
• The corpus' uninvested portion may be placed in liquid mutual funds, bank deposits, or other liquid assets of higher calibre like Treasury bills, CBLOs, Commercial Papers, Certificates of Deposits, etc. until the money is allocated in accordance with the investment goal.
   
• Units of close ended AIFs are allowed to be listed on a stock exchange (but only after final close of the fund or scheme) subject to a minimum tradable lot of 1 Crore rupees.
   
• The reporting requirements to SEBI must be followed by all AIFs either on a monthly basis (for Category III AIFs that do not use leverage) or a quarterly basis (for Category I, II, and III AIFs that do). The circular dated July 29, 2013 specifies the reporting formats and the method of reporting.[15]
   
• As stated in the circular, Category III AIFs must also adhere to standards for risk management, compliance, redemption, and leverage. The maximum leverage for a Category III AIF is 2 times, meaning that the gross exposure after hedging and portfolio rebalancing activities is neutralised should not be greater than 2 times the fund's NAV.Norms in case of application for change in category of the AIF were specified by SEBI vide circular dated August 7, 2013.
   
• Co-investment in an investee company by a Manager/Sponsor should not be on terms more favorable than those offered to the particular AIFs by such investee company.
   

Data Analysis And Findings

The analysis and conclusions are based on reports compiled from data that registered alternative investment funds submit to SEBI on a quarterly or monthly basis. All such reports are accessible on SEBI's official website.

• The data shows the growth rate of 102.8% each quarter in commitments raised and its growing very fast.
   
• The amount of funds committed under Category I's "Infrastructure Fund" subcategory is relatively significant, yet only 11.22% of those funds have really been raised, and only 30.50% of those monies have been invested effectively. Just 3.42% of promises under this sub category have been invested in thus far.
   
• "Social venture fund," the second subcategory under category I, had a rapid rise in funding commitments in the second quarter of the current fiscal year. By the conclusion of the third quarter of the current fiscal year, 18% of such funds had been raised and 32.34% had been invested. Just 5.82% of the promises under this sub category have been invested in thus far.
   
• In comparison to other subcategories and categories of funds, the third subcategory of funds under category I, "Venture capital fund," has shown a continuous and most consistent growth in commitments. Only 6.15% of the commitments made under this fund have been successfully invested, despite the fact that 44.45% of the commitments have already been raised and 13.84% of the funds successfully raised.
   
• No commitments raised on account of sub category 'SME fund' under category I till date.
   
• In the second and third quarters of the current fiscal year, obligations raised in category II suddenly increased. In comparison to category I, 74.19% of these pledges' money were effectively invested, and 34.18% of them have already been raised. Although only 25.36% of the funds committed have been invested, this indicates that there are still plenty of opportunities for investment in private equity and debt funds and that investors still have faith in these funds when thinking about long-term investment strategies.[16]
   
• The third quarter of the current fiscal year and the fourth quarter of the previous fiscal year saw a dramatic surge in commitments raised in category III. The rate of money raised in this area is the greatest of all categories at 66.95% of commitments raised, while the rate of investments made with those funds is the highest of all categories at 85.36%. This demonstrates that, in contrast to the other two groups, investors choose short-term open-ended hedge funds for their speedy profits.
   
• Till the end of the third quarter of the current fiscal year, pledges of Rs. 11186.36 crores have been raised under all of these categories. Out of the total of Rs. 2907.03 crores raised up to this point, Rs. 1904.09 crores have been successfully invested; however, Category I has only received Rs. 203.77 crores, or 10.70% of the total investment made, while Category II has received Rs. 1222.67 crores and Category III has received Rs. 477.65 crores. Although roughly half of the pledges received were for category I, this category received the majority of commitments.

So the investments opportunities are still higher in category II and Category III and investors prefer these categories, whereas the SEBI and government consider Category I as economically and socially desirable and may offer concessions and incentives for this, but still no great impact of such considerations visible as of now, it might happen due less opportunities available in the market or lack of confidence among investors.

Reasons Pertaining To The Sustainable Growth Of Alternative Investment In India

There are wide arrays of factors that affect the growth of AIFs in our country, some of them are mentioned below:
The AIFs in our nation have increased dramatically as a result of the expanding real estate market. Additionally, this industry was ranked as India's second-most active in 2017. One of the key causes of the growth of AIFs is the creation of the NIIF (National Infrastructure Investment Fund) by the Indian government, which has a budget of Rs 20,000 crores.

Investors are more likely to invest in Category III since they are permitted to do so up to 10% of the investable money. Additionally, they are allowed to take advantage up to two times.
The Reserve Bank of India has also released a notification for AIFs foreign investment via the automatic route since November 2015.

These two items are: First, FDI restrictions will apply to AFIs if the person in charge of the fund is an Indian Territory resident. Second, it would be considered local funds if the majority of the AIF is made up of foreign capital.

For the Category I and II funds, a tax pass-through structure is being used. In this manner, investors can easily avoid the issue of double taxation and will be responsible for handling tax liabilities under these categories.

However, there is still room for improvement to ensure long term growth stability.

Viable Strategies to Ensure Substantial in Alternative Investment Funds in India
AIF growth is another important economic success measure for India. In order to legitimately modify the structure of India's AIFs, it is imperative to close the gaps by choosing the appropriate reforms.

Finding local institutional investors to support AIF investments
Our nation is currently increasingly financially reliant on the international market. Positive results in the expansion of AIFs in India would result from a rise in local institutional investors.

