The Securities and Exchange Board of India (SEBI) has notified amendments1 to the Securities and Exchange Board of India (Alternative Investment Funds) Regulations, 2016 (AIFs Regulations) on 19 October 2020 prescribing conditions for the investment team as well as the investment committee formed by the investment managers of the alternative investment funds (AIFs)
The key amendments are enumerated hereunder:
Eligibility criteria for the investment team of the investment manager
As per the existing Regulation 4(g) of the AIF Regulation, the investment team of the investment manager should have adequate experience and professional qualification with at least one key personnel having relevant professional qualification and a minimum of five years of experience in advising or managing pools of capital or in fund or asset or wealth or portfolio management or in the business of buying, selling and dealing of securities or other financial assets.
Pursuant to the amendment, Regulation 4(g) of the AIF Regulations has been expanded stipulating that investment manager should also ensure that the investment team consist of at least one key personnel having a 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.
It is to be noted that SEBI has allowed both the conditions to be fulfilled by one individual.
Conditions for the investment committee
The amendments have recognized the presence of the investment committee under the AIF Regulations for the first time.
As per the amendments, a new sub-regulation (6) has been added to Regulation 20 in relation to general obligations. As per Regulation 20(6) of the AIF Regulation, the investment manager shall be responsible for investment decisions of the AIF. However, the investment management may constitute an investment committee, to approve the investment decisions of the AIF, subject to the following conditions:
- The committee members shall be equally responsible as the investment manager for the investment decisions of the AIF;
- The investment manager and the 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 private placement memorandum (PPM), an agreement made with the investor, any other fund documents and any other applicable law; and
- External members whose names are not disclosed in the PPM or agreement made with the investor 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 75% of the investors by the value of their investment in the AIF or scheme.
SEBI has been steadily streamlining governance, reporting and compliance vis-à-vis the AIFs over a period of time starting with standardization of the PPMs, PPM audits and the standardization of performance benchmarking for AIFs etc. The eligibility criteria for investment managers will further ensure that the investment management team of the AIF has a relevant, diverse skillset for investment as well as asset management.
The roles and responsibilities of investment committees varied from one AIF to another. These amendments will ensure that the member of the investment committee if appointed, will have equal skin in the game while evaluating recommendations of the investment manager providing clarity on their role and responsibilities. Further, in cases where investment committee has non-residents as members, the role played by the investment committee would also require an evaluation from the perspective of Indian exchange control regulations in terms of the 'control' status for the investment manager. These provisions could also entail a few conflict of interest situations wherein representatives of large/anchor investors can influence investment decision making. The composition of the investment committee would require proper evaluation of the above aspects.
1. SEBI (AIF) (Amendment) Regulation, 2020
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