Alternative Investment Funds

SEBI circular dated 5th February, 2020 on streamlining disclosure standards for Alternative Investment Funds (AIFs)

·        The said circular is based on disclosure standards for AIF which is required to be followed by all AIF.

·        Since there is a significant growth in AIF in current scenario, SEBI has taken an initiative through a Consultation Paper dated on 04^th December 2019 for inviting public opinion on “Introduction of Performance Benchmarking” and “Standardization of Private Placement Memorandum (PPM) for AIF’s”.

·        After invitation of public opinion and also after consultation and deliberation with Alternate Investment Policy Advisory Committee (AIPAC) the SEBI has finally decided to introduce templates for PPM but it shall be subject to certain exemptions and also mandatory performance benchmarking for AIF’s.

·        PPM is a primary document in which all the necessary information about the AIF is disclosed to the investors for making investment decisions. Also in order to ensure that a minimum standard of disclosure is made available in the PPM, now it has been made mandatory to provide certain minimum level of information in a simple and comparable format in accordance with the template provided.

·        Such template consists of 2 parts namely:

o   Party A- Section for minimum disclosure and

o   Part B- Supplementary section to allow full flexibility to the Fund in order to provide any additional information, which it deems fit.

·        The template for PPM of AIFs raising funds under Category I and Category II is provided at Annexure 1.The template for PPM of AIFs raising funds under Category III is provided at Annexure 2.

·        SEBI has also specified that in order to ensure compliance with the terms of PPM, it will be mandatory for AIFs to carry out an annual audit of such compliance. The audit shall be carried out by either internal or external auditor/legal professional. However, audit of sections of PPM relating to ‘Risk Factors’, ‘Legal, Regulatory and Tax Considerations’ and ‘Track Record of First Time Managers’ shall be optional.

·        In case any defect or query arises during the findings of the audit then the same shall be communicated with the Trustee or Board or Designated Partners of the AIF and SEBI.

·        It is to be noted that the terms and conditions pertaining to contribution and subscription agreement shall be in accordance with the terms and conditions of the PPM and it shall not contradict the same.

·        The requirements as mentioned above shall not be applicable to Angel Fund as defined in SEBI (AIF) Regulations 2012 and to AIF’s/Schemes in which each investor commits to a minimum capital contribution of Rs70 crores and also provides a waiver to the fund from the requirement of PPM in the SEBI prescribed template and annual audit of terms of PPM, in the manner provided at Annexure 3.

·        All the above specified requirements shall come into force with effect from 01^stMarch 2020.

·        Secondly the SEBI on receipt of industry request a proposal for performance benchmarking of AIF’s was incorporated in the above mentioned Consultation Paper.

·        Also the industry demands flexibility to showcase the performance of AIF’s based on different criteria so it has been finally decided to introduce:

o   Mandatory benchmarking of the performance of AIFs (including Venture Capital Funds) and the AIF industry.

o   A framework for facilitating the use of data collected by Benchmarking Agencies to provide customized performance reports.

·      As a result of this the following things is mandated:

o   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, with whom each AIF shall enter into an agreement for carrying out the benchmarking process.

o   The agreement entered between the Benchmarking Agencies and AIF’s shall cover the mode and manner of data reporting and other confidential information and etc.

o   AIFs, for all their schemes which have completed at least one year from the date of ‘First Close’, shall report all the necessary information including scheme-wise valuation and cash flow data to the Benchmarking Agencies in a timely manner.

o   Also the form and format of reporting shall be mutually decided by the Association and the Benchmarking Agencies.

o   If an applicant claims a track-record on the basis of India performance of funds incorporated overseas, it shall also provide the data of the investments of the said funds in Indian companies to the Benchmarking Agencies, when they seek registration as AIF.

o   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/Scheme shall also be provided.

o   In any reporting to the existing investors, if performance of the AIF/Scheme is compared to any benchmark, a copy of the performance versus benchmark report provided by the Benchmarking Agency shall also be provided for such AIF/scheme.

o   In the first step Association will appoint Benchmarking Agencies and thereafter will set timeline for reporting of requisite data to Benchmarking Agencies by all the registered AIFs. In this regard, Association and  Benchmarking Agencies  will  ensure  that  the  first  industry  benchmark  and  AIF  level performance versus Benchmark Reports are available latest by July 01, 2020, for the performance up to September 30, 2019. Further the Association shall submit  a  progress  report  in  this  regard  to  SEBI  on  a  monthly  basis  till  the creation of first industry benchmark.

·        It is to be noted that all the operational guidelines in respect of performance benchmarking are provided in Annexure 4 which is divided into 2 parts i.e. Part A and Part B.

·        In case any AIF seeks customized performance report in a particular manner other than as it was decided earlier then the same may be generated by the Benchmarking Agencies and it shall be subject to the following:

o  Consent of the AIFs, whose data needs to be considered for generation of       the customized performance report.

o  Terms and conditions, including fees, decided mutually between the Benchmarking Agencies and the AIF.

·        It is to be noted that the above mentioned requirements is not applicable in case of Angel Funds registered under sub category of Venture Capital Fund under Category I-AIF.

·           The said circular is been issued in exercise of powers mentioned under section 11(1) of SEBI Act , 1992 and also the main object behind this is to protect the interest of investors in securities and to promote and developed the securities market.