Fund Structuring for Alternative Investment Funds (AIF) | Nainit Savla & Associates

Fund Structuring for Alternative Investment Funds

Fund structuring is the foundational decision in the AIF setup process — the category, legal vehicle, investment strategy, fee structure, and governance framework chosen at inception will shape every aspect of the fund's operations, investor relationships, and regulatory obligations for its entire life. A poorly structured fund is costly to correct and can deter sophisticated investors. Our fund structuring advisory helps fund managers make informed, optimal structuring decisions before committing to an AIF registration application.

AIF Category Selection

Expert guidance on selecting the optimal AIF category — Category I (infrastructure, SME, social venture), Category II (private equity, debt, fund of funds), or Category III (hedge, long-short equity) — based on the fund's strategy and target investors.

Legal Vehicle Selection

Structuring the fund as a trust, company, LLP, or body corporate — evaluating governance, liability, tax pass-through, and investor preference considerations for each vehicle type under the AIF Regulations.

Investment Strategy Design

Defining the investment mandate — asset classes, sectors, geographies, stage of investment, concentration limits, and co-investment rights — in a manner consistent with the chosen AIF category and SEBI regulations.

Fee Structure & Economics

Designing the management fee, performance fee (carried interest), hurdle rate, catch-up, distribution waterfall, and fund expenses structure — balancing GP economics with LP competitiveness in the current market.

Tax Structure Advisory

Pass-through taxation analysis for Category I and II AIFs, tax implications for Category III, DTAA planning for offshore investors, and structuring to optimise the fund's overall tax efficiency.

Fund Governance Framework

Designing the fund's governance architecture — trustee responsibilities, investment committee structure, key-man provisions, LP advisory committee, and conflict of interest management policies.

Why Fund Structuring Is the Most Critical AIF Decision

The fund structure determines the tax pass-through treatment (Category I and II AIFs enjoy pass-through taxation at investor level; Category III does not), the eligible investor base, the regulatory restrictions on leverage and investment concentration, and the reporting obligations to SEBI and investors. Getting the structure right from the start avoids expensive restructuring later — particularly after investor capital has been committed. Our fund structuring advisory is the first step in a complete AIF setup journey that continues through the AIF application process and AIF documentation phases.

Key Fund Structuring Decisions

Choice between Category I, II, or III AIF based on the investment strategy
Selection of fund vehicle — trust (most common), LLP, company, or body corporate
Minimum corpus — ₹20 crore (₹10 crore for Angel Funds) and minimum investor commitment — ₹1 crore
Maximum number of investors — 1,000 per scheme (100 for Angel Funds)
Fund tenure and extension provisions — open or closed-ended fund design
Carry and fee structure — management fee, hurdle, carried interest, clawback
Domestic vs offshore fund structure — onshore AIF vs Mauritius/Singapore GIFT City structure
GIFT City IFSC fund structure for funds targeting foreign investors and DTAA benefits

Frequently Asked Questions

What is the difference between AIF Category I, II, and III?

Category I AIFs invest in start-ups, SMEs, infrastructure, social ventures, and other government-approved sectors — often with positive spillover effects. Category II AIFs include private equity funds, debt funds, fund of funds, and other funds that do not employ leverage or borrow other than for day-to-day operational purposes. Category III AIFs employ diverse or complex trading strategies and may use leverage — including hedge funds, PIPE funds, and long-short equity funds. The tax treatment differs: Category I and II enjoy pass-through status (investors are taxed directly on their share of income); Category III is taxed at the fund level.

What is the minimum corpus requirement to register an AIF in India?

The minimum corpus for an AIF is ₹20 crore. For Angel Funds (a sub-category of Category I AIFs), the minimum corpus is ₹10 crore. Each investor in the AIF must invest a minimum of ₹1 crore (₹25 lakh for employees or directors of the AIF or its manager). An AIF can have a maximum of 1,000 investors per scheme (100 for Angel Funds). These thresholds make AIFs suitable for institutional and sophisticated HNI investors rather than retail participation.

What legal vehicle is most commonly used for AIFs in India?

The trust structure is by far the most commonly used vehicle for AIFs in India — because it provides pass-through tax treatment, flexible governance, and is the most familiar structure for Indian institutional investors. The trust is registered under the Indian Trusts Act, with a trustee (individual or corporate) holding the fund assets for the benefit of the investors (beneficiaries). An LLP or body corporate structure may be used where specific commercial or governance requirements make the trust structure unsuitable.

What is GIFT City and why do some fund managers set up AIFs there?

GIFT City (Gujarat International Finance Tec-City) is India's first IFSC (International Financial Services Centre) where AIFs can be set up under the IFSCA (International Financial Services Centres Authority) framework. GIFT City AIFs offer significant advantages for funds targeting foreign investors: investments and fund administration can be conducted in foreign currencies, DTAA benefits may be available to offshore investors, carry and management fees may be structured more tax-efficiently, and GIFT City funds can invest in Indian and global assets. The regulatory framework is more flexible than SEBI's onshore AIF regime — making GIFT City attractive for global managers setting up India operations.

Can an AIF invest in listed securities?

Category III AIFs can invest in listed securities including equity shares, derivatives, REITs, and InvITs — this is central to their strategy as hedge funds and public market investment vehicles. Category II AIFs may invest in listed securities as part of a broader portfolio but are not primarily public market vehicles — their core mandate is typically unlisted investments. Category I AIFs generally focus on unlisted securities in their target sectors. SEBI prescribes specific investment restrictions for each category — including concentration limits, leverage restrictions, and eligible instrument lists — which must be reflected in the fund's placement memorandum and constitutional documents.

Structure Your AIF Right From the Start

Expert AIF fund structuring advisory — category selection, legal vehicle, tax structure, fee economics, and governance design for fund managers across India.

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