Debt Funds
Category II AIF Debt Funds provide structured private credit to mid-market Indian companies through NCDs, mezzanine instruments, and secured lending solutions — delivering predictable yield of 12–18% p.a. against collateral packages in a pass-through tax framework.
- Senior secured NCDs & mezzanine debt
- Target yield: 12–18% p.a.
- Collateral: promoter pledge, charge on assets
- No leverage at fund level permitted
- Pass-through taxation under Sec. 224, IT Act 2025
SEBI Definition
Category II AIF Debt Funds invest primarily in debt and debt-linked instruments of unlisted companies. They do not employ leverage or borrowing (other than for operational purposes up to 10 days). Unlike bank credit, AIF debt is privately negotiated, structured, and can be tailored to company-specific cash flow profiles with flexible tenures and covenants.
SEBI AIF Regs, 2012 – Reg 3(4)(b)
India's Private Credit Opportunity
India's mid-market (₹100 Cr – ₹2,000 Cr revenue companies) faces a structural credit gap. Banks are constrained by NPA concerns, collateral norms, and sector-level limits; public bond markets require credit ratings and large issuance sizes. AIF Debt Funds fill this gap by providing bespoke, relatively rapid credit to quality mid-market borrowers at higher-than-bank rates, with strong collateral coverage.
India's private credit AIF market has grown rapidly, with global managers (Ares, KKR Credit, Cerberus) and domestic managers (IIFL, Piramal, Kotak) deploying capital. The sector benefits from India's economic growth, formalisation of corporate borrowing, and the retrenchment of NBFCs from mid-market lending after the IL&FS crisis.
Debt Instrument Types
Senior Secured NCDs
Non-Convertible Debentures with first or second charge on company assets (plant, land, receivables). Highest in repayment priority. Typically yield 13–15% p.a. with 2–4 year tenure.
Mezzanine Debt
Subordinated debt ranking behind senior secured lenders but ahead of equity. Often includes equity kickers (warrants or CCPS) to enhance total returns. Yields 15–18% p.a. with higher risk profile.
Structured Receivables
Financing against contracted future receivables — government receivables, export proceeds, or escrow-backed cash flows. Short-duration, self-liquidating structures with strong asset coverage.
Real Estate Debt
Construction finance and last-mile funding for residential projects. RERA registration, sales velocity data, and cash flow escrows provide security. Typically 12–16% yield with 18–36 month tenure.
Agri & MSME Credit
Structured credit to agri-processors, MSME exporters, and supply chain financing vehicles. Government-backed schemes (MSME Udyam, RBI TLTRO) enhance credit quality of underlying borrowers.
Promoter Financing
Loans against promoter pledge of listed shares or other high-quality collateral. Short-duration, high-yield (14–18%) with conservative LTV (50–60%) for collateral coverage.
Key Characteristics at a Glance
Minimum Corpus
₹20 Crore
per scheme
Min. Investor Ticket
₹1 Crore
₹25L for employees
Fund Structure
Close-Ended
mandatory
Typical Tenure
3–5 Years
from final close
Leverage
Not Permitted
except short-term borrowing
Target Yield
12–18% p.a.
gross, indicative
Taxation
Pass-Through
Sec. 224, IT Act 2025
TDS on Fund Income
10% (residents)
Sec. 393(1), IT Act 2025
Risk Considerations
Credit / Default Risk
Borrower default or delayed repayment is the primary risk. Collateral enforcement in India can take 2–5 years through DRT/SARFAESI — post-default recovery is uncertain and time-consuming.
Illiquidity
AIF debt instruments have no secondary market. If a borrower delays repayment, the fund's tenure may extend beyond the planned exit horizon, trapping capital.
Collateral Enforcement Risk
Real estate or asset-backed collateral values can decline in downturns. Promoter pledges are subject to market price risk for listed share collateral.
Concentration Risk
Many debt AIFs have concentrated exposures (5–8 borrowers). A single large default can materially impact NAV. Diversification across borrowers and structures is essential.
Explore Private Debt Opportunities
Access SEBI-registered Category II Debt AIFs through Platizio Alternatives's institutional platform.
Debt Funds on Platizio
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