Key changes notified by SEBI impacting Alternate Investment Funds in India


Alternative investment funds (AIFs) are governed by Securities and Exchange Board of India (SEBI) under the SEBI (Alternative Investment Funds) Regulations, 2012 (‘AIF Regulations'). Prior to 2012, AIFs were governed by the SEBI (Venture Capital Funds) Regulations, 1996. With the introduction of AIF Regulations, the SEBI has been streamlining and easing the process of setting up of AIFs.

During this year, 2020, SEBI has issued many circulars on administration, disclosures etc. This blog covers highlights of the circulars of SEBI issued in 2020. We had written the below posts earlier, which might help as a primer / pre-read.

Alternative Investment Funds in India: A Brief Introduction

Post Formation Compliance Requirements for Alternative Investment Funds

SEBI - Overseas Investment by Alternate Investment Funds

Key changes in 2020 applicable to AIFs:

Circular 1: Disclosure standards for Alternate Investment Funds (AIFs)

SEBI issued a Consultation Paper on 4 December 2019 seeking public comments on ‘Introduction of Performance Benchmarking’ and ‘Standardization of Private Placement Memorandum (PPM) for AIFs’. Considering inputs from public and deliberations in Alternative Investment Policy Advisory Committee (AIPAC), SEBI decided to introduce standard template(s) for PPM basis the different category of AIF. However, this is subject to certain exemptions, and mandatory performance benchmarking for AIFs with provisions for additional customized performance reporting.

The key highlights of the circular dated 6 February 2020 issued to all AIFs which captures the inputs received as part of consultation paper is provided below:

Private Placement Memorandum

  • Mandatory disclosures and format of PPM:
  • To ensure minimum standard of disclosure is detailed in the PPM, a standard template is provided to mandatorily provide certain minimum level of information in a simple and comparable format. AIFs can, of-course, provide additional information in their PPM.
  • The format of the PPM has 2 parts:
    • Part A –for minimum disclosures (mandatory), and
    • Part B – supplementary section to allow full flexibility to the AIF in order to provide any additional information.
  • Separate templates have been provided for Category I & II and Category III.
  • Annual Audit:
    • The AIFs shall conduct mandatory audits by either internal or external auditor/legal professional. This is to ensure that the AIF is in compliance with the terms of PPM.
    • The findings of the audit, along with corrective steps, if any, shall be communicated to the Trustee or Board or Designated Partners of the AIF, Board of the Manager and SEBI.
  • Aligning Contribution Agreement with PPM:
    • The terms of contribution or subscription agreement, should be aligned to the terms of the PPM.
  • Exceptions to AIFs
  • Following funds are exempted from the mandatory disclosures requirement as required in Part-A of the PPM template and also annual audit requirements as provided herein above:
    • Angel Funds as defined in SEBI (Alternative Investment Funds), Regulations 2012;
    • AIFs/Schemes in which each investor commits to a minimum capital contribution of INR 70 crores (USD 10 million or equivalent, in case of capital commitment in non-INR currency). This exemption is available only if such investors agrees to provide waiver as provided in Annexure III of this circular.

Performance Benchmarking of AIFs

  • In view of establishing a comparative analysis of the performance a performance benchmarking of AIFs has been mandated. Further, this would also help investors in assessing the performance and help in making their investment decisions.
    • Mandatory benchmarking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.
    • A framework for facilitating the use of data collected by Benchmarking Agencies to provide customized performance reports.
    • Notification of Benchmarking Agencies Any association of AIFs (“Association”), which in terms of membership, represent at least 51% of the number of AIFs, may notify one or more Benchmarking Agencies to carry out the benchmarking process.
    • AIF shall enter into an agreement with Benchmarking Agencies for carrying out the process. The agreement between the Benchmarking Agencies and AIF 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.
    • AIF, for all their schemes that has completed at least one year from the date of ‘First Close’, shall provide all the necessary information to the Benchmarking Agencies.
    • In the PPM, as well as in any marketing or promotional or other material, where past performance of the AIF is mentioned, the performance versus benchmark report provided by the benchmarking agencies for such AIF shall also be provided.
    • Association and Benchmarking Agencies will ensure that the first industry benchmark and AIF level performance versus Benchmark Reports are available latest by 1 July 2020, for providing the data regarding the performance upto September 30, 2019. Due to the covid pandemic, the dates have been extended. Further the Association shall submit a progress report in this regard to SEBI on a monthly basis till the creation of first industry benchmark.
    • The operational guidelines for performance benchmarking are provided at Annexure 4 of this circular.
    • The requirements benchmarking process requirement shall not apply to Angel Funds registered under sub-category of Venture Capital Fund under Category I -AIF.

Circular 2: Impact of changes to Stamp Act on Alternate Investment Funds

The Finance Bill, 2019 has amended the Indian Stamp Act, 1899 (Amended Stamp Act) to introduce a single point for collection of stamp duty by authorized/collecting agents for issuance and transfer of securities and subsequent disbursement of the duty collected to the respective states. At present, collection of stamp duty on stock exchange transactions has led to multiple rates for the same instrument, resulting in jurisdictional disputes and multiple incidences of duty, thereby raising the transaction costs and hurting capital formation.

