Category III AIF – is an AIF that employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives. AIFs such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator are included under this Category

Private Equity funds (PE Funds) are involved in later stage financing and not for start-ups.

PE Fund means “an AIF which invests primarily in equity or equity linked instruments or partnership interests of investee companies according to the stated objective of the fund”. It may be understood that private equity fund is primarily an equity-based investor but unlike venture capital funds which are focussed on early stage investments, private equity funds are mostly involved in later stage financing in business entities that have established a business model and need to be scaled up for further growth.

Under Regulation 22 of the AIF Regulations, all AIFs shall ensure transparency and disclosure of information to investors. AIF shall provide at least on an annual basis, within 180 days from the year end, reports to investors.

The SEBI (Alternative Investment Funds) Regulations 2012 define the term ‘Alternative Investment Fund’ (AIF) as one which is primarily a privately pooled investment vehicle.

The words ‘privately pooled’ denote that the fund is pooled from select investors and not from the general public at large.

Equity value or market capitalisation (market value of a listed company) is the value of 100% of the shares of the company (total equity capital). It measures the total value of funds belonging to equity shareholders in the company after all other on the business, including debt and preference capital have been deducted.

Value of the firm = Equity Value + Debt

Value of the firm = 620 crore + 252 crore = Rs. 872 crore

Enterprise Value EV / EBITDA  = Value of Firm / EBITDA

Substituting the values :

EV / EBITDA   = 872 / 90 = 9.68

“Investee company” means any company, special purpose vehicle or limited liability partnership or body corporate or real estate investment trust or infrastructure investment trust in which an Alternative Investment Fund makes an investment.

Guaranteed returns to the AIF are not negotiated in the deal between the investment manager of AIF and the potential investee company.

Pass-backs are an indirect incentive provided to potential investors, wherein the distributor gives back a part of the commission earned from the AIF, to the investor.

Distributors should not follow unfair practices such as extending Pass-backs to investors, who subscribe to units of a Category I AIF/ Category II AIF being marketed by such distributor.

The distributor agreement forms the contractual basis for distributorship of AIF products. The distributor acts as a service provider for the AIF for marketing its schemes to prospective investors.

The details of commercial arrangement between the fund and the distributor is provided in the distributor agreement.

Withholding tax is a tax that is deducted by the payer of the income. This withholding tax is also called retention tax.

As per section 194LBB of the ITA, an Investment Fund is required to withhold tax at the rate of 10% on all income (other than business income) payable to resident investors and at the rates in force [as specified in the Finance Act of the relevant year or rates specified in the applicable Double Tax Avoidance Agreement (DTAA) entered into between India and the country of residence of such non-resident investor] as applicable on all income (other than business income) payable to non-resident investors at the time of credit or payment, whichever is earlier.

The due diligence process covers all the activities associated with evaluating an AIF and is commonly defined as “the process of investigation and evaluation, performed by investors, into the details of a potential investment, such as an examination of operations and management and the verification of material facts”.