Alternative Investment Industry

Why in news?

Alternative investment solves the supply-side problems of mainstream investing by creating companies of scale that attract investors across the spectrum.

What is an Alternative Investment?

• An alternative investment is a financial asset that does not fit into the conventional categories (stocks, bonds or cash)
• Private equity or venture capital, hedge funds, real property, commodities, and tangible assets are all examples of alternative investments.
• It creates diversification in an investment portfolio and act as a hedge against the movements of the traditional asset classes.
• Key Characteristics of Alternative Investments
  • Have high fees and minimum investments
  • Have lower transaction costs
  • Less liquid than conventional securities

Alternative Investment Fund means any fund established in India which is a privately pooled investment vehicle which collects funds from sophisticated investors( Indian or foreign), for investing in accordance with a defined investment policy for the benefit of its investors.

How about the alternatives industry in India?

• In India, the traditional three asset classes have been FDs, gold, and mutual funds.
• In 2012, SEBI introduced the Alternative Investment Funds (AIF) regulation to bring all investment funds under the regulatory oversight of SEBI.
• The alternatives industry in India is dominated by venture capital funds, private equity funds, hedge funds, venture debt funds and, now, special situation funds.
• The Indian alternatives industry has grown at a rapid pace of over 30% CAGR over the last 4-5 years, making it one of the fastest growing markets for alternative assets globally.
• The emergence of the Buyout Strategy has been one of the major drivers of hyper-growth in Indian PE/VC investments post 2015.
• A buyout is the acquisition of a controlling interest in a company and is used synonymously with the term acquisition.
• For a country that aims to grow to a 5 trillion dollar GDP by 2025, the alternatives and the innovation economy are expected to contribute 1 trillion dollar to this goal.

What steps have been taken to boost the alternatives?

• The Government’s focus on improving the ease of doing business has helped buyouts become more manageable. The measures include
  • The Insolvency and Bankruptcy Code (IBC)
  • Corporate tax reforms
  • GST
  • Streamlining of the labour codes
• Continuing liberalisation of the FDI regime across a wide range of sectors has boosted India’s image as a preferred destination for foreign investment.
• These in conjunction with policies such as Make in India, PLI scheme, REITs, InvITs etc. are attracting large global capital pools to increase their allocation towards the Indian market.
• In Budget FY23, the government has announced the creation of an expert committee to conduct a holistic examination of frictions that affects the private equity and venture capital industry.
• The Indian government is also viewing the PE/VC model as a means of allocating capital to important sectors through market-determined means.

What reforms can be suggested?

• Increasing retail participation- SEBI can consider reducing the minimum investment amount to increase retail participation and increase investment in AIF industry.
• Increasing retail participation could generate additional avenue for retailers to earn higher-than-equity returns.
• Increasing Maximum Number of investors- SEBI can ease the limit on maximum number of investors that can participate in a scheme.
• This will help in generation of higher AUMs under each scheme, resulting in greater investment amounts.
• Increasing transparency- The SEBI shall introduce regulations to increase the transparency of operations of AIFs to assist investors to make better decisions and to confidence of investors.
• Providing Tax Advantages- The SEBI could provide tax advantages or tax deductions to investors in a bid to scale up investment in AIFs.
• This would aid in diversifying investments in multiple asset classes and boosting multiple financial areas.

References

1. https://www.financialexpress.com/opinion/from-alternative-to-mainstream/2473388/
2. https://www.investopedia.com/terms/a/alternative_investment.asp#:~:text=Key%20Takeaways-,An%20alternative%20investment%20is%20a%20financial%20asset%20that%20does%20not,all%20examples%20of%20alternative%20investments.
3. https://www.sebi.gov.in/sebi_data/attachdocs/1471519155273.pdf
4. https://www.aranca.com/knowledge-library/articles/business-research/alternative-investment-funds-in-india-a-comparison-with-the-west
5. https://caia.org/blog/2020/09/27/india-an-alternative-investment-industry-growth-story