Post Formation Compliance Requirements for Alternative Investment Funds (AIFs)

AIFs are privately pooled investment funds in India, typically set up in the form of a trust or a company or a body corporate or a Limited Liability Partnership (LLP). Please see our previous post to read more on a brief introduction to AIFs. As per the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2012 (the ‘AIF Regulations’), an AIF can be registered in one of the following three categories:

  Reporting Mechanism For proper adoption of the AIF regulations, 2012 the Securities and Exchange Board of India has issued the Operational, Prudential and Reporting Norms for Alternative Investment Funds vide its Circular No. CIR/IMD/DF/10/2013 dated 29 July 2013. Furthermore, in order to ensure conformity with the operational guidelines, the SEBI introduced the “Guidelines on disclosures, reporting and clarifications under AIF Regulations” vide its Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014. Following are the reporting obligations for all categories of AIF:

1. As per Regulation 28 of the AIF Regulations, periodical reports (with respect to funds raised, net investments by the AIF, leverage undertaken if any, exposure, categories of investor, etc) shall be submitted by all AIFs to the SEBI with respect to their activity.
2. Category I and II AIFs and Category III AIFs that do not undertake leverage shall submit a quarterly report with the SEBI as per the Annexure I.
3. Category III AIFs undertaking leverage shall submit a monthly report with the SEBI as per Annexure II.
4. As per the Circular No. CIRCULARSEBI/HO/IMD/DF1/CIR/P/2017/87 dated 31 July 2017 the aforementioned reports shall be submitted through the SEBI Intermediary Portal at https://siportal.sebi.gov.in
5. Such reports shall be submitted within 7 calendar days from the end of the quarter/end of the month as the case maybe.

Further, all AIFs have to comply with the requirements of preparation of a Compliance Test Report (CTR) as laid down below:

1. At end of financial year, the manager of an AIF shall prepare a compliance test report on compliance (an exhaustive reporting of the AIF’s activities) with AIF Regulations and circulars issued thereunder in the format as specified.
2. In case of the AIF is a trust, the CTR shall be submitted to the trustee and sponsor within 30 days from the end of the financial year. In the case of other AIFs, the CTR shall be submitted to the sponsor within 30 days from the end of the financial year.
3. In case of any observations/comments on the CTR, the trustee/sponsor shall intimate the same to the manager within 30 days from the receipt of the CTR. Within 15 days from the date of receipt of such observations/comments, the manager shall make necessary changes in the CTR, as may be required, and submit its reply to the trustee/sponsor.
4. In case any violation of AIF Regulations or circulars issued thereunder is observed by the trustee/sponsor, the same shall be intimated to SEBI as soon as possible.

Apart from the aforementioned reporting requirements, Category III AIFs have to comply with certain other reporting and compliance norms. Risk Management and Compliance requirements for Category III AIFs employing leverage Category III AIFs that employ leverage have to comply with the following risk management requirements:

1. The AIF should have a comprehensive risk management framework along with an independent risk management function which shall be appropriate to the size, complexity and risk profile of the fund.
2. Presence of a strong and independent compliance function appropriate to the size, complexity and risk profile of the fund. The same shall be supported by sound and controlled operations and infrastructure, adequate resources and checks and balances in operations.
3. Appropriate records of the trades/transactions performed shall be maintained and such information should be available to SEBI, whenever sought.
4. Full disclosure and transparency about conflicts of interest should be made to the investors. Further, how such conflicts are managed from time to time shall also be disclosed in accordance with Regulation 21 of the AIF Regulations and any other guidelines as may be specified by SEBI from time to time. The details of such conflicts shall be disclosed to the investors in the placement memorandum and by separate correspondences as and when such conflicts arise. Such information shall also be disclosed to SEBI as and when required by SEBI.

Redemption Norms for open-ended Category III AIFs

1. The Manager of these AIFs should ensure that there is a sufficient degree of liquidity of the scheme/ fund so that it meets redemption obligations and other liabilities.
2. The Manager shall establish, implement and maintain a liquidity management policy and process so that the liquidity of the various underlying assets is consistent with the overall liquidity profile of the fund/scheme while making any investment.
3. The Manager shall disclose any possibility of suspension of redemptions to the investors in the placement memorandum
4. Suspension of redemptions shall be justified by the Manager only if such suspension is in the best interest of the investors of the AIF or if such suspension is required under the AIF regulations or SEBI
5. Operational capability shall be built by the Managers of such AIF so that redemption can be suspended in an efficient manner. No new subscriptions shall be accepted during the suspension of redemptions.
6. The Manager shall communicate to SEBI the decision of suspension along with the reason for such suspension and the same shall be appropriately documented.
7. The Manager shall review the suspension regularly and take all necessary steps to resume operations in the best interest of the investors.
8. It shall be the duty of the Manager to keep the SEBI informed about the actions undertaken throughout the suspension and also the decision to resume normal operations.

Category III AIFs undertaking leverage shall have to comply with the prudential requirements (calculation of leverage, total exposure, etc) as laid down in the Circular. Compliance requirements in case of breach of leverage limits for Category III AIFs Category III AIFs shall ensure that adequate systems are in place to monitor their exposure so that the leverage does not exceed at any time beyond the prescribed limits. The AIF shall report to the custodian on a daily basis the amount of leverage at the end of the day (based on closing prices) and whether there has been any breach of limit. Such reporting shall be done by the end of the next working day (as per Circular No. CIR/IMD/DF/14/2014 dated 19 June 2014). Reporting requirements in case of breach of limit:

1. AIF shall send a report to the custodian in case of any breach of limit. The custodian shall report to SEBI providing a name of the fund, the extent of breach and reasons for the same before 10 A.M. on the next working day.
2. A report shall be sent to all the clients stating that there has been a breach in the limit along with reason, before 10 A.M. of the next working day
3. The AIF shall square off the excess exposure and bring back the leverage within the prescribed limit by end of next working day. However, an action may be taken by SEBI against the AIF under SEBI (Alternative Investment Funds) Regulations, 2012 or the SEBI Act.
4. A confirmation of squaring off of the excess exposure shall be sent to SEBI by the custodian by end of the day on which the exposure was squared off.

Author: Ms. Alivia Das