In India, Alternate Investment Funds (AIFs) are governed by SEBI (Alternate Investment Funds) Regulations, 2012.

The Covid has led the governments all-round the globe to come out with fiscal stimulus measures and the die-hard attempts to come out with a vaccine to tackle the covid, which has now become a reality.

Having said so, the Covid has also resulted in extensive upheaval on the regulatory front which has witnessed some generous, though much needed and transitory, relaxations so as to provide succour to the battered businesses to grapple with the post covid world.

The regulatory changes include suo moto orders passed by the Supreme Court, amendments and relaxations given by the Ministry of Corporate Affairs, Insolvency and Bankruptcy Board of India and Securities Exchange Board of India.

In India, Alternate Investment Funds (AIFs) are governed by SEBI (Alternate Investment Funds) Regulations, 2012. Alternative Investment Fund or AIF means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors. SEBI in the last year after public discussions carried out quite a few changes in relation to the AIF Regulations.

SEBI has issued the following new circulars bringing about amendments in the AIF Regulations in the year 2020 which includes PPM Standardisation, Performance benchmarking for AIFs, annual audit requirement and formalising the requirement of having Investment Committees for the AIF, the responsibility and accountability of such Investment Committee. The changes to the AIF space also include levying stamp duty on issue, transfer and sale of units of AIF.

Templates for PPM:

SEBI has prescribed a template for the Private Placement Memorandum (PPM), for all the three categories of AIFs, which will disclose certain preliminary information about the AIF to prospective investors. By this step, the SEBI has sent out the message loud and clear as to what it expects from the prospective AIFs to disclose and at the same time provided a clarity on the contents of the PPM, thereby bringing some kind of uniformity.

Annual Audit of AIF:

An annual audit (can be carried out by an internal/external auditor/legal professional) of sections of the PPM is a mandatory requirement and the findings of such an audit is required to be communicated to the Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI. Furthermore, the subscription agreement has to be in accordance with the PPM and cannot go beyond what is stated in the PPM.

However, the aforesaid requirements with respect to PPM template and Audit is exempted for Angel Funds (as defined in the AIF Regulations) and AIFs/Schemes where each investor commits to a minimum capital contribution of INR 70 crores and also provides a waiver to the fund in this respect.

Performance Benchmarking:

In order to evaluate the performance of the AIF industry as compared to other investment avenues, it was considered prudent to introduce Performance Benchmarking and the circular also provides for operation guidelines for performance benchmarking. The circular inter alia mandates any association of AIFs, which in terms of membership, represents at least 51% of the number of AIFs, shall enter into an agreement for carrying out the benchmarking process. The performance benchmarking agreement shall cover the mode and manner of data reporting, specific data that needs to be reported, terms including confidentiality in the manner in which the data received by the Benchmarking Agencies may be used, etc. Angel Funds registered under the sub-category of Venture Capital Fund under Category I-AIF are not required to abide by these performance benchmarking requirements.

SEBI Clarification on the Circular on Disclosure Standards for AIFs:

SEBI has issued a circular clarifying the following positions:

  • The audit compliance in terms of PPM is required to be completed at the end of each financial year and the findings of audit along with corrective steps, if any, shall be communicated to the Trustee or Board or Designated Partners of the AIF, Board of Manager and SEBI, within 6 months from the end of the financial year and where AIFs have not raised funds from their investors the requirement of audit compliance shall not be applicable to them. However, they are required to submit a certificate from a chartered accountant within six months from the end of the financial year verifying that no funds have been infused by the investors;
  • The threshold of representation in an association which was earlier at 51% was amended to 33%.

Collection of stamp duty on issue, transfer and sale of units of AIFs:

In view of the amendments made to the Indian Stamp Act, 1899 by virtue of the Finance Bill, 2019 the Registrars to an Issue & Share Transfer Agents were required to act as collecting agents and were empowered to collect stamp duty on the issue, transfer and sale of the units of AIFs.

Formalising Investment Committees and their responsibility:

The Manager of the AIF is generally responsible for the decisions taken by the AIF and the overall management of the AIF. SEBI has now provided clarity as to the qualification and experience for the investment team of the Manager of AIF. Fund managers while proposing new schemes generally set up investment committees for seeking recommendations or advice or to review the and approve crucial decisions to be taken by the fund. SEBI has now clarified that the manager of the fund will be responsible for all the decisions of the fund and the members of the investment committee shall be equally responsible for the decisions of the fund. The Amendment Regulations further mandates that the managers as well as the members of the investment committee shall ensure that the investments of AIFs are compliant.

Further, SEBI has prescribed that where the names of the external members are not disclosed in the placement memorandum or the agreement entered into with the investors, then in such an event the external member shall only appointed subject to a minimum of 75% of consent received the investors by value of their investment.

As part of the amendments, SEBI has provided a clarification with respect to where the external members of the investment committee are not resident Indian citizens and has stated that although such schemes will be duly processed but they will be considered only after a clarification has been provided from RBI as regards the investment that would be made by such AIF (having external members who would be not resident Indians).

There was tremendous concern in the AIF ecosystem as regards the responsibilities imposed on an Investment Committee as it was felt that it would be quite cumbersome to attract good talent for the AIF if the Investment Committee members, who generally are experts in their respective fields, are also held responsible and accountable for the investment decisions along with the Investment Manager. Addressing this concern, SEBI, in the year 2021 has granted conditional relaxation from the said condition and subject to waiver being granted by the AIF investors.

Relaxations for AIFs set up in GIFT City:

Relaxations have been provided to the AIFs that would be set up in the GIFT City. Such relaxations include undertaking leverage, co-investment opportunities, investment in domestic AIFs, relaxations from diversification of investments.


SEBI has been at forefront in strengthening the capital markets and injecting necessary reinforcement measures in the market regime with interests of the stakeholders at the forefront. The year 2020 has not only changed everyone's perspective vis-à-vis their health but also caused the businesses, corporates, investors to do a re-think on their commercial proposition and strategizing. By the recent reforms introduced by SEBI as regards AIF, one may not be incorrect in inferring that SEBI has, time and again, showcased that it has been perennially on the cusp of reinforcing and revitalising the regulatory regime with best global practices with changing times by integrating the concerns of stakeholders to the extent possible.

Originally published by IIFL Securities, February 16, 2021

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