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NISM Series XIX-A practice questions

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Question 1Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Under SEBI (Alternative Investment Funds) Regulations, 2012, which of the following is the minimum corpus required for an Alternative Investment Fund?

  1. Fifty crore rupees
  2. Ten crore rupees
  3. One hundred crore rupees
  4. Twenty crore rupees Correct answer.

Explanation

The SEBI AIF Regulations prescribe a minimum corpus of twenty crore rupees for any AIF scheme. A corpus below this threshold cannot be registered with SEBI as an AIF.

Question 2Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF that invests primarily in unlisted securities of start-ups and early-stage ventures is best classified as which type of fund?

  1. Social impact fund
  2. Infrastructure fund
  3. Venture capital fund Correct answer.
  4. Hedge fund

Explanation

Category I AIFs include venture capital funds, which invest predominantly in unlisted securities of start-ups and early-stage companies. Hedge funds fall under Category III, not Category I.

Question 3Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following best describes the minimum investment requirement for an investor in an AIF?

  1. One crore rupees per investor Correct answer.
  2. Twenty-five lakh rupees per investor
  3. Fifty lakh rupees per investor
  4. Ten lakh rupees per investor

Explanation

SEBI prescribes a minimum investment of one crore rupees per investor in an AIF scheme. This threshold ensures participation by investors with adequate risk capacity.

Question 4Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF that raises capital primarily to invest in debt securities of companies is classified as which of the following?

  1. Private equity fund
  2. Infrastructure fund
  3. Venture capital fund
  4. Debt fund Correct answer.

Explanation

Category II AIFs include debt funds, private equity funds, and funds for distressed assets. A fund investing primarily in debt securities is a debt fund under Category II.

Question 5Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Under the AIF Regulations, which category of funds may employ leverage for the purpose of making investments?

  1. Category III AIFs Correct answer.
  2. Category I AIFs
  3. All categories equally
  4. Category II AIFs

Explanation

Category III AIFs are permitted to use leverage, subject to specified conditions and limits. Category I and II AIFs are generally restricted from employing leverage except for limited operational purposes.

Question 6Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

What is the tenure of registration granted to an AIF under the SEBI AIF Regulations?

  1. Perpetual, subject to renewal Correct answer.
  2. Three years
  3. Five years
  4. Ten years

Explanation

AIF registration is not granted for a fixed short term but continues subject to renewal and compliance with the regulations. The fund must apply for renewal before expiry of the registration period specified by SEBI.

Question 7Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following entities is responsible for appointing a custodian for a Category III AIF?

  1. The trustee or board of directors Correct answer.
  2. The manager
  3. The investors
  4. The sponsor

Explanation

The trustee or board of directors of the AIF is responsible for appointing a custodian where required. The custodian safeguards the fund's assets and ensures compliance with regulatory requirements.

Question 8Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme is required to be wound up and its assets distributed to investors within how many years from the date of registration, unless extended?

  1. Five years
  2. Twelve years
  3. Seven years
  4. Ten years Correct answer.

Explanation

An AIF scheme must be wound up within ten years from the date of registration unless the period is extended with investor consent. This tenure limit ensures funds do not operate indefinitely without review.

Question 9Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF is considering whether it can invest in a single company beyond twenty-five percent of its investible funds. Which statement is most accurate?

  1. It can invest without any concentration limit in a single company
  2. It can invest up to twenty-five percent in a single company, subject to the concentration limits Correct answer.
  3. It can invest up to ten percent in a single company
  4. It can invest up to fifty percent in a single company without restriction

Explanation

Category I AIFs are subject to concentration limits, generally capped at twenty-five percent of investible funds in a single company. These limits manage portfolio concentration risk and protect investors.

Question 10Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager wants to launch a new scheme under an existing registered AIF. What is the correct regulatory approach?

  1. Obtain approval only from the trustee
  2. Launch the scheme without any filing as the AIF is already registered
  3. File the scheme with SEBI along with the prescribed fee and obtain registration Correct answer.
  4. Seek fresh registration for the AIF entity

Explanation

Each scheme of an AIF must be filed with SEBI along with the prescribed fee before launch, even if the AIF entity is already registered. This allows SEBI to review the scheme's terms and compliance.

Question 11Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following investors is eligible to invest in an AIF under the SEBI AIF Regulations?

