AIF Registration

New SEBI Norms for Fund Managers

Norms on Fund

The Securities Exchange Board of India (SEBI) recently introduced new norms on fund managers by bringing changes in the SEBI (Alternative Investment Regulations) of 2012 (SEBI (AIF) Regulations, 2012) along with the circulars issued thereunder. The change inter alia prescribes a timeline for the first closing, distribution of the waterfall mechanism and foreign investments in Alternative Investment Funds (AIF). A circular dated 17th November 2022 (Circular I) was issued regarding the tenure of a scheme of AIF, the timeline for the declaration of the first close and the procedure for a change in control of the manager or sponsor. Another circular was issued on 23rd November 2022 (Circular II) prohibiting AIFs that have adopted the priority distribution waterfall mechanism from receiving fresh commitments and from making investments in new companies. Thereafter a third circular was issued dated 9th December 2022 on acceptance of capital commitment from foreign investors in AIFs. In this blog, you will see how these circulars affect fund managers.

Circular I on first close, tenure and change in control of sponsor or manager

  1. Timeline for first close and determining the tenure of AIFs

SEBI (AIF) Regulations, 2012 allow AIFs to launch a new scheme before the launch of the scheme by filing a separate private placement memorandum (PPM) with SEBI. This has to be accompanied by fees as prescribed under the SEBI (AIF) Regulations, 2012. The purpose behind the issue of new norms on fund management was to reduce the instances where the period between submitting the PPM and the launch of the scheme was unduly long. Such instances resulted in the launch of outdated PPMs with out-of-line disclosures as compared to the regulatory requirements existing as of the date of the launch. In addition to this, the SEBI (AIF) Regulations, 2012 were silent on what constitutes a ‘launch’ of a scheme so there prevailed no uniform industry practice. Usually, the date on which the AIF commenced seeking capital commitment from prospective investors was considered as the date of launch of the scheme. In the practical sense, it was difficult to ascertain the date on which a fund manager starts seeking capital commitment. This created absurdity and inconsistency. To resolve the issue and provide clarity, SEBI issued this circular providing timeline for the first close and determining the tenure of AIFs. The Circular has been summarized below:

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2. Change in control of manager or sponsor or change in manager or sponsor of AIF

Under the erstwhile norms, AIFs were only required to inform SEBI in case of a change in sponsor or manager or any change in control of such entities. For this, prior approval from SEBI was required only in case of a change in control of the sponsor or manager, while mere intimation to SEBI was sufficient in case of a change in sponsor or manager. However, SEBI observed instances where a new entity or group was set up as an AIF without obtaining fresh registration from SEBI. This practice was carried out either by replacing the manager or sponsor or by acquiring a controlling stake in the manager and sponsor of an inactive but existing AIF. Under the new norms on fund managers, SEBI has mandated the requirement to obtain prior approval for both changes in control of sponsor or manager as well as change in sponsor or manager. Approval granted under this norm shall be valid for 6 (six) months from the date SEBI communicates the approval. The application for approval should be accompanied by a fee to be paid within 15 days from the date on which the proposed change comes into effect.

SEBI who is responsible to ensure that the interest of the investor is protected, has provided that the fees shall be borne by the manager and the AIF and not be treated as a fund expense and passed on to the investors. This change brings the rules regulating change in manager or sponsor of AIF at par with the rules governing SEBI registered Portfolio Managers, Merchant Bankers, Stock Exchanges, Debenture Trustees, Depositories, underwriters, bankers, credit rating agencies, registrar to an issue and share transfer agents. This circular clarifies that the requirement of the fee shall be only for those applications which have not declared their First close.

  1. Ring Fencing of assets of schemes
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As per the prevailing SEBI (AIF) Regulations, AIF can launch many investment schemes under a single registration. Each group has its own set of investors and investment portfolios. But AIFs have to obtain separate PAN numbers for each of its schemes. It is important to note that there was no provision segregating assets between different schemes of an AIF which created uncertainty among investors, especially foreign investors who were concerned about the protection of their assets from any liability arising from other schemes of the same AIF. Hence, this Circular was issued to bring clarity. SEBI now provides that the manager of AIF and the trustees or designated partners should ensure the separation of assets and liabilities of each scheme and the banks and securities accounts are also segregated and ring-fenced. This amendment brings the SEBI (AIF) Regulations, 2012 at par with the global standards.

Circular II on Priority Distribution Waterfall

Under the erstwhile SEBI norms[1], SEBI observed that AIFs were adopting a distribution waterfall model where one class of investors shared greater loss to their pro rata holding in the AIF as compared to other unit holders. SEBI considered such practice as unfair and unethical as it is a mechanism to avoid losses disproportionately. The new norms on fund managers prohibit AIFs from using such practices to accept fresh commitments or make investments in new companies till the time a decision is arrive arrived at in this regard. SEBI looks forward to engaging with the Alternative Policy Advisory Committee (APAC) and other stakeholders in this regard.

Circular III on Foreign Investment in AIF

The new norms on fund managers prescribe guidelines for raising funds from foreign investors. As per the new norms on fund managers, the manager of the AIF must ensure the following at the time of onboarding foreign investors:

  1. The foreign investor should be a resident of a country whose securities regulator is a signatory to the International Organization of Securities Commission’s (IOSC) Multilateral Memorandum of Understanding (MOU) or has a bilateral Memorandum of Understanding with SEBI;
  2. The foreign investor or its underlying investor must not be on the sanction list as notified by the United Nations Security Council (UNSC) and the investor must not be a resident of a country identified by the Financial Action Task Force (FATF) as having strategic anti-money laundering or terrorism financing deficiencies or not making sufficient progress in addressing the deficiencies.
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The investors who subsequently fail to meet the above conditions, shall not be permitted by SEBI to draw down any further capital contribution from the investor until they meet the conditions again. These provisions are such that they can restrict the flexibility of fund managers while they look for overseas feeder fund jurisdictions. In addition, the grey list of countries is updated thrice a year which will create an atmosphere of uncertainty especially because the fund managers are required to ensure compliance with the provisions during the span of the fund.


The new norms on fund managers have been issued to provide clarity in the SEBI (AIF) Regulations, 2012. Circular I provides certainty to the manager and investors regarding the tenure and timeline of the first close and the requirement for prior approval from SEBI in case of a change in sponsor or manager to provide adequate protection to investors. Similarly, Circular II deals with adequate disclosures by AIFs and obtaining express consent from the investor for the adoption of such a Priority Distribution Waterfall model. Lastly, Circular III, even though it brings parity between Foreign Portfolio Investors but imposes a greater compliance burden on fund managers by implementing stricter and frequent KYC diligence. The new norms on fund managers aim to bring the required balance between interests of the investors and fund managers at all times.

Read our Article: How are New SEBI AIF Regulations Impacting Investment in Start-Ups?

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