Latest Amendments in SEBI (Alternative Investment Funds) Regulations, 2012

The Securities and Exchange Board of India (“SEBI”) in exercise of the powers conferred by sub-section (1) of Section 30 read with sub-section (1) of Section 11, clause (ba) and clause (c) of sub-section (2) of Section 11 and sub-section (1) and (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992has introduced certain amendments to the SEBI (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”) vide the notification number SEBI/LAD-NRO/GN/2021/21 dated May 5, 2021.[1] A brief snapshot of the changes introduced by SEBI has been discussed below:

S. No.

Reference Earlier Position Current Position
1. Definition [Regulation 2 (1) (wa)] _ Insertion of clause (wa) after clause (w) and before clause (x) pursuant to which

“startup” means a private limited company or a limited liability partnership which fulfills the criteria for startup as specified by the Department of Promotion of Industry and Internal Trade, Ministry of Page 2 of 11 Commerce and Industry, Government of India, vide notification no. G.S.R. 127(E) dated February 19, 2019 or such other policy of the Central Government issued in this regard from time to time.”

2. Definition [Regulation 2 (1) (aa)] Venture capital undertaking” means a domestic company:

i.     which is not listed on a recognised stock exchange in India at the time of making investment; and

ii.     which is engaged in the business for providing services, production or manufacture of article or things and does not include following activities or sectors:

1.    non-banking financial companies;

2.    gold financing;

3.    activities not permitted under industrial policy of Government of India;

4.    any other activity which may be specified by SEBI in consultation with Government of India from time to time.

Venture capital undertaking means a domestic company which is not listed on a recognised stock exchange at the time of making investments.
3. Placement Memorandum [Regulation 11(2)] An information or placement memorandum (“IM”) shall contain all material information about the alternative investment fund (“AIF”) and the manager, background of key investment team of the manager, targeted investors, fees and all other expenses proposed to be charged, tenure of the AIF or scheme, conditions or limits on redemption, investment strategy, risk management tools and parameters employed, key service providers, conflict of interest and procedures to identify and address them, disciplinary history, the terms and conditions on which the manager offers investment services, its affiliations with other intermediaries, manner of winding up of the AIF or the scheme and such other information as may be necessary for the investor to take an informed decision on whether to invest in the AIF. The IM shall contain all material information about AIF and the manager, background of key investment team of the manager, targeted investors, fees and all other expenses proposed to be charged, tenure of the AIF or scheme, conditions or limits on redemption, investment strategy, risk management tools and parameters employed, key service providers, terms of reference of the committee constituted for approving the decisions of the AIF, conflict of interest and procedures to identify and address them, disciplinary history, the terms and conditions on which the manager offers investment services, its affiliations with other intermediaries, manner of winding up of the AIF or the scheme and such other information as may be necessary for the investor to take an informed decision on whether to invest in the AIF.
4. General Investment Conditions [Regulation 15(1)] Category I and II AIFsshall not invest more than twenty-five percent (25%) of the investable funds in one investee company. Category I and II AIFsshall not invest more than twenty-five percent (25%) of the investable funds in one investee companydirectly or through investment in the units of other AIFs.
5. General Investment Conditions [Regulation 15(1) (d)] Category III AIF shall invest not more than ten percent (10%) of the investable funds in one investee company. Category III AIF shall invest not more than ten percent (10%) of the investable funds in one investee companydirectly or through investment in the units of other AIFs.
6. General Investment Conditions [Regulation 15(1) (da)] _ Insertion of clause (da) after clause (d) and before clause € pursuant to which:

AIFs which are authorised under the fund documents to invest in units of AIFs shall not to offer their units for subscription to other AIFs.

7. General Investment Conditions [Regulation 15(1) (e)] AIF shall not invest in associates except with the approval of seventy-five percent (75%) of investors by value of their investment in the AIF. AIF shall not invest except with the approval of seventy-five percent (75%) of investors by value of their investment in the AIF in

a)     associates; or

b)     units of AIFs managed or sponsored by its manager, sponsor or associates of its manager or sponsor.

