India: SEBI Revises Operational Framework For Alternative Investment Funds

  • SEBI issues consolidated circular providing guidelines on disclosures, reporting and clarifications under AIF Regulations. Disclosure norms vastly strengthened.
  • Tabulated examples of the distribution waterfall terms and charges to be borne by a fund have to be mandatorily included.
  • Changes to the placement memorandum need to be notified to all investors and the regulator. 'Key Changes' may trigger the fund to afford exit opportunities to the investors.

Following closely on the footsteps of the recent observations1 by U.S. Securities and Exchange Commission (SEC) that there are several disconnects between "what [general partners] think their [limited partners] know and what LPs actually know", the Indian Securities Exchange Board of India ("SEBI") has issued a circular2 ("Circular") that consolidates guidelines on disclosures and reporting that alternative investment funds ("AIFs") have to make. The Circular also provides certain clarifications on the interpretation of the provisions of the AIF Regulations.

The SEBI (Alternative Investment Funds) Regulations, 2012 ("AIF Regulations") were notified on May 21, 2012. Subject to certain exceptions, the ambit of the AIF Regulations is to regulate all forms of vehicles set up in India for pooling of funds on a private placement basis. To that extent, the AIF Regulations provide the bulwark within which the privately pooled discretionary fund management industry operates in India.

The Circular inter alia requires detailed tabular example of how fee and other charges are calculated and how the distribution waterfall is structured. The Circular also provides specifics on how certain identified key-man events are to be handled. This hotline summarises these and other important aspects of the Circular.


The Circular observes that the fee structure applicable to investors in an AIF is generally complex in nature.3 It is not uncommon for investors to negotiate a preferential fee arrangement with fund managers. Similarly, fund managers have evolved a number of variations to differentiate product offerings and to improve investor friendliness. In view of these variations and to facilitate better understanding among investors, SEBI has directed fund managers to add by way of an annexure to the placement memorandum, a detailed tabular example of (1) how the fees and charges shall be applicable to the investor and (2) the distribution waterfall.4

This change is critical for fund managers to note. Such disclosure reduces the space for 'views' being taken by a fund manager in a given liquidity event leading to distribution. This also requires that the fund manager engages more closely with the fund counsel to articulate the waterfall in a manner that they can actually implement with a degree of automation. Any deviance from the waterfall as illustrated in the fund documents could potentially be taken up against the fund manager.


Regulation 11(2) of the AIF Regulations requires an AIF to include disciplinary actions in its placement memorandum. The Circular provides that AIFs should include (1) a disciplinary history of the AIF, sponsor, manager and their directors, partners, promoters and associates5 and (2) a disciplinary history of the trustees or the trustee company and its directors if the applicant for AIF registration is a trust. Further, the Circular provides guidance on what should be covered under 'disciplinary history'. Disciplinary history inter alia includes details of outstanding / pending and past cases (where the person has been found guilty), criminal or civil prosecution, non-payment of statutory dues, overdues to / defaults against banks or financial institutions, adverse findings with respect to compliance with securities laws, disputed tax liabilities, etc. as well as any disciplinary action taken by SEBI or any other regulatory authority.6


The Circular provides that any changes made to the placement memorandum submitted to SEBI at the time of the application for registration as an AIF must be listed clearly in the covering letter submitted to SEBI and further, such changes must be highlighted in the copy of the final placement memorandum.7 The Circular provides that any change to the placement memorandum not only needs to be highlighted and brought to the notice of all unit holders within 7 days of making such change but also that such changes must be intimated to SEBI.8

However, in case the change to the placement memorandum is a case of a 'material change' (factors that SEBI believes to be a change significantly influencing the decision of the investor to continue to be invested in the AIF), said to arise in the event of (1) change in sponsor / manager, (2) change in control of sponsor / manager, (3) change in fee structure or hurdle rate which may result in higher fees being charged to the unit holders), existing unit holders who do not wish to continue post the change shall be provided with an exit option and the unit holders will be provided not less than one month for indicating their dissent.9 The Circular also lays down the exit options that need to be provided in the case of an open-ended10 fund and a close-ended11 fund and provides that the process of providing exit to dissenting investors should be completed within 3 months from the date of expiry of the last date of offer for dissent.


