Answer ... AIFs must ensure transparency and disclose the following information to investors:
- financial, risk management, operational, portfolio and transactional information regarding fund investments;
- any fees ascribed to the AIF manager or sponsor, and any fees charged to the AIF or any investee company by an associate of the AIF manager or sponsor;
- any inquiries/legal actions by legal or regulatory bodies in any jurisdiction, as and when they occur;
- any material liability arising during the AIF’s tenure, as and when it arises;
- any breach of a provision of the placement memorandum or agreement made with the investor or any other fund documents, as and when it occurs; and
- any change in control of the sponsor, manager or investee company.
Any significant change in the key investment team must be intimated to all investors.
Answer ... Category I and Category II AIFs must provide reports to investors at least on an annual basis, within 180 days of the year-end. Category III AIFs must provide quarterly reports to investors within 60 days of the end of the quarter. These reports must include the following information, as may be applicable to the specific AIF:
- financial information of investee companies; and
details of material risks and how they are managed, which may include:
- concentration risk at fund level;
- foreign exchange risk at fund level;
- leverage risk at fund and investee company levels;
- realisation risk (ie, change in exit environment) at fund and investee company levels;
- strategy risk (ie, change in or divergence from business strategy) at investee company level;
- reputation risk at investee company level; and
- extra-financial risks, including environmental, social and corporate governance risks, at fund and investee company level.
Answer ... In terms of governance, the AIF Regulations impose a fiduciary duty on the manager and sponsor to act in the interests of the AIF’s investors. All conflicts of interest must be mandatorily disclosed to all investors; and the AIF manager is mandated to establish and implement policies and procedures to identify, monitor and mitigate all conflicts of interest.
The AIF Regulations also oblige the manager to:
- address all investor complaints;
- provide any information sought by the Securities and Exchange Board of India (SEBI);
- maintain all records as specified by SEBI;
- take all steps to mitigate conflicts of interest; and
- ensure transparency and disclosure requirements as specified in the AIF Regulations.
The AIF Regulations are silent with regard to the establishment of investment committees and advisory boards. Hence, by market practice, this is left to the discretion of the manager.
Answer ... As per the AIF Regulations, AIFs shall provide, when required by SEBI, information for systemic risk purposes (including the identification, analysis and mitigation of systemic risks).
There are also risk management requirements for Category III AIFs which employ leverage. These include:
- having a comprehensive risk management framework supported by an independent risk management function appropriate to the size, complexity and risk profile of the fund;
- having a strong and independent compliance function appropriate to the size, complexity and risk profile of the fund, supported by sound and controlled operations and infrastructure, adequate resources and checks and balances in operations;
- maintaining appropriate records of trades/transactions performed, which must be made available to SEBI on request; and
- ensuring full disclosure and transparency as regards conflicts of interests to investors (and to SEBI, on request), both in the placement memorandum and through correspondence as and when such conflicts arise.