SEBI notifies New Registration Requirement for Cat I & II AIF Managers

Ashish M. Shaji

30 May, 2024

Those fund managers that desire facilitating co-investments for contributors, sponsors or themselves, related to their category I or category II AIFs, must register themselves with the Securities Exchange Board of India as Co-investment Portfolio Manager. It is a new category of portfolio managers under SEBI (Portfolio Managers) Regulations, 2020 effective from 9 December 2021. In a change from the former stand, as per SEBI Cat (Category) I and Cat II AIF managers should get a portfolio management license for facilitating co-investments.

What do you mean by Co-investment?

Under the SEBI (Alternate Investment Funds) Regulations of 2012, Co-investment is defined as investment made by a manager or sponsor or investor of cat I and II Alternative Investment Fund(s) in investee companies where such Cat I or Cat II Alternative Investment Fund make investment;

Provided that co-investment by investors of Alternative Investment Fund will be through a Co-investment portfolio manager as provided under the SEBI (Portfolio Managers) Regulations, 2020.

Who is a Co-investment Portfolio Manager?

Under the SEBI (Portfolio Managers) Regulations, 2020, Co-investment Portfolio Manager is defined as a manager of Cat I or Cat II Alternative Investment Fund(s) and who provides services only to the investors of Cat I or Cat II Alternative Investment Fund(s) and makes investment in only unlisted securities of the investee companies where such Cat I or Cat II Alternative Investment Fund(s) make investments;

Provided that the co-investment portfolio manager can provide services to investors from any other Cat I or Cat II Alternative Investment Fund(s), which is managed by them and is also sponsored by the same sponsor(s).

Salient features of the registration requirement for Cat I and II AIF Managers

Investments permitted by Co-Investment Portfolio Managers

They shall invest 100% of the assets under management in unlisted securities of the investee companies where Cat I & 2 Alternative Investment Funds managed by it as a manager, has made investments.

Registration requirement for Co-Investment Portfolio Managers

SEBI has prescribed a separate registration form for such managers. The application should be filed along with the draft disclosure document and draft client agreement with SEBI. Moreover, detailed requirements is asked on the mandatory contents of the client agreement.

It may be noted that the net worth criteria for registration as a portfolio manager is waived off in case of Co-investment portfolio managers.

Principal Officer

The Co-Investment Portfolio Manager can designate a member of the key investment team of the manager as a principal officer, which has been mandated under the regulations. Such person should fulfill the criteria provided under SEBI Alternative Investment Fund Regulations^[1] which includes 5 years of experience and professional qualification. It eliminates the need to appoint a separate principal officer. Moreover, for the purposes of the SEBI Portfolio Manager Regulations, the role of compliance officer can also be performed by the same person.

Co-investment terms

The investment made by the co-investor must be on similar terms as Cat I or II AIF. Further, the timing of exit should also be the same as that of the Cat I or II AIF by the co-investor.

Others-

• As per the amendment, the disclosure document, which has to be prepared by the portfolio managers, doesn’t need to be made available on the manager website, but it is still needed to be filed with SEBI.
• The clients of a portfolio manager have a minimum 50 lakh rupees investment criteria applicable to them, but it is not applicable to Co-investment portfolio managers. This means that the investors of cat I or II AIFs can invest lower amount than the said limit.
• Further the investors participating in the co-investment pertaining to Cat I and II AIFs will not have a regulatory right to withdraw from the co-investments due to voluntarily or compulsorily terminating the portfolio management services with the Co-investment portfolio manager. This is owing to the fact that Cat I and II AIFs are close ended funds with fixed tenures. This right has been given to the clients of a regular portfolio manager under the SEBI Portfolio Manager Regulations.
• The need to appoint a custodian separately for co-investments by Co-investment portfolio manager is waived off due to the fact that investments are allowed only in unlisted securities, and only AIFs with a corpus of more than 500 crore rupees must appoint custodians. SEBI in this regard clarified that the appointment of custodian will be needed in case where the sum of corpus of the AIF and the value of the co-investment managed by the manager of the AIF as co-investment portfolio manager is more than 500 crore rupees.

Conclusion

AIF Managers should decide whether they seek to offer co-investment option to investors of Cat I or II AIFs. If they seek to do so then they will have to apply for registration with SEBI as CO-investment portfolio manager. However, the registration requirement will extend the set up time for fund platforms considering the requirement of additional filings with SEBI and will also increase the compliance cost for fund managers.

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