  1. A retail investor with a net worth of twenty lakh rupees
  2. A person who is not a resident of India without any regulatory approval
  3. An institutional investor meeting the minimum investment threshold Correct answer.
  4. A minor acting through a guardian

Explanation

AIFs are open to institutional investors and high-net-worth individuals who meet the minimum investment threshold of one crore rupees. Retail investors with lower net worth are not eligible.

Question 12Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF invests in unlisted securities of a company that later gets listed. What is the maximum period within which the fund must divest such listed securities?

  1. Within three months of listing
  2. Within two years of listing
  3. Within six months of listing Correct answer.
  4. Within one year of listing

Explanation

Where an investee company of a Category II AIF becomes listed, the fund must divest its holdings within six months of listing. This ensures the fund returns to its mandate of investing in unlisted securities.

Question 13Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF wishes to borrow funds for operational purposes. Which of the following is the most accurate statement regarding borrowing?

  1. Category I AIFs may borrow freely for any purpose
  2. Category I AIFs are absolutely prohibited from borrowing under any circumstances
  3. Category I AIFs may borrow up to fifty percent of the corpus for investments
  4. Category I AIFs may borrow only for meeting temporary shortfall in drawdown, subject to limits Correct answer.

Explanation

Category I AIFs may borrow only to meet temporary shortfalls in drawdown of committed capital, subject to prescribed limits. They cannot borrow for making investments or for general purposes.

Question 14Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF proposes to change its fundamental attributes. What is the required approval mechanism?

  1. Approval by a simple majority of the trustee board
  2. No approval is required as the manager can decide
  3. Approval by the sponsor alone
  4. Approval by at least seventy-five percent of investors by value Correct answer.

Explanation

Changes to fundamental attributes of an AIF scheme require approval of at least seventy-five percent of investors by value. This protects investor interests in significant scheme changes.

Question 15Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following best describes the role of a sponsor in an AIF?

  1. To manage the day-to-day investment decisions of the fund
  2. To provide capital and bear the risk of the fund's operations Correct answer.
  3. To distribute the fund's units to investors
  4. To act as custodian of the fund's assets

Explanation

The sponsor establishes the AIF and provides capital, bearing a significant portion of the fund's risk. The manager handles investment decisions while the custodian safeguards assets.

Question 16Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF is evaluating whether to invest in a company that is already listed. Which statement is most accurate?

  1. Category II AIFs are absolutely prohibited from holding any listed securities
  2. Category II AIFs may invest in listed securities only to the extent permitted and generally not as a primary strategy Correct answer.
  3. Category II AIFs may invest in listed securities without restriction
  4. Category II AIFs may invest only in government securities

Explanation

Category II AIFs primarily invest in unlisted securities, though limited investment in listed securities may be permitted incidentally. Holding listed securities as a primary strategy is not consistent with the category's mandate.

Question 17Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager is structuring a fund where the sponsor will contribute a minimum of what percentage of the corpus?

  1. Five percent
  2. Ten percent
  3. Two and a half percent Correct answer.
  4. Twenty percent

Explanation

The sponsor or manager of an AIF is generally required to contribute a minimum of two and a half percent of the corpus or fifty lakh rupees, whichever is lower. This aligns the sponsor's interest with investors.

Question 18Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following is a key distinction between Category I and Category II AIFs?

  1. Category I funds are open-ended, while Category II funds are closed-ended
  2. Category I funds invest in start-ups and infrastructure, while Category II funds invest in debt and private equity Correct answer.
  3. Category I funds may use leverage, while Category II funds cannot
  4. Category I funds are registered, while Category II funds are unregistered

Explanation

Category I AIFs focus on start-ups, early-stage ventures, infrastructure, and social impact sectors, while Category II AIFs include private equity and debt funds. Both categories are closed-ended and registered with SEBI.

Question 19Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme raises capital from investors in tranches. What is the maximum period within which the scheme must be launched after registration?

  1. Eighteen months Correct answer.
  2. Six months
  3. Two years
  4. One year

Explanation

An AIF scheme must be launched within eighteen months of registration, extendable by six months with SEBI approval. This ensures registered schemes are activated within a reasonable timeframe.

Question 20Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF invests in a social impact project. Which of the following is a requirement specific to social impact funds?