8. Conditions for Category I Alternative Investment Funds[Regulation 16 (1) (a)] Category I AIF shall invest in investee companies or venture capital undertaking or in special purpose vehicles or in limited liability partnerships or in units of other AIFs as specified in these regulation. Category I AIF shall invest in investee companies, venture capital undertakings, special purpose vehicles, limited liability partnerships or in units of other Category I AIFsof the same sub category.
9. Conditions for Category I Alternative Investment Funds[Regulation 16 (1) (b)] Fund of category I AIFs may invest in units of category I AIFs of same sub-category.

Provided that they shall only invest in such units and shall not invest in units of other fund of funds.

Provided further that the investment conditions shall not be applicable to investments by such funds

Omitted
10. Conditions for Category II Alternative Investment Funds[Regulation 17 (a)] Category II AIFs shall invest primarily in unlisted investee companies or in units of other AIFs as may be specified in the IM. Category II AIFs shall invest in investee companies or in the units of category I or other category II AIFs as may be disclosed in the IM.Explanation.– Category II AIF shall invest primarily in unlisted companies directly or through investment in units of other AIFs.
11. Conditions for Category II Alternative Investment Funds[Regulation 17 (b)] Fund of category II AIFs may invest in units of category I or category II AIFs.

Provided that they shall only invest in such units and shall not invest in units of other fund of funds

Omitted
12. Conditions for Category III Alternative Investment Funds[Regulation 18 (a)] Category III AIFs may invest in securities of listed or unlistedinvestee companies or derivatives or complex or structured products. Category III AIFs may invest in securities of listed or unlisted investee companies, derivatives, units of other AIFs or complex or structured products.
13. Conditions for Category III Alternative Investment Funds[Regulation 18 (b)] Fund of category III AIFs may invest in units of category I or category II AIFs.

Provided that they invest solely in such units and shall not invest in units of other fund of funds.

Omitted
14. Investment by Angel Funds[Regulation 19F (1)] Angel funds to invest in venture capital undertakings. Angel funds to invest in startups.
15. Investment by Angel Funds[Regulation 19F (1) (b) and (c)] Angel funds shall invest in venture capital undertakings which:

b)      have a turnover of less than twenty- five crore rupees;

c)       are not promoted or sponsored by or related to an industrial group whose group turnover exceeds three hundred crore rupees.

Omitted
16. General Obligations[Regulation 20] 1.       All AIFs shall review policies and procedures, and their implementation, on a regular basis, or as a result of business developments, to ensure their continued appropriateness.

2.       The sponsor or manager of the AIF shall appoint a custodian registered with SEBI for safekeeping of securities if the corpus of the AIF is more than five hundred crore rupees.

Provided that the sponsor or manager of a category III AIF shall appoint such custodian irrespective of the size of corpus of the AIF.

Provided further that the custodian appointed by category III AIF shall keep custody of securities and goods received in delivery against physical settlement of commodity derivatives.

3.       All AIFs shall inform SEBI in case of any change in the sponsor, manager or designated partners or any other material change from the information provided by the AIF at the time of application for registration.

4.       In case of change in control of the AIF, sponsor or manager, prior approval from SEBI shall be taken by the AIF.

5.       The books of accounts of the AIF shall be audited annually by a qualified auditor.

6.       The manager shall be responsible for investment decisions of the AIF.

Provided that the manager may constitute an investment committee to approve investment decisions of the AIF, subject to the following:

i.            The members of investment committee shall be equally responsible as the manager for investment decisions of the AIF.

ii.            The manager and members of the investment committee shall jointly and severally ensure that the investments of the AIF are in compliance with the provisions of these regulations, the terms of the placement memorandum, agreement made with the investor, any other fund documents and any other applicable law.

iii.            External members whose names are not disclosed in the placement memorandum or agreement made with the investor or any other fund documents at the time of on-boarding investors, shall be appointed to the investment committee only with the consent of at least seventy-five percent (75%)of the investors by value of their investment in the AIF or scheme.

iv.             Any other conditions as specified by SEBI from time to time.

