Part 20 zooms into Category I's internal structure — a single "category" that in practice contains several distinct sub-categories, each with its own conditions and typical investor profile.
Q1. What sub-categories exist within Category I AIFs?
Category I AIFs encompass Venture Capital Funds, SME Funds, Social Venture Funds, Infrastructure Funds, and Angel Funds — each targeting sectors SEBI considers to have positive spillover effects on the broader economy, but each with distinct investment conditions.
Q2. What is an Angel Fund, and how is it different from a standard Venture Capital Fund sub-category?
An Angel Fund is a specific sub-category of Category I AIF designed for pooled early-stage investing by angel investors, with distinct (generally lower) minimum investment thresholds and a distinct regulatory framework compared to a standard Venture Capital Fund, reflecting the smaller-ticket, higher-volume nature of angel investing.
Q3. Are there restrictions on what a Venture Capital Fund sub-category can invest in?
Yes — Venture Capital Fund sub-category AIFs are generally expected to invest predominantly in unlisted equity or equity-linked instruments of start-ups and early-stage ventures, consistent with the developmental intent behind the Category I classification.
Q4. What defines a "Social Venture Fund" under the AIF Regulations?
A Social Venture Fund invests in "social venture" entities — enterprises pursuing a social objective alongside, or ahead of, purely commercial returns — and is permitted certain flexibility (such as accepting muted/below-market returns, or grants in some structures) not available to standard commercial Category I sub-categories.
Q5. What is an "SME Fund" and what does it typically invest in?
An SME Fund invests in securities of small and medium enterprises, or units of other funds investing in SMEs, as listed on an SME exchange or SME segment of a stock exchange, or unlisted SMEs, consistent with SEBI's regulatory intent to channel capital toward this segment.
Q6. How does an Infrastructure Fund sub-category differ from other Category I sub-categories?
An Infrastructure Fund focuses specifically on infrastructure sector investments — a sector-specific mandate distinct from the stage-specific (early-stage/venture) focus of VCF, Angel, or SME sub-categories.
Q7. Do all Category I sub-categories share the same restriction on leverage?
Broadly yes — Category I AIFs as a whole are generally restricted from borrowing except for meeting temporary funding requirements/day-to-day operational needs, subject to specific conditions, and this restriction applies across the sub-categories rather than varying sub-category to sub-category.
Q8. Do all Category I sub-categories receive the same tax pass-through treatment?
Yes — pass-through taxation under the Income-tax Act applies to Category I AIFs as a classification, without further differentiation by sub-category, provided the fund meets the general conditions for pass-through eligibility.
Q9. Can a fund switch its sub-category after registration — for example, from VCF to SME Fund?
Sub-category is determined at registration based on the fund's stated investment strategy in the PPM; changing sub-category after registration would generally require regulatory approval and PPM amendment, and is not something funds should assume is a simple administrative change.
Q10. Are minimum investment thresholds the same across all Category I sub-categories?
No — Angel Funds in particular typically have distinct (and often lower) minimum investment thresholds compared to standard VCF, SME, Infrastructure, or Social Venture Fund sub-categories, reflecting SEBI's intent to keep angel investing more broadly accessible to a wider investor pool within defined limits.
Q11. Why does sub-category selection matter beyond just regulatory labelling?
Sub-category shapes the fund's permitted investment universe, its typical investor base and minimum ticket size, and how the fund is perceived and marketed — a mismatch between actual investment activity and the registered sub-category is a compliance risk, not just a labelling inconvenience.
Q12. Should a sponsor considering a new Category I fund get sub-category selection reviewed before drafting the PPM?
Yes — sub-category selection has downstream implications for permitted investments, investor eligibility, and disclosure requirements that are far easier to get right at the outset than to correct after investors have already committed capital.
Advising on the Right Sub-Category From Inception
We advise sponsors on Category I sub-category selection as part of our fund structuring and PPM drafting support, ensuring the chosen sub-category genuinely matches the fund's intended strategy.
This FAQ is for general informational purposes and does not constitute regulatory advice specific to any fund's structuring decisions.