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CONCEPT – ALTERNATE INVESTMENT FUNDS (AIFS)
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- What are AIFs: Alternative investment funds (AIFs) are defined in Regulation 2(1) (b) of Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012.
- Definition: An AIF refers to any privately pooled investment fund (whether from Indian or foreign sources), in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Hence, in India, AIFs are private funds which are otherwise not coming under the jurisdiction of any regulatory agency in India.
- Categories of AIFs: As per SEBI (Alternative Investment Funds) Regulations, 2012 AIFs are one of the three categories–
- Category I: Mainly invests in start- ups, SMEs or any other sector which Govt. considers economically and socially viable.
- Category II: These include Alternative Investment Funds such as private equity funds or debt funds for which no specific incentives or concessions are given by the government or any other Regulator
- Category III : Alternative Investment Funds such as hedge funds or funds which trade with a view to make short term returns or such other funds which are open ended and for which no specific incentives or concessions are given by the government or any other Regulator.
- Tenure and Listing of Alternative Investment Funds / Schemes: For AIF scheme launched under Category I & II shall be close ended, the tenure shall be determined at the time of application and shall be for minimum three years. Category III Alternative Investment Fund may be open ended or close ended.
- Stock exchange: Units of close ended Alternative Investment Fund may be listed on stock exchange subject to a minimum tradable lot of one crore rupees. Such listing shall be permitted only after final close of the fund or scheme. However, listing on stock Exchanges is purely voluntary.
- Definition of Solvency : Solvency is defined as a company’s potential to carry on business activities in the near future, so as to expand and grow. It is the company’s capability to fulfil its long-term financial obligations when they fall due for payment. So, assets of the company are greater than its liabilities. Assets are the resources owned by the enterprise while liabilities are the obligations which are owed by the company. It is the firm’s financial soundness which can be reflected on the Balance Sheet of the firm. A lack of solvency in the business, may become the cause for its liquidation, as its directly affects the firm’s day to day operations and thus the revenue.
- Definition of Liquidity : Liquidity is a company’s ability to fulfil its obligations in the short run, normally one year. It may be called the near-term solvency of the firm, i.e. to pay its current liabilities. So, it measures the extent to which the firm can meet their financial obligations, as they fall due for payment, with the assets like stock, cash, marketable securities, certificate of deposits, savings bonds, etc. available to them. Cash is the highly liquid asset, as it can be easily and quickly turned into any other asset. When a firm is unable to pay off its short-term obligations, it directly affects the firm’s credibility, and if the default in the payment of debt continues, then the commercial bankruptcy occurs, due to which the chances of sickness and dissolution will be increased. Therefore, the liquidity position of the firm helps the investors to know whether their financial stake is secured or not.
- Key Differences Between Liquidity and Solvency
- Liquidity, means is to get money at the time of need, i.e. it is the company’s ability to cover its financial obligations in the short run. Solvency refers to the firm’s ability of a business to have enough assets to meet its debts as they become due for payment.
- Liquidity is the firm’s potential to discharge its short-term liabilities. On the other hand, solvency is the readiness of firm to clear its long-term debts.
- Liquidity is how easily the assets can be converted into cash. Conversely, solvency is how well the firm sustains itself for a long time.
- The ratios which measure firms liquidity are known as liquidity ratios, which are current ratio, acid test ratio, quick ratio, etc. As against this, the solvency of the firm is determined by solvency ratios, such as debt to equity ratio, interest coverage ratio, fixed asset to net worth ratio.
- Liquidity risk can affect the company’s creditworthiness. Unlike, solvency risk can lead the company to bankruptcy.
- Summary: Both liquidity and solvency help the investors to know whether the company is capable of covering its financial obligations or not, promptly. Investors can identify the company’s liquidity and solvency position, with the help of liquidity and solvency ratios. These ratios are used in the credit analysis of the firm by creditors, suppliers and banks.
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