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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.
Table of Contents
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:
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:
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 registered intermediary who separately charge fees from investors are on-boarded via Direct Plan only.
Trail Model for distribution commission in AIFs
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.
Read our Article: SEBI Rolls out the Legal Entity Template
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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