On July 29, 2013, SEBI issued a circular specifying the extent to which leverage can be employed by Category III AIFs and also prescribing a formula for computing leverage. SEBI had also indicated that those Category III AIFs which employ leverage are required to report the amount of leverage to the custodian on a daily basis. SEBI has now formally taken cognizance of the fact that the calculation of leverage by a Category III AIF requires information from various parties who provide such information at varied time periods which has consequently made it difficult for Category III AIFs to report the amount of end-of-day leverage to the custodian on the same day.12 Accordingly, the Circular now provides that Category III AIFs shall report the amount of end-of-day leverage to the custodian by the end of the next working day.13


Regulation 10(b) of the AIF Regulations provides that each scheme of an AIF should have a corpus of at least INR 20 crores (approx. USD 3.3 million) ("Minimum Corpus"). Further, Regulation 2(1)(h) of the AIF Regulation defines "corpus" as the total amount of funds committed by investors to the AIF by way of a written contract or any such document as on a particular date. An AIF cannot commence operations until it has secured the Minimum Corpus. SEBI now proposes to extend regulatory oversight to a post-commencement scenario where an open-ended scheme (post redemption(s) by investors or exits) is not able to sustain the Minimum Corpus. The Circular provides that where the corpus of an open-ended scheme falls below the Minimum Corpus, the AIF shall intimate SEBI within 2 days of receiving request of redemption from the client. Further, the fund manager is given a period of 3 months to restore the Minimum Corpus, failing which, all the interests of the investors will need to be mandatorily redeemed. The Circular also provides that SEBI may take appropriate action where the Minimum Corpus is breached repeatedly.


Regulation 10(c) of the AIF Regulations provides that an AIF shall not accept an investment of value less than 1 crore (approx. USD 166,667) ("Minimum Investment Amount"). The Circular specifically clarifies that (1) in the case of an AIF which is open-ended, the first single lump-sum investment amount received from an investor should not be less than the Minimum Investment Amount and (2) in case of requests for partial redemption of units by an investor in an open-ended AIF, the amount of investment retained by an investor in the AIF should not fall below the Minimum Investment Amount. In other words, an investor cannot redeem its investment in such funds such that their allocation reduces below the Minimum Investment Amount and instead, an investor will need to make a request for full and complete redemption of its investment in the fund.


A manager to an alternative investment fund must now contend with greater oversight and accountability to both the regulator and the investors. While bespoke terms are designed to maintain investor friendliness, sight must not be lost on the disclosure norms that are now statutorily mandated. Given the recent observations by regulators in sophisticated jurisdictions, the Circular seems to be in line with where the discretionary management industry is expected to be, from a disclosure to investor perspective.


1 On May 6, 2014, Andrew Bowden, Director of the U.S. Securities and Exchange Commission's Office of Compliance Inspections and Examinations (OCIE), stated that the OCIE has found widespread instances of insufficiently disclosed fees in the private equity industry. Also see

2 CIR/IMD/DF/14/2014

3 See paragraph 2(a)(i)of the Circular.

4 Ibid.

5 See Regulation 2(1)(c) of the AIF Regulations.

6 See paragraphs 2(a)(ii)(1) and (2) of the Circular.

7 See paragraph 2(b)(i) of the Circular.

8 See paragraph 2(b)(iii) of the Circular.

9 See paragraph 2(b)(iv)(a) of the Circular.

10 See paragraph 2(b)(iv)(b) of the Circular.

11 See paragraph 2(b)(iv)(c) of the Circular.

12 See paragraph 1(b) of the Circular.

13 See paragraph 1(c) of the Circular.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Richie Sancheti
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions