Category III AIF
The most sophisticated AIF class — employing diverse and complex trading strategies with the ability to use leverage through listed and unlisted derivatives. Taxed at the fund level; suitable for institutional-grade risk capital.
- check_circleComplex / diverse trading strategies
- check_circleLeverage via derivatives permitted (max 2× NAV)
- check_circleOpen-ended or close-ended structure
- check_circleFund-level taxation at MMR (~42.744%)
- check_circleNo concessional tax pass-through
SEBI Definition
Under Regulation 3(4)(c) of the SEBI (Alternative Investment Funds) Regulations, 2012, Category III AIF means an alternative investment fund that employs diverse or complex trading strategies and may employ leverage including through investment in listed or unlisted derivatives.
SEBI AIF Regs, 2012 — Reg. 3(4)(c)
SEBI/HO/IMD/IMD-I/DOF3/P/CIR/2021/685
Dated Dec 10, 2021 — prescribes max 2× NAV leverage
What Distinguishes Category III?
Category III AIFs are India's regulatory equivalent of hedge funds. Unlike Categories I and II which are long-only, private market vehicles, Category III funds can take short positions, use derivatives for leverage and hedging, and deploy across both listed and unlisted instruments simultaneously — enabling strategies that generate returns independent of broad market direction.
The key trade-off is taxation: Category III AIFs do not benefit from the pass-through regime. The fund is treated as a determinate trust and all income is taxed at the fund level at Maximum Marginal Rate before distribution to investors. This makes Category III most efficient for high-turnover trading strategies where the tax deferral advantage of pass-through is less material.
APMI Data — FY 2024
As of March 2024, Category III AIFs manage approximately ₹75,000 Crore+ in AUM across 600+ registered schemes, with commitments growing at ~35% CAGR over the last three years (Source: SEBI/APMI monthly reports).
Strategy Types
Long Only
Concentrated, high-conviction equity portfolios that hold listed securities with no short positions. Differentiated from PMS by fund structure, pooled capital, and institutional access to block deals and IPO anchors.
View Strategy arrow_forward sync_altLong Short
Takes long positions in fundamentally undervalued stocks and simultaneous short positions in overvalued ones via equity derivatives. Aims to generate alpha irrespective of market direction with managed net exposure.
View Strategy arrow_forward hubMulti-Strategy
Dynamically allocates capital across equity long/short, statistical arbitrage, event-driven, and macro strategies within a single fund structure, managed by a central risk team with risk-budgeting discipline.
View Strategy arrow_forward balanceLong Short — Market Neutral
Statistical arbitrage, pairs trading, and merger arbitrage strategies engineered to generate positive returns independent of index direction. Net equity exposure maintained near zero for pure alpha generation.
View Strategy arrow_forwardLeverage Framework
As prescribed by SEBI Circular SEBI/HO/IMD/IMD-I/DOF3/P/CIR/2021/685 dated December 10, 2021
Maximum Leverage
2× NAV
Cat III AIFs may not exceed gross exposure (long + short) of 2 times the Net Asset Value of the fund at any point.
Hedging Exclusion
Permitted
Derivatives used purely for hedging existing portfolio positions are excluded from the leverage computation.
Computation Basis
Notional
Leverage is computed on the notional value of derivative positions, not the premium paid — a critical operational distinction.
Investor Disclosure Requirement
Category III AIFs must disclose in their PPM: (a) the maximum leverage they intend to employ, (b) the methodology for computing leverage, and (c) the risk management framework including stop-loss and drawdown controls. Any change in leverage policy requires PPM amendment with SEBI filing.