One of the key amendments is that the responsibility to collect stamp duty is now with the Stock Exchanges, Clearing Corporation and Depositories. Accordingly, the definition of Depository has been amended to include Registrars to an Issue & Share Transfer Agents (RTAs) as a collecting agent which poses responsibilities of collecting stamp duty in terms of any transactions effected otherwise than through a recognised stock exchange or depository. These amendments are effective from 1 July 2020.

In line with the Amended Stamp Act, the SEBI on 30 June 2020 has issued circular to all Alternate Investment Funds (AIFs) and RTAs to comply with the Amended Stamp Act.

Way forward

  1. AIFs to appoint RTAs In case the AIFs has not appointed an RTA, then it should appoint on or before 15 July 2020 to enable collection of applicable stamp duty on issue, transfer and sale of units of AIFs. RTAs already appointed by AIFs shall collect the stamp duty on issue, transfer and sale of units of AIFs.
  2. Transitional Provision While the Amended Stamp Act is effective from 1 July 2020, till the time AIFs appoint RTA as mentioned above, it shall keep the stamp duty on issue, transfer and sale of units of AIFs in a designated bank account. Upon RTA’s appointment, AIFs shall transfer the amount so collected to RTA upon appointment for onward remittance to States / Union Territories as per the provisions of Indian Stamp Act, 1899 and the Rules.
  3. Transactions carried out on Stock Exchanges Transactions carried out through recognized Stock Exchange or Depository, then respective Stock Exchange/authorized Clearing Corporation or a Depository is already empowered to collect stamp duty as per the Amended Stamp Act and the rules made thereunder.

Circular 3: Changes to eligibility criteria for key investment team & responsibilities of the Investment Committee

On 19 October 2020, SEBI (Alternative Investment Funds) (Amendment) Regulations, 2020 (Amendment Regulations) was notified, to widen the eligibility criteria of key investment team and the defined responsibilities of the members of the investment committee.

The Amendment Regulations revised the eligibility criteria of the key investment team and mandated to have the following persons as its members:

  1. At least one person having adequate experience of not less than five years in advising or managing pools of capital or in fund or asset or wealth or portfolio management or the business of buying, selling and dealing of securities or other financial assets; and
  2. At least one person with professional qualification in finance, accountancy, business management, commerce, economics, capital market or banking from a university or an institution recognized by the Central Government or any State Government or a foreign university, or a CFA charter from the CFA institute or any other qualification as may be specified by the Board.

Additionally, SEBI has made Manager as a responsible person for all investment decisions of the Fund. However, the Manager may also delegate such decision-making powers to a separate investment committee. In so:

  1. The members of such investment committee shall be equally responsible as the Manager for investment decisions of the AIF.
  2. The Manager and members of the Investment Committee shall jointly and severally ensure that the investments of the Fund comply with the provisions of AIF Regulations, the terms of the placement memorandum, agreement obligations with the investor, any other fund documents and any other applicable law.
  3. External members of the investment committee whose names are not disclosed in the placement memorandum or any other fund documents at the time of onboarding investors, shall be appointed to the investment committee only with the consent of at least seventy five percent of the investors by value of their investment in the Alternative Investment Fund or scheme.

Circular 4: Processing of applications for registrations of AIFs and launch of schemes

While processing applications for registration of AIFs and launch of new schemes, SEBI has observed that the Manager of AIF often proposes to set up an Investment Committee with the mandate to provide investment recommendations or advice to the Manager. In some applications, the Investment Committee is mandated to approve the investment decisions of the AIF. Such Investment Committees may consist of internal members (employees, directors or partners of the Manager) and/ or external members.

Additionally, on 19 October 2020, SEBI amended the AIF Regulation to allow the Manager to constitute an Investment Committee (by whatever name it may be called) to approve investment decisions of the AIF, subject to certain conditions laid down in Amendment Regulation.

Considering the Amendment Regulations, SEBI has written to Government and RBI seeking clarity on the applicability of clause (4) of Schedule VIII under FEM (Non-debt Instruments) Rules, 2019 to the investment made by an AIF whose Investment Committee approves investment decisions and consists of external members who are not ‘resident Indian citizens’. Until the clarification is received from Government/RBI as the case may be, the applications for registration of AIFs and launch of new schemes shall be dealt by SEBI in terms of its circular dated 22 October 2020 (Circular) as under:

  1. The applications wherein Investment Committee proposed to be constituted to approve investment decisions of AIF includes external members who are ‘resident Indian citizens', shall be duly processed;
  2. The applications wherein Investment Committee proposed to be constituted to approve investment decisions of AIF includes external members who are not ‘resident Indian citizens’, shall be considered only after receipt of clarification as stated above.

We are of the opinion, that SEBI is taking many steps to making India an investment hub and also promoting formation of funds in India.

If you want to read further about Opportunities and Challenges for AIFs in India’s first IFSC, GIFT City, Gujarat

Authors: Ms. Sharda Balaji and Mr. Ashwin Bhat with support from the Research Team members Mr. Prakarsh Seth and Mr. Avaneesh Satyang

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