Framework and Legal Structuring behind Alternative Investments

If you are someone who follows the latest updates on the stock market and other forms of investments, it is highly likely that you are already familiar with alternative investments. For any kind of trade and investments, the participating individuals must comply with the legal framework that surrounds these investments, in this case, alternative investments. The following article delves deep into the legal structure and regulations that control these alternative investments.

What is Alternative Investment?

Alternative investments, as the name suggests, are the type of investments that do not fall under the traditional investing forms, those that depend on stock markets. Alternative investments are essentially modes of passive income for retail investors and a chance to broaden their portfolio, and a way to maintain risk balance for high-profile investors. The alternative forms of investments include a variety of processes that range from private equity funds, hedge funds, and real estate to venture capitalism, asset leasing etc. 

Source: Legal 500

Growth of Alternative Investments in India

SEBI (Securities and Exchange Board of India) published a report that declares that by the end of December 2021, the AIFs or the Alternative Investment Funds saw a 38% growth. Ever since the housing market crash of 2008, investors and the general public have been looking for investment options that may be more stable, and since alternative investments are in no way connected to the stock market, they ensure that the only factors that can affect an IF would be the agreement contract and not the fluctuating stock market. Other reasons for growth in AIFs could be:

• They are a dependable form of passive income.
• Fixed payments ensure steady incomes when the investors get the return
• Low volatility since it has no correlation to the stock market
• Taxes on leased assets become deductible.

Moreover, it is important to note that AIFs are divided into three categories:

1. Category I deals with investments in SMEs and start-ups, such as Venture capitalism.
2. Category II includes private equity and debt funds.
3. Category III includes investment in unlisted or listed trades and other forms of trade.

Legal Regulations of Alternative Investments

One must get familiar with the laws surrounding a certain investment before participating in the act. In the case of AIFs, some of the regulations under SEBI are as follows:

• The investors need to go through the registration process for the different categories that come under AIFs (three, to be precise). 
• The minimum corpus is INR 20 crore.
• The sponsors of an AIF are required to maintain an interest of 2.5%.
• The minimum investment amount of an AIF is INR 1 crore. 
• For an investment of 1 crore INR or over, an investor and their spouse, parents or children are allowed to be considered joint investors. 

Let us delve into the regulations of some individual fields under Alternative Investments, namely: Asset Leasing, Venture Capitalism and Fractional Ownership.

Asset Leasing

Regulations under asset leasing are:

• The asset is legally required to be delivered to the lessee by the lessor
• The lessee has to maintain the asset and is under a legal obligation to make the agreed payments.
• Lessee has the right to reap the benefits of the asset, such as warranty.
• The lessee also has the option to renew a lease.

Venture Capitalism

The legal structure of Venture Capitalism includes the following:

• A firm or a company can receive a maximum amount of 25% in terms of alternative funding 
• Borrowing is allowed for short-term needs 4 times a year, with not more than 10% of the funding being eligible for borrowing.
• Borrowing can be done for a maximum of 30 days.

Fractional Ownership

Fractional Ownership laws in India include:

• People who participate in fractional ownership must legally register themselves as real estate agents as fractional ownership comes under real estate as well as AIFs.
• They must maintain an account book for their properties
• Investors must in no way get involved in fraud and unfair trades.
• They must maintain transparency with their investors.

Conclusion

Before the bloom of AIFs, such as venture capitalism or private equity, the investors, be it retail or high-level, mainly generated profit through private financial institutions. Investments that are dependent on the stock market are considered to be high-risk as the position of the stock market is susceptible to fluctuations. Therefore, investors look for other options in order to maintain balance and seek stability, which is where alternative investments come in handy. They broaden the portfolio of high-end investors while providing profits and, in some cases, tax reliefs. In order to invest in such a process, it is important that the investors are familiar with the aforementioned regulations and guidelines and invest in the AIFs through personal calculation weighing out their options. 

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