SEBI Master Circular for Alternative Investment Funds (AIFs)

SEBI Master Circular for Alternative Investment Funds (AIFs)

SEBI has issued a new circular no. SEBI/HO/AFD/PoD1/P/CIR/2023/130 dated 31st July 2023. This circular came into existence on the date of its issuance. It aims to ensure an effective regulatory framework for AIFs and to safeguard the interests of the investors. The AIFs will have to comply with other requirements as well, apart from this circular. The competent authority has issued this circular by exercising its powers under section 11(1) of the Securities Exchange Board of India Act, 1992. This circular is divided into 19 Chapters. Let’s discuss the main crux of each chapter.

Chapter 1: Online Filing System for AIFs

A SEBI Intermediary Portal has been formed through which the applicants desirous of obtaining registration can submit their applications, and the already registered AIFs can submit applications for any request.

Chapter 2: Filing of Private Placement Memorandum (PPM) and related compliance requirements

  1. Template(s) for PPM and disclosures in PPM

PPM is a document where all the needed information about the AIF is disclosed to potential investors. To ensure a minimum standard of disclosure is maintained, a template has been mandated for the PPM, which provides a certain minimum level of information in a simple and comparable format. The template consists of two parts, that are:

  • Part A – Section for minimum disclosures and
  • Part B – Additional section to allow flexibility to the AIF to provide any other information that it deems fit.

As per Regulation 11(2) of the AIF Regulations, the AIF is also required to include the history of disciplinary actions in its PPM, especially of the last 5 years where the penalty is greater than INR 5 lakh rupees.

Modalities for filing of PPM through a Merchant Banker

 As per Regulation 12(2) of the AIF Regulations, AIFs should launch scheme(s) subject to filing of PPM with SEBI through a SEBI Registered Merchant Banker. However, the Merchant Banker should independently exercise due diligence on all the disclosures in the PPM. The due diligence certificate and other necessary documents must be submitted while filing the draft PPM at the time of registration or before the launch of the new scheme on the SEBI intermediary portal. The details of the merchant banker should be disclosed in the PPM, and the Merchant Banker appointed for filing of PPM shall not be an associate of AIF, its Sponsor, manager, or trustee.

  • Validity of PPM- Timeline for declaration of First Close of Schemes of AIFs
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As per Regulation 12(4) of the AIF Regulations, the first close scheme shall be declared by an AIF in the manner prescribed by SEBI from time to time.

  • Audit of terms of PPM

An annual Audit of the terms of PPM is mandatory, and it should be carried out either by an internal or external auditor or legal professional. It should be conducted at the end of each FY, and the findings should be communicated to the Trustee or Board of Directors or Designated Partners of the AIF, Board of Directors or Designated Partners of the Manager and SEBI within 6 months from the end of the FY. Audit is not required for AIFs that have raised any funds from investors. This shall not apply to Angel Funds and AIFs/ Schemes in which each investor commits to a minimum capital contribution of 70 crore rupees.

  • Change in PPM

Any changes to the draft PPM shall be submitted to SEBI at the time of application and should be listed in the cover letter. Any changes in the documents of the funds or scheme shall be intimated to investors and SEBI on a consolidated basis and within one month from the end of the financial year. Such changes to a PPM shall be submitted through a Merchant Banker along with the due diligence certificate provided by the Merchant Banker. Where material changes are to be made, it has to be done as per the process prescribed in this circular.

Chapter 3 – Registration-related clarifications

  1. Where in-principle approval is granted to the applicant, but the registered trust deed or duly filed partnership deed is not submitted within the specified time, the applicant must file a fresh application for registration under the AIF Regulations.
  2. An AIF registered under a particular category cannot change its category except with the approval of the Board and in the manner specified under this circular.