Provided further that clauses (i) and (ii) shall not apply to an AIF in which each investor other than the manager, sponsor, employees or directors of the AIF or employees or directors of the manager, has committed to invest not less than seventy crore rupees (or an equivalent amount in currency other than Indian rupee) and has furnished a waiver to the AIF in respect of compliance with the said clauses, in the manner specified by SEBI.

1.       AIF, key management personnel of the AIF, trustee, trustee company, directors of the trustee company, designated partners or directors of the AIF, as the case may be, managers and key management personnel of managers shall abide by the code of conduct as specified in the Fourth Schedule.

Explanation.– For the purpose of this sub-regulation, ‘key management personnel’ shall have the meaning as specified by SEBI from time to time.

 

2.       The manager and either the trustee or trustee company or the board of directors or the designated partners of the AIF, as the case may be, shall ensure compliance by the AIF with the code of conduct as specified in the Fourth Schedule.

3.       AIFs shall have detailed policies and procedures, as approved jointly by the manager and the trustee or trustee company or board of directors or designated partners of the AIF, as the case may be, to ensure that all the decisions of the AIF are in compliance with the provisions of these regulations, terms of the IM, agreements made with investors, other fund documents and applicable laws.

4.       All AIFs shall review the policies and procedures, other internal policies, if any, and their implementation, on a regular basis or as a result of business developments, to ensure their continued appropriateness. (5)

5.       The manager shall be responsible for every decision of the AIF, including ensuring that the decisions are in compliance with the provisions of these regulations, terms of the placement memorandum, agreements made with investors, other fund documents and applicable laws.

6.       The manager shall be responsible for ensuring that every decision of the AIF is in compliance with the policies and procedures laid down for the AIF in terms of sub regulation (3) of this regulation and other internal policies of the AIF, as applicable.

7.       The manager may constitute an investment committee to approve the decisions of the AIF and such constitution shall be subject to such conditions as specified by SEBI from time to time.

8.       The members of the investment committee shall be responsible for ensuring that the decisions of the investment committee are in compliance with the policies and procedures laid down in terms of sub regulation (3) of this regulation.

Provided that sub-regulation (8) of this regulation shall not apply to an AIF in which each investor other than the manager, sponsor, employees or directors of the AIF or employees or directors of the manager, has committed to invest not less than seventy crore rupees (or an equivalent amount in currency other than Indian rupees) and has furnished a waiver to the AIF in respect of compliance with the said sub-regulation, in the manner as may be specified by SEBI.

9.       The members of the investment committee shall abide by the code of conduct applicable to them as specified in Fourth Schedule.

10.   The external members of the investment committee whose names are not disclosed in the IM or in the agreement made with the investor or any other fund document at the time of on-boarding investors shall be appointed to the investment committee only with the consent of at least seventy-five percent (75%) of the investors by the value of their investment in the AIF or scheme.

11.   The sponsor or manager of the AIFshall appoint a custodian registered with SEBI for safekeeping of the securities if the corpus of the AIF is more than five hundred crore rupees.

 

Provided that the sponsor or manager of a category III AIF shall appoint such a custodian, irrespective of the size of the corpus of the AIF.

Provided further that the custodian appointed by category III AIF shall keep the custody of the securities and goods received in delivery against the physical settlement of commodity derivatives.

 

12.   All AIFs shall inform SEBI in case of any change in the sponsor, manager or designated partners or any other material change from the information provided by the AIF at the time of application for registration.

13.   In case of change in control of the AIF, sponsor or manager, prior approval from SEBI shall be taken by the AIF.

14.   The books of accounts of the AIF shall be audited annually by a qualified auditor.

7. Code of Conduct[Fourth Schedule] _

Inserted Fourth Schedule specifying code of conduct for:

·   AIFs;

·   Managers of AIFs and key management personnel of managers and AIFs;

·   Members of investment committee, trustee, trustee company, directors of the trustee company, directors or designated partners of the AIF.

[1] Available at https://www.sebi.gov.in/legal/regulations/may-2021/securities-and-exchange-board-of-india-alternative-investment-funds-second-amendment-regulations-2021_50089.html.

Dated: May 31, 2021
Author: Prashaant Vikram Rajput, Partner & Head - Capital Markets

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