  1. They must invest at least fifty percent in social impact projects
  2. They must invest at least twenty-five percent in social impact projects
  3. They must invest at least seventy-five percent in social impact projects Correct answer.
  4. They must invest entirely in social impact projects

Explanation

Social impact funds under Category I must invest at least seventy-five percent of their investible funds in social impact projects. This ensures the fund's mandate remains focused on its stated social objectives.

Question 21Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager is considering whether a Category III fund can invest in derivatives for hedging and speculation. Which statement is most accurate?

  1. Category III funds may use derivatives only for hedging
  2. Category III funds are prohibited from using derivatives
  3. Category III funds may use derivatives for both hedging and taking exposure, subject to conditions Correct answer.
  4. Category III funds may use derivatives only for speculation

Explanation

Category III AIFs may use derivatives for both hedging and taking exposure, subject to conditions and limits prescribed by SEBI. This flexibility supports complex strategies typical of such funds.

Question 22Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF is winding up its operations. What is the priority order for distribution of assets to stakeholders?

  1. Investors first, then creditors, then sponsor
  2. Creditors first, then investors, then sponsor Correct answer.
  3. Equal distribution among all stakeholders
  4. Sponsor first, then investors, then creditors

Explanation

On winding up, creditors are paid first from the fund's assets, followed by investors, and any residual amount goes to the sponsor. This reflects standard priority in liquidation.

Question 23Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF scheme has completed ten years. What options are available to the fund manager regarding extension?

  1. The scheme must be wound up immediately without any extension option
  2. The scheme may be extended indefinitely without any approval
  3. The scheme may be extended by up to five years automatically
  4. The scheme may be extended by up to two years with investor consent and SEBI approval Correct answer.

Explanation

An AIF scheme may be extended by up to two years beyond the ten-year tenure with investor consent and SEBI approval. This allows orderly liquidation of remaining investments.

Question 24Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following best describes the reporting obligation of an AIF to its investors?

  1. Reports only on request
  2. Annual reports only
  3. No reporting requirement as AIFs are private funds
  4. Quarterly reports on performance and portfolio to investors Correct answer.

Explanation

AIFs must provide investors with periodic reports, typically quarterly, covering performance and portfolio details. This transparency enables investors to monitor their investments effectively.

Question 25Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager wants to determine the maximum leverage permitted for a Category III fund. Which of the following is most accurate?

  1. Leverage is prohibited for Category III funds
  2. Leverage may be up to two times the net asset value, subject to conditions Correct answer.
  3. Leverage may be unlimited with no restrictions
  4. Leverage may be up to ten times the net asset value

Explanation

Category III AIFs may employ leverage up to two times the net asset value, subject to conditions prescribed by SEBI. This limit balances flexibility with investor protection.

Question 26Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Under the SEBI AIF Regulations, a Category I AIF that is an angel fund must invest its corpus primarily in which type of instrument?

  1. Debt securities of listed mid-cap companies
  2. Equity shares or equity-linked instruments of early-stage venture capital undertakings Correct answer.
  3. Units of open-ended mutual fund schemes
  4. Commodity derivatives traded on recognised exchanges

Explanation

Angel funds fall within the venture capital sub-category of Category I and are mandated to channel their investible funds into equity or equity-linked instruments of start-ups and early-stage ventures. This early-stage equity focus is what distinguishes them from debt-oriented or listed-security strategies.

Question 27Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF's scheme holds a mix of unlisted securities and cash awaiting deployment. Which statement correctly describes the permitted treatment of uninvested cash under the regulatory framework?

  1. It may be used freely for speculative trading in derivatives
  2. It may be parked in government securities, T-bills, or similar low-risk instruments pending deployment Correct answer.
  3. It must be returned to investors immediately upon receipt
  4. It must be invested in the sponsor's own group companies

Explanation

Pending deployment, an AIF scheme may hold uninvested amounts in low-risk liquid instruments such as government securities, T-bills or money market instruments. This protects investor capital while the manager identifies eligible portfolio investments.

Question 28Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which document must an AIF issue to each investor at the time of accepting their commitment, setting out the scheme's investment objective and terms?

