The Alternative Investment Fund in India, regulated by the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 provides a systematic framework for pooled investment vehicles collecting funds from private investors and investing the same in private equity, venture capital or hedge funds. Among the three categories of Alternative Investment Fund, Venture Capital Funds (VCFs) falls under Category I- AIFs which invest in early stage startups having a high potential for growth.
However, a practical question arises whether the Sponsors or Investors can offer immovable property like land instead of cash to fulfill minimum ₹20 crores Corpus requirement for the AIF Scheme under the SEBI norms.
WHAT IS CORPUS IN AN ALTERNATIVE INVESTMENT FUND (AIF) ?
Under Regulation 2(1)(h) of the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (as amended),
Corpus, in relation to the Alternative Investment Fund, means the amount of money which shall be raised or that is raised by the investors for the Alternative Investment Fund under a written contract or any such document.
This term refers to “money contributed by the investors” rather than physical assets such as land. In essence, only cash or cash-equivalent commitments are the ones that count under the minimum corpus of Alternative Investment Fund.
In the case of Dhfl Venture Capital Fund, Mumbai vs. Assessee I.T.A. No.8475/Mum/2010, the Court looked into the definition of “corpus” in the older SEBI (Venture Capital Funds) Regulations, 1996, and further under AIF Regulations, 2012. It held that corpus exists in the form of fund commitments, not in the form of physical or tangible assets.
MINIMUM CORPUS REQUIREMENT IN AN ALTERNATIVE INVESTMENT FUND
The minimum corpus for any AIF scheme (even for venture capital funds under Category I) is ₹20 crore (₹200 million) at first close under the SEBI (Alternative Investment Funds) Regulations, 2012.
Regulation 10(b) and 10(c) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 state:
1. Every AIF scheme should have a minimum corpus of Twenty crore
2. In case of Social Impact Fund scheme, it has to be a minimum corpus of Rs. 5 crores.
3. An AIF cannot receive an amount lower than the amount of Rs 1 crore from each investor.
4. If the investor is an employee or a director of the AIF or its Manager, the minimum investment is reduced to Rs 25 Lacs.
INTERPRETATION AND IMPLICATION OF DEFINITION OF CORPUS
Given the statutory definition, the following things are critical:
1. The term funds in the corpus definition refers to a monetary commitment, and do not expressly consider non-cash or physical assets.
2. In practical sense, AIFs mobilize capital by issuing units to investors against their capital contribution, where capital is measured in money terms (e.g. Indian rupees or any other currency).
Thus, assets that are non-cash in nature (such as land) are not particularly considered as being part of the ‘funds committed’ under Alternative Investment Fund corpus. If land is offered by an investor as part of his contribution of capital, it is actually the monetary valuation of the asset which is considered capital commitment and not the physical asset itself.
LAND OR OTHER NON-CASH ASSTES CANNOT BE CONTRIBUTED AS CORPUS OF AN ALTERNATIVE INVESTMENT FUND (AIF)
Investment of immovable property like land in lieu of cash towards meeting the minimum corpus requirement of Rs. 20 Crores is not valid. The Reason is:
1. Corpus refers to investible funds i.e. money available for investment in the portfolio companies.
2. AIF structures work on capital commitments in monetary form which will be drawn down by the fund manager.
3. In accordance with the SEBI regulations and market practice, contributions must be:
a) cash-based
b) capable of immediately being deployed for investments.
4. Immovable property cannot be contributed in lieu of cash as it is:
a) illiquid,
b) hard to deploy in form of investment capital,
c) not considered a “capital contribution” for AIF corpus purposes.
Therefore, non-cash asset such as land are not recognised as corpus contribution.
RECOMMENDED COURSE OF ACTION
Though non-cash assets cannot be contributed as corpus of an Alternative Investment Fund, possible alternative solution is to covert these non-cash assets in the form of cash. Once the assets are converted into cash form, they can be invested towards the corpus requirement of an Alternative Investment Fund. This can be done through:
1. Sale of Land
The simplest and most regulatory safe option is to dispose of the land by way of an outright sale. Upon completion of the sale, net sale proceeds received in cash amount received may be contributed in the AIF as capital contribution towards fulfilling the minimum corpus requirement. This approach ensures full compliance to the SEBI (AIF) Regulations, 2012, no valuation disputes, and no regulatory objections.