Chapter 4: Investments in AIF

  1. As per Regulation 10(a) of the AIF Regulations, AIFs can raise funds from any investor, irrespective of whether Indian, Foreign or non-resident Indians, by way of issue of units. While onboarding investors, the Manager of an AIF will have to ensure the following:
  2. Foreign investors of the AIF must be a resident of the country whose securities market regulator is a signatory to the International Organization of Securities Commission’s Multilateral Memorandum of Understanding or a signatory to the bilateral Memorandum of Understanding with SEBI.
  3. The investor or its underlying investor contributing 25% or more in the corpus of the investor depending upon the control is not the person stated in the Sanctions List notified with time by the United Nations Security Council and is not a resident of the country recognised in the public statement of Financial Action Task Force as:
  4. A jurisdiction must have a strategic Anti-Money or Combating the Financing of Terrorism deficiencies to which countermeasures apply or
  5. A jurisdiction with insufficient progress in taking measures to remove the deficiencies or does not have an action plan developed with the Financial Action Task Force to address the deficiencies.

Chapter 5: Operational and prudential norms for Category III AIFs

  1. Calculation of investment concentration norm for Category III AIFs.

This chapter talks about the operational and prudential norms for Category III AIFs. As per Regulation 15(1)(d) of the AIF Regulations, flexibility is provided to Category III AIFs, including large value funds for accredited investors of Category III AIFs to calculate investment concentration norms based either on investable funds or net asset value (NAV) of the scheme while investing in listed equity of an investee company based on the conditions specified by SEBI from time to time. In addition to norms, certain norms have been specified regarding this in this circular.

  • The prudential requirement concerning leverage
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Calculation of leverage shall be done as the ratio of the AIF exposure to the NAV. The formula for the calculation of leverage is:

Leverage = Total exposure {Long + Shorts (after offsetting as permitted)} ÷ Net Asset Value (NAV)

Exposure shall be calculated as below:

  1. Futures (long and short) = Futures Price x Lot Size x Number of contracts
  2. Options bought = Option Premium Paid x Lot Size x Number of Contracts
  3. Options sold = Market price of underlying x Lot Size x Number of contracts
  4. Where there is any other derivative exposure, the exposure is proposed to be calculated as the notional market value of the contract.

Chapter 6 – Norms for Special Situation Funds (SSF)

The corpus of SSF should be at least one hundred crore rupees, and it shall accept an investment of a minimum of ten crore rupees from an investor. Where there is an accredited investor, the SSF shall accept an investment of a minimum of five crore rupees. Where investors are employees or directors of the SSF or employees or directors of the Manager of the SSF, then the minimum value of investment shall be twenty-five lakh rupees.

Chapter 7 – Guidelines for overseas investments by AIFs and related reporting

Regulation 15(1)(a) of the AIF Regulations provides that AIFs may invest in securities of companies incorporated outside India based on conditions or guidelines that may be prescribed or issued by the RBI and SEBI from time to time. The investment conditions, allocation of overseas investment limits and reporting of overseas investment have been prescribed under this chapter of this circular.

Chapter 8 – Investment in units of AIFs

As per Regulation 15(1)(c) and (d) of the AIF Regulations, an AIF may invest in an investee company up to a prescribed limit, either directly or through investment in the units of other AIFs. AIFs can invest in units of other AIFs without tagging themselves as funds of AIFs.

Chapter 9 – Participation of AIFs in Credit Default Swaps

As per Regulations 16 (1) (aa), 17 (da), 18 (ab), and 20 (11) of the AIF regulations, AIFs can participate in CDS in a way as may be specified by SEBI from time to time. In this regard, the following has been specified:

  1. Conditions for Category I, II and III AIFs for buying CDS
  2. Category I & II AIFs can purchase CDS on underlying investment in debt securities only to hedge.
  3. Category III AIFs can purchase CDS for the purpose of hedging or otherwise within the permissible leverage as specified in para 5.2 of this Master Circular.
  4. Conditions for Category II and III AIFs for selling CDS
  5. Category III AIFs can sell CDS based on the condition that effective leverage undertaken should be within the permissible limits.
  6. Category II & III AIFs may sell CDS by setting aside unencumbered Government bonds or Treasury bills equal to the amount of said CDS exposure. The earmarked securities can also be utilised to maintain the required margin requirements for the said CDS exposure. The exposure to CDS taken up in the aforesaid manner shall not result in leverage.
  7. The total exposure to an investee company, inclusive of the exposure through CDS, shall be within the limit of the required concentration norm as specified in AIF Regulations.

