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<h1>Category II AIF investment rules restrict leverage, allow hedging and inter-fund investments with SME disclosure and lock-in obligations.</h1> Category II Alternative Investment Funds shall invest in investee companies or units of Category I or other Category II funds as disclosed in the placement memorandum, primarily in unlisted securities and rated listed debt securities, and may enter agreements with merchant bankers for unsubscribed portions or market making. Borrowing is generally prohibited except for limited short-term temporary or operational needs under specified limits and Board conditions; encumbrances on equity of infrastructure investee companies are permitted only to facilitate the investee's borrowing. Funds may undertake hedging and credit default swap transactions under Board guidelines and qualify for an exemption from certain insider-trading rules for SME investments subject to disclosure within two trading days and a one-year lock-in.