AIF Registration

New Guidelines on Disclosure Standards of Private Placement Memorandum of AIFs

Standards of Disclosure

Looking at the growing trend of investments in Alternative Investment Funds (AIF), the Securities Exchange Board of India (SEBI) took initiative to streamline the standards of disclosure vide Circular No. SEBI/HO/IMD/DF6/CIR/P/2020/24 dated 5th February 2020. Through this circular, SEBI standardized Private Placement Memorandum (PPM) for AIFs by introducing templates for PPM with certain exemptions. In furtherance of this circular, SEBI recently introduced two new circulars on 10th April 2023. Circular No. SEBI/HO/AFD-1/PoD/P/CIR/2023/053 relates to guidelines on excusing or excluding an investor from an investment opprtunity of AIF. Circular No. SEBI/HO/AFD/PoD/CIR/2023/054 relates to the direct plan for schemes of AIFs and trail model for distributing commission in AIFs. Let’s discuss these circulars in detail to understand how SEBI ensures the maintenance of minimum standards of disclosure in PPM.

Standards of Disclosure in PPM

Before getting on with the standards of disclosure in PPM, let’s understand what is a PPM. A PPM in short for Private Placement Memorandum is a primary document that contains all the necessary information about the AIF. The information contained in the PPM is disclosed to prospective investors. A template for PPM has been mandated which ensures that a minimum level of information in a simple and comparable format is provided in the PPM. Apart from the information that has been mandated to be provided, any additional information can also be provided by AIFs in their PPM. This standard disclosure guideline shall come into effect from 1st March 2020.

The process of making standard disclosures in PPM is as follows:

  1. The template for PPM has two parts. Part A is the section for minimum disclosures and Part B is the section where AIF has full flexibility to provide any additional information as it deems fit.
  2. A different template for PPM is provided for raising funds under Category I & Category II and that of Category III.
  3. An annual audit shall be carried out by either an internal or external auditor/legal professional to ensure due compliance with the terms of PPM. It is further provided that the audit of sections of PPM relating to Risk Factors, Legal, Regulatory and Tax considerations and track record of first-time managers shall be optional.
  4. The findings of the audit along with the corrective steps shall be communicated to the Trustee, Board or Designated Partners of AIF, the Board of Managers and to SEBI.
  5. The terms of the contribution or subscription agreement should align with the terms of the PPM and not be ultravires to the terms of the PPM.
  6. There is no mandate on Angel Funds and AIFs/schemes where each investor commits to a minimum capital contribution of Rs. 70 crores or an equivalent amount in case of capital commitment in any other currency, to make disclosures in the PPM and to conduct an annual audit in terms of PPM.
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Guidelines on Excusing or Excluding an Investor from an Investment Opportunity in AIF

Despite the guidelines on standards of disclosure, SEBI observed inconsistency and lack of adequacy in disclosures. So after obtaining recommendations from the Alternative Investment Policy Advisory Committee (AIPAC), SEBI decided to excuse or exclude certain investors from participating in a particular investment opportunity by issuing Circular No. SEBI/HO/AFD-1/PoD/P/CIR/2023/053, which came into effect on 10th April 2023. The excuse or exclusion shall be provided in the following circumstances:

  1. If the investor, on the basis of an opinion from a legal professional or legal advisor, confirms that their participation in investment would violate applicable law or regulation; or
  2. If as a part of the contribution agreement or any other agreement with AIF, the investor had disclosed to the manager that his participation in investment would be in contravention to the internal policy of the investor.
  3. An AIF may exclude an investor from participating in an investment opportunity if the manager of the AIF is satisfied that the participation of the investor in the investment policy would adversely affect the scheme of AIF. Such exclusion shall be recorded by the manager along with the documents relied upon, if any.
  4. In case the investor of an AIF is an AIF or any other investment vehicle then such investor may be excused or excluded from participating in an investment opportunity to the extent of the contribution of the said fund/investment vehicle’s underlying investors who are to be excluded from the investment opportunity. Such exclusion shall be recorded by the manager of AIF by stating the rationale behind exclusion along with the supporting documents, if any.
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Direct plan for schemes of AIFs and trail model for distributing commission in AIFs

In furtherance to the guidelines providing PPM templates regarding standards of disclosure for AIFs, SEBI introduced Circular No. SEBI/HO/AFD/PoD/CIR/2023/054, which provides disclosure with respect to Direct Plan for investors and constituents of fees chargeable by AIF/scheme of AIF including the distribution fee or placement fee. This circular intends to provide flexibility to investors investing in AIFs, ensures transparency in expenses and curbs mis-selling. This circular is not yet in force and shall apply to investors on-boarded in AIFs/scheme of AIFs on 1st May 2023 and onwards. The circular is divided into two parts. Part A deals with the Direct Plan for schemes of AIFs and Part B deals trail model for distribution commission in AIFs.

Direct Plan for Schemes of AIFs

Under this part, the schemes of AIFs have been provided with an option of a ‘Direct Plan’ for investors. The Direct Plan shall not involve any distribution fee or placement fee. It shall be the responsibility of the AIF to ensure that investors who approach the AIF via SEBI[1] registered intermediary who separately charge fees from investors are on-boarded via Direct Plan only.

Trail Model for distribution commission in AIFs

  • If any distribution fee or placement fee is applicable, then the same shall be disclosed by AIF to the investors of AIF/scheme of AIF at the time of on-boarding.
  • If Category III AIF charges a distribution fee or placement fee from investors, it shall be charged on an equal trail basis i.e. no upfront distribution fee or placement fee shall be charged by Category III AIF either directly or indirectly to investors. Distribution fee or placement fee shall only be paid from management fee received by the managers of Category III AIFs.
  • Category I AIFs and Category II AIFs may pay up to 1/3rd of the total distribution fee or placement fee to the distributors on an upfront basis. The remaining 2/3rd of the distribution fee or placement fee shall be paid to the distributors on an equal trail basis over the tenure of the fund.
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Conclusion

As a final observation, it can be said that SEBI is time and again making attempts to streamline the standards of disclosure for AIFs. First, it introduced the templates for PPM to standardize PPM for AIFs to provide disclosure of a minimum level of information in a simple format. When inconsistency and lack of adequacy were observed, SEBI introduced two more circulars in furtherance of the earlier circular to provide flexibility to investors, ensure transparency and curb mis-selling.

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