Under SEBI (Alternative Investment Funds) Regulations, 2012, into how many categories are Alternative Investment Funds (AIFs) classified?

[ A ]Three (Category I, Category II, and Category III)[ CORRECT ]

[ B ]Two

[ C ]Four

[ D ]Five

Takeaway

Option A is correct: Three categories — Category I, Category II, and Category III.

Derivation

SEBI (Alternative Investment Funds) Regulations, 2012 classify AIFs into three categories based on their investment strategy and the extent of leverage employed. Category I AIFs (e.g., venture capital funds, SME funds, social venture funds, infrastructure funds) invest in start-ups or sectors considered economically desirable and are generally not permitted to use leverage. Category II AIFs (e.g., private equity funds, debt funds) do not undertake leverage other than to meet day-to-day operational requirements. Category III AIFs (e.g., hedge funds) may employ diverse or complex trading strategies, including leverage through investment in listed or unlisted derivatives.

Why the others fail

B — Two

Two categories understates the classification — SEBI's AIF framework has a third category covering funds that employ complex or leveraged trading strategies.

C — Four

SEBI's AIF Regulations, 2012 define exactly three categories; there is no fourth formal AIF category.

D — Five

Five categories overstates the classification under the SEBI AIF Regulations, 2012.