  1. A draft scheme information document approved by SEBI
  2. A contribution agreement along with a private placement memorandum Correct answer.
  3. A credit rating rationale prepared by a rating agency
  4. A monthly fact sheet filed with the exchange

Explanation

AIF schemes are privately placed, so the manager issues a private placement memorandum describing the scheme and a contribution agreement recording the investor's commitment. There is no public offer document approval process as with mutual funds.

Question 29Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An investor is reviewing the fee structure of a Category II AIF scheme. Which of the following is the most accurate description of the regulatory position on fees?

  1. Only a fixed management fee is permitted and performance fees are prohibited
  2. Fees must match the maximum expense ratio prescribed for mutual fund schemes
  3. The manager may charge a management fee and a performance-linked fee, both disclosed in the placement memorandum Correct answer.
  4. Fees may be charged only after the scheme is fully wound up

Explanation

AIF regulations permit both a management fee and a performance-linked fee, provided the basis is clearly disclosed in the private placement memorandum and contribution agreement. There is no mutual-fund style expense ratio cap for AIFs.

Question 30Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which regulator is responsible for registering and supervising Alternative Investment Funds in India?

  1. PFRDA
  2. IRDAI
  3. SEBI Correct answer.
  4. Reserve Bank of India

Explanation

SEBI administers the AIF Regulations and grants registration to AIFs through their sponsors or managers. The other regulators oversee banking, insurance and pensions respectively.

Question 31Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme's investors include a foreign investor. Which statement about foreign investment in AIFs is most accurate?

  1. Foreign investment is permitted only in Category III funds
  2. Foreign investors must route investments exclusively through portfolio management schemes
  3. Foreign investors may invest subject to the foreign exchange regulations and applicable FDI rules Correct answer.
  4. Foreign investors are entirely barred from subscribing to AIF units

Explanation

Foreign investors can participate in AIFs, but their investment must comply with FEMA and the foreign direct investment framework applicable to the underlying sectors. The AIF route does not exempt them from those rules.

Question 32Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF is set up as a trust. Which entity typically holds the assets of the scheme on behalf of investors?

  1. The investors jointly in a dematerialised pool
  2. The trustee, with the manager conducting investment operations Correct answer.
  3. The custodian, which also decides investment strategy
  4. The sponsor in its own name

Explanation

In a trust-structured AIF, the trustee holds the scheme assets for the benefit of investors while the manager runs the investment function. This separation supports independent safeguarding of assets.

Question 33Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following statements about the minimum investment threshold for an AIF investor is correct?

  1. Each investor other than specified exempt categories must commit at least one crore rupees Correct answer.
  2. There is no minimum commitment and any amount is accepted
  3. The minimum commitment is fifty lakh rupees for all investors
  4. The minimum commitment applies only to Category III funds

Explanation

The AIF framework prescribes a minimum commitment of one crore rupees per investor, with relaxations for certain specified categories such as employees of the manager or sponsor. This ensures participation by investors capable of bearing the associated risk.

Question 34Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager is preparing the scheme's investment strategy for a Category I fund focused on infrastructure. Which feature most accurately characterises Category I funds?

  1. They may freely short-sell securities to generate alpha
  2. They invest in sectors or areas that the government or regulator considers socially or economically desirable Correct answer.
  3. They are permitted unlimited leverage to boost returns
  4. They must invest at least half the corpus in listed equity

Explanation

Category I covers venture capital, SME, infrastructure and social impact funds, which target areas the government or regulator deems economically or socially desirable. They receive certain regulatory incentives in recognition of this role.

Question 35Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF scheme has a tenure of eight years. What is the standard position on extension of the scheme's tenure?

  1. It may be extended by up to two years with the approval of two-thirds of unit holders by value Correct answer.
  2. It can be extended indefinitely at the manager's discretion
  3. It may be extended only with prior SEBI approval in every case
  4. It cannot be extended under any circumstances

Explanation

Where the scheme's tenure is not specified in the regulations, the AIF may extend it by up to two years with the consent of two-thirds of unit holders by value. Further extension requires a different approval route.

Question 36Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF's manager wants to co-invest alongside the scheme in a portfolio company. Which statement best reflects the regulatory approach to such conflicts?