Chapter 10 – Transaction in Corporate Bonds through Request for Quote (RFQ) Platform by AIFs

This chapter requires that AIF can take up at least 10% of total secondary market trades in Corporate Bonds by value in a month by placing/seeking quotes on the RFQ platform. Further, Chapter XXII of Master Circular for the issue and listing of Non-convertible securities, Securitised Debt Instruments, Security Receipts, Municipal Debt Securities and Commercial Paper dated 7th July 2023, quotes on the RFQ platform may be placed to an identified counterparty or all the participants. In this regard, it is made clear that all transactions in Corporate Bonds where AIF is on both sides of the trade should be executed via the RFQ platform in ‘one-to-one’ mode. However, any transaction entered by an AIF in Corporate Bonds in ‘one-to-many’ mode that gets executed with another AIF shall be counted in ‘one-to-many’ mode and not in ‘one-to-one’ mode. This requirement came into force w.e.f. 1st April, 2023.

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Chapter 11 – Other prudential and operational norms and related clarifications

In this chapter, clarifications related to investments, schemes of AIFs that have adopted priority in distribution among investors and calculation of tenure of close-ended schemes of AIFs are provided.

Chapter 12 – Framework for Accredited Investors

After public consultation and approval of SEBI, the structure for “Accredited Investors” (AIs) has been introduced in the securities market. Under this framework, AIs may take advantage of flexibility in minimum investment amount or concessions from specific regulatory requirements required to investment products based on the conditions applicable for specific products or services under SEBI (AIFs) Regulations, 2012, SEBI (Portfolio Managers) Regulations, 2020 and SEBI (Investment Advisers) Regulations, 20131. Further, this chapter talks about the Accreditation Agency, Filing of LVF Schemes with SEBI, and Extension of tenure beyond two years.

Chapter 13 – Obligations of managers, sponsors and trustee of AIFs

This chapter provides for the Appointment and designation of personnel of AIF and Manager, Code of Conduct, Stewardship Code and other obligations.

Chapter 14 – Constitution of Investment Committee

As per Regulation 20(7) of the AIF Regulation, the Manager can constitute an Investment Committee. Based on certain conditions, the Investment Committee will approve decisions of the AIF. As per the provision to Regulation 20(8) of the AIF Regulations, there is a requirement to serve a waiver to AIF in respect of compliance with the Regulation pertaining to the responsibility of members of the Investment Committee.

Chapter 15 – Reporting by AIFs

In this chapter, Reporting by AIFs, SEBI has discussed the Reporting of Investment Activities by AIFs, Compliance Test Report (CTR) and Term Sheet- Angel Funds.

Chapter 16 – Performance Benchmarking of AIFs

A performance benchmark was developed to compare the performance of the AIF industry against other investment avenues and global investment opportunities. Performance benchmarking will help investors in assessing the performance of the industry. It was decided to introduce:

  1. Mandatory benchmarking of the performance of AIFs and the AIF industry.
  2. A framework for facilitating data collection from Benchmarking Agencies’ performance reports.

Chapter 17 – Investor Charter and Disclosure of Complaints by AIFs

SEBI has prepared an Investor Charter to provide relevant information to investors about the activities of AIFs. The Investor Charter is a brief document. It contains details of services provided to investors, parties of grievance redressal mechanism, responsibilities of the investor, etc., in one place in easy language for ease of reference.

Section 18 – Collection of stamp duty on issue, transfer and sale of units of AIFs

AIFs have been mandated to comply with the applicable provisions of the Indian Stamp Act 1899 and the Rules made thereunder regarding the collection of stamp duty on sale, transfer and issue of units of AIFs w.e.f. 1st July 2020.

Chapter 19 – Change in Sponsor and/or Manager or Change in Control of Sponsor and/or Manager of AIF

This chapter talks about the fee for change in control of the Manager or Sponsor or change in Manager or Sponsor of AIFs and the change in control of the Sponsor and or Manager of AIF involving a scheme of arrangement under the Companies Act 2013.


SEBI generally issues various Master Circulars from time to time to protect the interest and promote fair trade practices in the Indian stock market. These circulars comprise a comprehensive statutory and regulatory structure of rules and regulations that lay out suitable guidelines and basic requirements to comply with AIFs operating in the Indian stock market. To comply with the said Master circular and other SEBI guidelines is a duty for all AIFs, and it will identify itself as non-compliant if it fails to do so.




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