Regulatory Requirements
gavelSEBI Registration
- check_circleMandatory SEBI registration before commencing operations or fundraising
- check_circleRegistration fee: ₹5 Lakh (application) + ₹15 Lakh (registration)
- check_circleAnnual compliance report submission to SEBI via intermediary portal
- check_circleAny change in key personnel (KIT) requires prior SEBI intimation
gavelFund Structure
- check_circleMinimum corpus: ₹20 Crore per scheme
- check_circleMaximum 1,000 investors per scheme (excluding employees/directors)
- check_circleMinimum investment per investor: ₹1 Crore (₹25 Lakh for employees)
- check_circleMay be structured as open-ended or close-ended — disclosed in PPM
gavelManager Obligations
- check_circleSkin-in-the-game: 5% of corpus or ₹10 Crore, whichever is lower (higher than Cat I/II)
- check_circleInvestment Manager must be a SEBI-registered body corporate
- check_circleCompliance Officer appointment mandatory
- check_circleAnnual internal audit by independent auditor recommended by SEBI
gavelOperational Controls
- check_circleMandatory Risk Management Framework (RMF) filed with PPM
- check_circleCustodian and prime broker arrangements must be disclosed
- check_circleSeparate NAV computation mechanism with independent valuer for unlisted assets
- check_circleDaily/weekly NAV computation required for open-ended funds
gavelDisclosure & Reporting
- check_circlePPM mandatory — filed with SEBI, updated quarterly if NAV changes materially
- check_circleQuarterly investor reports including gross/net exposure, leverage, drawdown
- check_circleAnnual SEBI reporting via SIP portal on standard templates
- check_circleSEBI SCORES portal available for investor grievances
gavelRestrictions
- check_circleInvestment in units of other Cat III AIFs not permitted (no fund of funds)
- check_circleManager cannot charge both fixed management fee and performance fee exceeding SEBI limits
- check_circleShort-selling permitted only in securities listed on recognised stock exchanges
- check_circleOTC derivatives exposure subject to SEBI and RBI limits on eligible instruments
Tax Treatment
Fund-Level Taxation — No Pass-Through
Category III AIFs do not benefit from the pass-through regime available to Categories I and II. The fund is treated as a determinate trust under the Income Tax Act, 1961, and all income accruing to the AIF is taxed at the Maximum Marginal Rate (MMR) at the fund level. Investors receive post-tax distributions, and there is no further tax liability in most cases. The Finance Act 2023 confirmed this treatment while requiring TDS on distributions.
Taxed at fund level at 15% + surcharge (15% for income > ₹1 Cr to ₹10 Cr; 25% for > ₹10 Cr to ₹50 Cr; max 37% for > ₹1 Crore as applicable to AOPs) + 4% cess.
Listed equity LTCG taxed at 10% + applicable surcharge + cess at fund level. Unlisted securities: 20% with indexation for 24+ month holding period.
Derivatives trading gains are treated as non-speculative business income and taxed at MMR (~42.744% for highest income slab including surcharge and cess).
Dividend received from portfolio companies is added to AIF income and taxed at MMR. No further tax at investor level post-distribution.
Finance Act 2023: TDS at 10% for resident investors, applicable treaty rate / 20% for non-residents. Form 26Q/27Q filings mandatory quarterly.
Cat III AIFs are most efficient for high-frequency, high-turnover strategies. Long-duration equity strategies may be better served by Cat II (PE) or PMS for superior after-tax outcomes.
Key Characteristics at a Glance
Minimum Corpus
₹20 Crore
per scheme
Min. Investor Ticket
₹1 Crore
₹25L for employees
Max. Investors
1,000
per scheme
Fund Structure
Open / Closed
as per PPM
Leverage
Up to 2× NAV
via derivatives
Taxation
Fund Level
MMR ~42.744%
Skin-in-the-Game
5% / ₹10 Cr
whichever is lower
No Min. Tenure
Flexible
per fund design
Category III vs Category II
| Parameter | Category III | Category II |
|---|---|---|
| Strategy Type | Complex / leveraged trading | Private markets (PE, RE, Debt) |
| Leverage | Up to 2× NAV via derivatives | Not permitted |
| Structure | Open or close-ended | Mandatorily close-ended |
| Taxation | Fund level at MMR (~42.744%) | Pass-through (Sec 115UB) |
| Skin-in-the-Game | 5% of corpus / ₹10 Cr (lower) | 2.5% of corpus / ₹5 Cr (lower) |
| Short Selling | Permitted (listed securities) | Not permitted |
| Liquidity | Higher (listed instruments) | Illiquid (private assets) |
| Minimum Tenure | No minimum | 3 years minimum |
Explore Category III Funds
Browse registered Category III AIFs — long/short, multi-strategy, and market neutral — available through PlatAlt.