  1. Co-investment is permitted only if the manager invests through a separate Category III fund
  2. The conflict must be disclosed and addressed through the scheme's conflict-of-interest policy approved by the trustee or board Correct answer.
  3. Co-investment requires no disclosure if the amount is small
  4. Co-investment by the manager is prohibited in all circumstances

Explanation

AIF regulations require managers to identify and manage conflicts of interest, with disclosure and a policy framework overseen by the trustee or board. Co-investment is not banned outright, but it must be transparently handled.

Question 37Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme intends to invest in a portfolio company where the sponsor holds a significant stake. What is the appropriate regulatory treatment of such a related-party investment?

  1. It requires the prior written consent of every single investor in the scheme
  2. It should be assessed under the scheme's conflict policy and disclosed, with pricing at arm's length Correct answer.
  3. It is permitted without any review as sponsors commonly hold portfolio stakes
  4. It is automatically void and must be unwound immediately

Explanation

Related-party investments are not prohibited, but they must be evaluated under the AIF's conflict-of-interest policy and priced at arm's length to protect investors. Disclosure to investors is part of that process.

Question 38Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which of the following best describes the difference between a Category I and a Category II AIF in terms of regulatory incentives?

  1. Category I funds may receive incentives such as pass-through taxation, while Category II funds generally do not Correct answer.
  2. Category II funds receive more tax and regulatory benefits than Category I funds
  3. Both categories are treated identically for all tax and incentive purposes
  4. Only Category II funds are eligible for pass-through status

Explanation

Category I AIFs are given certain incentives, including pass-through taxation for the fund's income, reflecting their role in desirable sectors. Category II funds do not receive the same pass-through treatment.

Question 39Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager plans to launch a scheme that will invest in units of other AIFs. Which statement is most accurate about such fund-of-funds structures?

  1. Fund-of-funds structures are prohibited for all AIFs
  2. Such a scheme automatically qualifies as Category I
  3. Investing in other AIFs is permitted only for Category III funds
  4. A scheme investing primarily in units of other AIFs would generally fall under Category II if it does not qualify as a Category I fund Correct answer.

Explanation

AIFs that invest in other AIFs and do not meet the criteria for Category I generally fall within Category II. The categorisation depends on the fund's investment strategy and the regulatory definitions.

Question 40Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF scheme is in its final year and needs to dispose of its remaining unlisted holdings. Which statement best describes the manager's obligation to investors during this phase?

  1. The manager must hand over holdings to the sponsor at cost
  2. The manager must liquidate investments and distribute proceeds in accordance with the scheme's winding-up provisions Correct answer.
  3. The manager may indefinitely defer liquidation without any approval
  4. The manager may transfer the remaining holdings to a new scheme without investor consent

Explanation

At the end of the scheme's tenure, the manager must liquidate the portfolio and distribute proceeds to investors under the winding-up provisions. Any extension of the tenure requires the prescribed unitholder approval.

Question 41Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme receives a large capital commitment from a single investor exceeding the usual concentration. What is the regulatory position on investor concentration in an AIF scheme?

  1. A single investor may hold the entire corpus if the sponsor approves
  2. There are no concentration limits and one investor may hold the entire corpus
  3. Concentration limits apply only to Category III schemes
  4. Concentration limits apply to prevent a single investor from holding an excessive share of the scheme's corpus Correct answer.

Explanation

The AIF framework prescribes limits on the proportion of the corpus that a single investor may hold, to avoid excessive concentration. These limits apply across categories, subject to specified exceptions.

Question 42Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF invests in a start-up and later wants to invest additional capital in the same company. Which statement best reflects the regulatory considerations?

  1. Further investment is permissible subject to the scheme's investment strategy and any sectoral or concentration limits Correct answer.
  2. Further investment in the same company is prohibited once an initial investment is made
  3. Further investment is allowed only if the start-up is already profitable
  4. Further investment requires the prior approval of SEBI in each instance

Explanation

Follow-on investment is generally permitted, provided it fits the scheme's stated strategy and complies with applicable concentration or sectoral limits. It does not require case-by-case SEBI approval.

Question 43Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

Which statement correctly describes the role of the manager in an AIF scheme?

  1. The manager sets the regulatory limits applicable to the scheme
  2. The manager makes investment decisions and operates the scheme under the oversight of the trustee or board Correct answer.
  3. The manager holds the scheme assets in its own name
  4. The manager guarantees a minimum return to investors

Explanation

The manager is responsible for investment decisions and day-to-day operation of the scheme, subject to oversight by the trustee or board. Asset custody and regulatory limits sit elsewhere.

