AIF Regulations: Meaning of Ownership Interests and Investor Interests in a Company – Part I

[The following is the
first in a series of posts contributed by Vinod
and Soma Bagaria. The
authors can be reached at
There has
been a speculation and confusion regarding the extent of applicability of the
SEBI (Alternative Investment Fund) Regulations, 2012 (“AIF Regulations”), particularly in the case of alternative
investment funds (“AIFs”) set up as
companies. It is notable that the AIF Regulations permit an AIF to be organised either as a
company, a limited liability partnership (“LLP”),
or a trust. In case of the SEBI (Venture Capital Funds) Regulations, 1996, the options
of organising a fund as a company, trust or a body corporate were available.
However, most venture capital funds were actually orgnaised as trusts.
The difficulty arises from a reading of the
definition of an AIF, and is further compounded by the definition of “units”. Regulation
2(1)(b) of the AIF Regulations defines the term an AIF to mean, subject to the
exceptions set out therein, any fund established or incorporated in India in
the form of a trust or a company or an LLP or a body corporate which:
is a
privately pooled investment vehicle which collects funds
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 Securities and Exchange
Board of India (Mutual Funds) Regulations, 1996, Securities and Exchange Board
of India (Collective Investment Schemes) Regulations, 1999 or any other
regulations of the Board to regulate fund management activities.
Regulations do not define the word “investor”. However, the definition of the
term “unit” includes shares, and therefore, every shareholder becomes a
unitholder, and by extension, an investor. If, therefore, every shareholder of
a company is taken to be an investor, then every company, other than a listed
public company, irrespective of what business the company carries on, is a
privately pooled vehicle which collects money from its sareholders to be used
in a particular manner. The question that, therefore, arises, and in relation
to which no clarification has been issued by SEBI, is whether all privately
pooled capital, such as contribution of ownership capital to a company, would
fall within the purview of the AIF Regulations.
If any
application of funds by a company is taken to be covered by the expression “investing
it in accordance with a defined investment policy”, then every company becomes
an AIF. And if the expression “investing it in accordance with a defined
investment policy” is taken to mean
investments as commonly understood, then every investment company becomes an
AIF. There are thousands of investment companies registered with the Reserve
Bank of India (“RBI”) and yet other  thousands which are not registered.
Obviously, the idea of AIF Regulations could not have been to bring all such
investment companies, currently under RBI’s non banking finance company regime,
also under AIF Regulations. If the idea of the AIF Regulations was to include
only such funds as companies gather and manage other than shareholders’ money,
then that meaning is not at all clear from the extant definition of either AIF
or units.
SEBI intends to regulate a pooling vehicle which
essentially pools capital from various investors and investing such capital in
accordance with defined investment policy. The idea is to ensure benefit to the
Who are investors? The Black’s Law Dictionary (9th Edition) defines an investor
as a buyer of a security or other property who seeks to profit from it without
exhausting the principal, i.e. a person who spends money with an expectation of
earning profit. Under common parlance, investors are outsiders who are neither
the owners of the pooling vehicle, nor are they the managers. Therefore, it
makes good sense to have excluded owners and managers.
2.1       Meaning of investment
The Blacks’
Law Dictionary (9th Edition)
defines investment to mean
expenditure to acquire property or assets to produce revenue, a capital outlay.
Furthermore, P Ramanatha Aiyar’s, The Law
Lexicon, (3rd edition)
has also similarly defined the term
investment to signify the laying out of money in such a manner that it may
produce a revenue, whether the particular method be a loan or the purchase of
stocks, securities, or other property.[1]
The term
investment is defined in the Accounting Standard AS 13 as assets held by an
enterprise for earning income by way of dividends, interest and rentals, for
capital appreciation, or for other benefits to the investing enterprise and
assets held as stock-in-trade are not investments.
It is true
that behind every outlay of capital the ultimate purpose is to earning revenue.
However, there is a difference in the intentions and purposes while outlaying
capital (a) by way of an ownership capital and (b) solely with the purpose of
earning profit.
To our
understanding where two or more persons come together with a common objective
and work together to pursue that common objective, it cannot be said to constitute
an AIF. There is an element of control is present in an ownership
2.2       Key determinants of an AIF
The key deciding factors, as set out in the
definition, are:
a privately pooled investment vehicle;
collection of funds from investors;
investment made in accordance with a well
defined investment policy; and
investments are made for the benefit of the investors.
Therefore, funds are collected from investors on a private placement
basis which are invested in accordance with an investment policy is drawn with
an idea to earn returns in form of dividends, etc., for the benefit of the
In an ownership capital scenario, the primary benefit is attributable to
the entity (the company or a LLP, for instance) and the purpose is the growth
of such entity. Furthermore, unlike an AIF, there are no third party funds
(to be continued)
– Vinod Kothari &
Soma Bagaria

[1] In case of Surat Peoples’ Co-Operative
Bank v. CIT
, 1958 33 ITR 396
Bom, it was stated that the word “investment” in itself literally means
nothing more or less than to lay out money; and, therefore, where a person
purchase securities whether as his stock-in-trade or by way of capital
investment, he is in either case investing in securities.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.


  • With due respect to SEBI, as usual this is a half-backed regulation, drafted without applying any mind.

    The SEBI (CIS) Regulations, are actually good enough to bring within its purview, what is intended to be achieved through AIF regulations.

    But it seems, for SEBI, CIS regulations is only restricted to plantation companies or at the most art fund and nothing beyong, which actually is incorrect.

    Anyways, we are where we are.

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