W&B Overview on Regulatory reporting by AIFs.

Overview:

The Securities and Exchange Board of India ("SEBI") mandated the Alternative Investment Funds ("AIFs") to submit periodical reports to SEBI relating to their activity in order to ensure transparency and disclosure of information.¹ The potential magnitude of capital which can be mobilized through these AIFs if significant for the economy and hence regulatory reporting by AIFs was felt necessary by the SEBI and market stakeholders. However, with the growth and diversification of the Indian securities market, SEBI realized the need to rationalize the existing reporting requirements for AIFs. Therefore, based on the experience gained from the current regulatory framework coupled with the consultation with various stakeholders and recommendations of Alternative Investment Policy Advisory Committee ("AIPAC"), SEBI² decided to review and rationalized the existing reporting requirements for AIFs. The SEBI, with the purpose to provide ease of compliance for AIFs in India issued the circular no. SEBI/HO/IMD/IMD-I/DOF6/CIR/2021/549 dated April 7, 2021 ("Circular")³

Background:
The mandatory periodic reporting by AIFs was introduced on the recommendations of the AIPAC report.4 The raison d'etre for developing regulatory reporting by AIFs was that the funds generate different returns at different stages of their maturity and different macro-economic conditions. Typically, in the early stages of a fund, negative or low returns occur due to capital drawdowns and a portfolio that is yet to mature. Over time returns are higher when the mature portfolio starts generating returns and distributions are made. Consequently, the funds may be classified by the stage, industry and geographical region of the fund which enables the performance of individual fund managers to be benchmarked relative to aggregate industry returns performance data. It was believed by AIPAC that the periodic- monthly or quarterly- reporting by AIFs to SEBI would result in capturing of individual fund performance data which, in turn, could be used to create industry benchmarks.

Furthermore, as per the AIPAC report, an important reason to mandate regulatory reporting by the AIFS was to differentiate between discretionary and trustworthy information. The AIPAC felt it necessary because discretionary information may be more forthcoming in good times than in bad, or when risks appear to be lower. Also, because poorly performing funds usually stop reporting, the investor only receives information about surviving funds, which leads to the problem of "survivor bias." The trust-deficit originating from such skewed information about industry performance can aggravate the concerns of potential investors and thus limit their participation in AIFs.

Therefore, the disclosure of fund level information combined with superior governance can facilitate informed decision-making among investors and can thus be instrumental in bringing a wide swath of investors to invest in AIF.

Salient features:

1. Submission of report to SEBI: All AIFs shall submit report on their activity as an AIF to SEBI on quarterly basis within 10 (ten) calendar days from the end of each quarter. The requirement to include general information about the AIF, information about the schemes of AIF, fund currency information, borrowing details of AIF, major investments by AIF, breakup of investors in AIF, sector-wise investments by AIF, information on co- investment with AIF, information on warehousing of investments by AIF, details of complaints, details of arbitration and reporting of suspension of redemptions is common for AIFs of all categories.
2. Specific requirements for Category- I AIFs: The Circular also prescribes information requirements which are particular to category- I AIF, with a further dissemination between social venture funds, venture capital funds, small and medium enterprises funds (SME funds) and infrastructure funds.
3. Reporting by Category- III AIFs: Category III AIFs shall include report on leverage undertaken on a quarterly basis.
4. Process of submission: The AIFs shall submit the reports to SEBI through SEBI intermediary portal.
5. Intimation to investors and SEBI: Any changes in terms of private placement memorandum and in the documents of the fund/ scheme shall be intimated to investors and SEBI on a consolidated basis within 1 (one) month of the end of each financial year. Such intimation shall specifically mention the changes carried-out in the private placement memorandum and the documents of the fund/scheme, along with the relevant pages of revised sections/clauses.
6. Modifications to earlier framework: The Circular has brought a partial modification to a circular5 issued by SEBI regarding guidelines on disclosures, reporting and clarifications by AIFs. The earlier framework required the changes and modifications carried in terms or documents of the fund/scheme to be intimated to investors and SEBI once every 6 (six) months on a consolidated basis. While, the Circular has brought down the timeline to 1 (one) month.
7. Effective date: The reporting requirements regarding submission of report to SEBI shall be applicable for the quarter ending December 31, 2021. Whereas the provision which requires intimation to investors and SEBI shall come into effect immediately.

W&B view:
This move by SEBI is expected to lead to greater efficiencies, improve uniformity and transparency and lower expenses in administering and monitoring of AIFs. The measures introduced by SEBI, including high level of detailing regarding information to be stated in report submitted to SEBI is highly incisive with increased level of specificity. The step is in the right direction towards ensuring that a sound information ecosystem is created for the AIFs in India given that performance measurement and reporting are key components to enable investors to make informed decisions.

Authored by: Prashaant Rajput, Partner and Arohi Londhe, Associate