Question 44Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF proposes to appoint a new auditor for its scheme. Which statement is most accurate regarding the audit requirement for AIF schemes?

  1. Audits are required only when the scheme is wound up
  2. Audits are required only for Category III schemes
  3. Audits are optional and depend on investor demand
  4. The scheme's accounts must be audited annually and the audit report furnished to investors and SEBI Correct answer.

Explanation

AIF schemes are subject to annual audit, and the audited accounts and report are provided to investors and submitted to SEBI. This supports transparency on valuation and performance.

Question 45Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF scheme's valuation of an unlisted portfolio company becomes disputed. Which approach best reflects the regulatory expectation?

  1. The manager may set any valuation it considers reasonable without documentation
  2. Valuation is determined solely by the sponsor's board
  3. Valuation must always equal the acquisition cost
  4. Valuation should follow a documented policy, with independent valuation for unlisted securities as required Correct answer.

Explanation

AIFs must adopt a documented valuation policy, and unlisted securities are typically valued with independent input. This ensures fair treatment of investors entering or exiting the scheme.

Question 46Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF manager is assessing whether a proposed Category II scheme can accept a commitment from an investor who is a related party of the manager. Which statement is most accurate?

  1. Related-party investors may participate subject to disclosure and the scheme's conflict-of-interest framework Correct answer.
  2. Related-party participation is allowed only in Category III schemes
  3. Related-party investors may participate without any disclosure
  4. Related-party investors are absolutely barred from subscribing

Explanation

Related-party investors are not prohibited, but their participation must be disclosed and managed under the conflict-of-interest framework. Transparency protects other investors from preferential treatment.

Question 47Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category I AIF scheme's investment in a portfolio company is proposed to be sold to another scheme managed by the same manager. Which consideration is most important under the regulatory framework?

  1. The transaction requires only the sponsor's informal consent
  2. The transaction must be conducted at arm's length with proper valuation and conflict disclosure Correct answer.
  3. The transaction is permitted freely because both schemes share a manager
  4. The transaction is prohibited in all circumstances

Explanation

Cross-scheme transactions between funds under the same manager raise significant conflict concerns, so arm's-length pricing, independent valuation and disclosure are essential. The shared manager does not make the transaction automatically acceptable.

Question 48Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme's private placement memorandum states that the scheme may invest up to a certain percentage in a single portfolio company. The manager wishes to exceed this limit. What is the correct course of action?

  1. The manager may exceed the limit whenever it sees a good opportunity
  2. The limit can be exceeded with the sponsor's approval alone
  3. The limit is indicative and has no binding effect
  4. The limit can be changed only through the prescribed approval process for changes to the scheme's terms, with investor consent Correct answer.

Explanation

Investment limits stated in the placement memorandum form part of the scheme's terms, so exceeding them requires the prescribed approval process, typically involving investor consent. The manager cannot unilaterally depart from disclosed limits.

Question 49Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

A Category II AIF is considering investing in a company whose promoters have a history of regulatory violations. Which statement best reflects the manager's obligation?

  1. The manager must automatically reject any company with any regulatory history
  2. The manager may invest without diligence if the expected return is high
  3. The manager should conduct appropriate due diligence and document the basis for the investment decision Correct answer.
  4. The manager must obtain SEBI's prior clearance before investing

Explanation

Managers are expected to exercise due diligence on portfolio companies and document their investment rationale. A regulatory history is a risk factor to be assessed, not an automatic bar or a matter requiring prior SEBI clearance.

Question 50Alternative Investment Funds (Category I and II) distribution - official content domains not enumerated in source

An AIF scheme's investor base includes an investor who wishes to transfer its units to another eligible investor. Which statement best describes the regulatory position on transfer of AIF units?

  1. Units cannot be transferred under any circumstances
  2. Units may be transferred only with the prior approval of SEBI
  3. Units may be transferred to eligible investors subject to the scheme's terms and the minimum investment threshold Correct answer.
  4. Units may be freely transferred to any person without restriction

Explanation

AIF units are transferable to eligible investors, subject to the terms of the scheme and compliance with the minimum investment threshold. Transfers to ineligible persons are not permitted.