2. Monetisation of Land through Financing
If the purpose is not to immediately sell the land, an alternative is to monetise the asset by means of financial structuring. The land can be mortgaged with a bank or financial institution; or it can be used as collateral in raising debts or secured financing. The money raised by such borrowing can then be made as contribution to the AIF as capital commitment. This option retains ownership of the land, but still provides the needed monetary contribution, however, financial liability is introduced.
3. Investment through holding structure – Special Purpose Vehicles (SPV)
Transferring or holding the land through separate legal entity (such as a private limited company or Special Purpose Vehicle (SPV)) may also be adopted. SPV is generally integrated by means of a Private limited company or Limited Liability Partnership firm. SPV is created for holding land, making one investment or financing a project.
The land is owned on the SPV/company level. The SPV monetises the land (through sale, development, leasing or refinancing). The proceeds resulting after being monetised can be contributed the AIF scheme. Alternatively, the SPV itself may become the investor in the AIF and make contributions in terms of cash capital.
REGULATORY AND STRUCTURAL RISKS
If land or other non-cash asset is contributed towards the 20 Crore corpus minimum requirement of AIF scheme, various risks may arise.
1. Risk of non-Compliance with Regulations
The Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 clearly indicate monetary commitments that are capable of drawdown and deployment, rather than immovable property, in case of corpus requirement of an Alternative Investment Fund. In case land or any other non-cash assets is contributed instead of cash, then SEBI’s view may be that such scheme does not have investible capital. It may be made an asset transfer rather than capital commitment. Consequently, SEBI may pass the order that minimum corpus is not satisfied.
2. Risk of Acceptance of Registration or Regulatory Objections
During the time of AIF registration and scheme filing, SEBI examines the documents of commitment by investors. It checks capital commitments and drawdown mechanisms to ensure they are correct. It evaluates whether or not the scheme can make investments in a portfolio. Clarification letters may be issued according to SEBI. The applicant may be obliged to convert commitments in money form. Registration can be delayed for a long timeand in extreme situations, the application can be rejected. Such delays can have a negative impact on investor confidence, and can throw off funding timelines.
3. Failure to Invest in Venture Investment.
A Venture Capital Fund make investments in startups and in early-stage companies. This requires a rapid speed of deployment and liquidity. Land or non-cash assets cannot be drawn down or deployed rapidly like cash. They must be converted into cash by way of sale. It can take months or years to be liquidated. This brings about paralysis in operations.
4. Risk of Disputes
Land is not valued as cash. Its price may vary based on the market conditions, location, circle rate and clarity of title or any legal problems. Even if a certificate is issued by a valuer, the land’s value is still based on estimate. Due to this fact, disputes between investors can arise with regard to whether the land has been fairly valued. The valuation method may also be challenged by SEBI. In case the value later drops, it may create accounting and audit challenges to the fund.
5. Investor Confidence and Governance Risk.
The expectations of large institutional investors like banks, insurance companies, and development finance institutions, normally require transparent and liquid (cash) commitments to ensure that the fund runs smoothly. If land or non-cash asset is contributed as corpus amount, the fund becomes less predictable because land cannot be turned into money within a short period of time. This will make the investors less confident, deter co-investors and damage the credibility of the fund during subsequent fundraising rounds.
CONCLUSION
According to the regulations of the Securities and Exchange Board of India (Alternative Investment Funds) 2012, the minimum AIF corpus of ₹20 crore should be in the form of money commitments and not the physical assets. Land or other types of non-cash asset are not allowed since they cannot be easily deployed to invest. Contributing land rather than cash can result in objections, slow registration and valuation controversy, as well as loss of investor trust. So, the legally safe and work-able solution is to initially transfer such assets to cash either by selling it, financing or monetising it and then investing the amount of money towards the corpus of the AIF scheme. This guarantees maximum compliance, ease of registration, and smooth functioning of the AIF fund.