Essential Amendments to the Goods and Service Tax Framework

The current GST framework must be incorporated with 2 changes, which are as follows:

• For all investors who put up their funds in PE and VC funds, 5% of tax ought to be levied on services provided to these funds.
• GST should be applied on overseas investments that surpassed 50% in AIFs as all the services that the Alternative Investment funds receive must be deemed as an export of services.

Growth-Oriented Taxation Reforms
Existing tax reforms for AIF sectors isn't favourable as it should be. Below we have mentioned some essential measures to cater to such an issue.

• For Category III AIFs, there should be a Pass-through structure.
• The transaction-related unlisted securities and profits should not be perceived as business gains. Rather it must be treated as capital gains. Besides, the expenses related to AIF management should be treated as improvement costs.
• If the AIF ends up unprofitable, it must be set-off against the income of the investor rather than the business profits of AIFs.
• Deployment of a Unit-based Taxation Approach must be done prior to the advent of AIFs under the stock exchange platform, such as mutual funds. The tax shall not be imposed on the investors of registered AIFs:
  
  • Distribution tax should be applied on dividends as well as interest.
  • Capital gains tax should be brought into existence along with unit transfer for short and long-term capital gain.
  • Tax exemption should be accessible to an overseas investor for the generated income via an AIF in as IFSC.

Compulsory Disclosure of Fund-based Information
Important information on the performance of the fund must be disclosed to the investor. Additionally, it is necessary to create an Investment Advisory Committee that will be crucial in better controlling all conflicts relating to the fund.

The aforementioned crucial measures would undoubtedly support the long-term, sustainable expansion of AIFs in India. Even if alternative investment funds are still in their infancy, with such reforms in place, they will undoubtedly achieve success in the years to come.

Conclusion
The growth in AIFs will surely have a sustainable future in the coming years. You will witness the increase in the investor's numbers, which in turn leads to stimulate the growth of the Indian Economy. A great transformation is on its way that will ensure cut development in the AIF sector soon.

The SEBI has done a good job of providing very specific regulations, guidelines, and criteria's for different types of funds in accordance with the risk-return prospective involved in the same and economically and socially desirable prospects. Additionally, it has developed various compliances to protect investors, but there needs to be more specific elaboration in respect of various points needed to be framed as investor will feel appropriately informed and less hesitate towards investing in such.

Regardless of the category or subset to which they belong, there is nothing new for alternative investment funds in terms of tax advantages, with the exception of trust forms, which are still clearly specified for venture capital funds exclusively.

In order to increase the number of people who can invest and ensure that those with good ideas and opportunities do not experience a financial crisis or find it difficult to manage their finances, it is necessary to improve alternative investment opportunities and reduce the formalities associated with investing in such funds.

The impact of alternative investment options on the global economy as a whole contributes to an increase in investment, productivity, and employment globally.

Alternative investments give investors more access to a variety of schemes with flexibility and a number of options to invest based on their risk and return expectations. This encourages more people to participate in investment opportunities, which strengthens the financial system by allowing money to flow smoothly from the surplus sector to the deficit sector as needed, satisfying the needs of each.

The government is also playing a significant part in this by promoting these alternative investment options by offering a variety of incentives and exemptions where necessary, provided the investment is for goals that are both economically and socially beneficial.

End-Notes:

1. SEBI (Alternative Investment Funds) Regulations, 2012 � 2(1)(b).
2. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 � 3.
3. SEBI (Alternative Investment Funds) Regulations, 2012 � 2(b).
4. SEBI (Mutual Funds) Regulations, 1996.
5. SEBI (Collective Investment Schemes) Regulations, 1999.
6. Alternative Investment Funds in India - A Comparison with the West, ARANCA (Nov. 25, 2022), https://www.aranca.com/knowledge-library/articles/business-research/alternative-investment-funds-in-india-a-comparison-with-the-west.
7. Directive on Alternative Investment Fund Managers, 2 European Union Committee's 3rd Report (2009-2010).
8. What are Alternative Investment Funds? Should You Invest In Them?, INDMONEY (Nov. 25, 2022), https://www.indmoney.com/articles/personal-finance/what-are-alternative-investment-funds.
9. SEBI (Alternative Investment Funds) Regulations, 2012 � 2(1)(l).
10. SEBI (Alternative Investment Funds) Regulations, 2012 � 2(1)(r).
11. SEBI (Alternative Investment Funds) Regulations, 2012 � 2(1)(z).
12. The Business Finance Market: A Survey, Industrial Systems Research Publications, Manchester UK, 3rd. revised edition 2008.
13. Alternative Investment Funds, Tax Management India (Nov. 26, 2022), http://www.taxmanagementindia.com/wnew/print_Article.asp?ID=1855.
14. James Chen, Venture Capital Funds: Definition for investors and how it works, Investopedia (Nov. 24, 2022), http://www.investopedia.com/terms/v/vcfund.asp.
15. Rosemary K. Abraham, Alternative investment funds (AIFS), ARTHAPEDIA (Nov. 23, 2022), http://www.arthapedia.in/index.php?title=Alternative_Investment_Funds_%28AIFs%29.
16. Nusrat Hassan, India- Alternative investment fund, MONDAQ (Nov 25, 2022), http://www.mondaq.com/india/x/206874/Fund+Management+REITs/Alternative+Investment+Fund.