NISM Series XIX-D cheat sheet

SEBI (Alternative Investment Funds) Regulations, 2012 define an AIF as a privately pooled investment vehicle collecting funds from investors for investment in accordance with a defined investment policy; it excludes mutual funds, collective investment schemes, family trusts, employee benefit funds and holding companies.

Category I AIFs invest in start-ups, early-stage ventures, SMEs, infrastructure or social impact sectors, and include Venture Capital Funds, SME Funds, Infrastructure Funds and Social Impact Funds; they are considered to have positive spillover effects on the economy.

Category II AIFs are private equity funds and debt funds that do not undertake leverage other than for operational requirements and do not fall in Category I or III; they may invest in unlisted securities and in listed securities subject to limits.

Minimum corpus per scheme is INR 20 crore, and each investor's minimum commitment is INR 1 crore; for angel funds the minimum corpus is INR 10 crore and minimum commitment INR 25 lakh, with a maximum of 49 angel investors.

The fund must be constituted as a trust, company, LLP or body corporate; the sponsor or manager must have a minimum continuing interest of 2.5% of the corpus or INR 5 crore, whichever is lower, in Category I and II schemes, locked in until the scheme is wound up.

A scheme may have a maximum of 1,000 investors, and the manager must disclose the investment strategy, fees, expenses and any material changes to investors; the fund cannot accept investments from an investor below the minimum commitment threshold.

Category I and II AIFs may accept funds in instalments linked to drawdowns, but the total corpus must be disclosed; the manager must maintain records, file periodic reports with SEBI, and comply with valuation, audit and related-party transaction norms.

The manager must appoint a custodian if the corpus exceeds INR 500 crore (mandatory for Category III; for Category I and II custodianship is required where specified), and must ensure proper segregation of fund assets from manager and sponsor assets.

AIFs must be registered with SEBI before commencing operations; the application is made in the prescribed form with fees, and registration is valid until surrendered or cancelled; any change in control, sponsor or manager requires prior SEBI approval.

SEBI (AIF) Regulations, 2012, read with the SEBI Act, 1992, form the primary legal basis; the manager must also comply with the Companies Act, 2013 (if constituted as a company), the Indian Trusts Act, 1882 (trust form), the LLP Act, 2008 (LLP form) and the Prevention of Money Laundering Act, 2002.

The manager must be registered with SEBI as an investment manager and must satisfy eligibility criteria including a minimum net worth of INR 20 crore for the manager or the sponsor, or a track record of at least five years in fund management with minimum assets under management.

Key personnel of the manager must meet the 'fit and proper person' criteria prescribed by SEBI, including no conviction for fraud or economic offences, no insolvency, and no regulatory disqualification.

The AIF must appoint a trustee (if trust form), a sponsor, a manager, a custodian, a registrar and transfer agent, and a compliance officer; the trustee oversees the manager and ensures compliance with the regulations.

Related-party transactions must be disclosed to investors and, where material, approved by the trustee or the investment committee; the manager cannot invest more than 25% of the corpus in a single investee company, and not more than 10% in a single company for debt funds, subject to specified exceptions.

AIFs are subject to SEBI inspection and investigation powers; the manager must furnish information, maintain records for at least eight years, and report material changes such as change of sponsor, manager, trustee or control.

Foreign investment in AIFs is governed by FEMA and the RBI's regulations; Category I and II AIFs may receive foreign investment subject to sectoral caps and the conditions in the FDI policy, and the fund must comply with know-your-customer and anti-money laundering norms.

Taxation: Category I and II AIFs are generally treated as pass-through entities for income from investments (except business income), and the manager must handle TDS, GST, and filing obligations under the Income-tax Act, 1961.

The scheme must be launched within 12 months of SEBI registration, and the fund must raise the minimum corpus before the first close; the manager must disclose the first close date and the drawdown schedule to investors.

Valuation of unlisted securities must be done by an independent valuer in accordance with the SEBI-prescribed valuation norms, and the manager must disclose the valuation methodology and any changes to it to investors.

The manager must conduct periodic portfolio reviews, monitor concentration limits, and maintain a risk management framework covering liquidity, credit, market and operational risks; the trustee or investment committee must review the same.

Investor reporting: the manager must provide at least annual reports, audited financial statements, and periodic disclosures on portfolio, fees and expenses; the manager must also disclose any material event within a reasonable time.

The fund must maintain a separate bank account for each scheme, and the manager cannot commingle scheme assets with its own assets or with assets of other schemes; the manager must not use fund assets for its own benefit.

Drawdowns and distributions must follow the terms of the contribution agreement; the manager must not call capital beyond the disclosed corpus without investor consent, and must return uninvested capital within the period specified in the scheme documents.

Winding up: the scheme must be wound up within the period specified in the scheme documents (generally not exceeding the tenure), and the manager must distribute proceeds to investors after settling liabilities; any extension requires investor consent and SEBI notification.

Compliance: the manager must appoint a compliance officer, conduct periodic compliance audits, file quarterly reports with SEBI, and maintain a whistle-blower policy and a code of conduct for employees.

The manager owes fiduciary duties to investors, including the duty of loyalty, duty of care, and duty to act in the best interest of the fund; conflicts of interest must be disclosed and managed.

The manager must disclose all fees, including management fees, performance fees, and any other charges, in the private placement memorandum and contribution agreement; hidden or undisclosed fees are prohibited.

Marketing of AIF schemes must be through private placement only, and the fund must not solicit investments from the public; the manager must ensure that only accredited or eligible investors invest.

The manager must maintain confidentiality of investor information and must not use it for personal benefit; insider trading and front-running are prohibited under the SEBI (Prohibition of Insider Trading) Regulations, 2015.

Governance: the AIF must have an investment committee and, where applicable, an advisory committee of investors; the manager must avoid self-dealing and must obtain investor consent for transactions with related parties.

The manager must have a grievance redressal mechanism and must disclose the same to investors; complaints must be resolved within the prescribed timelines, and the manager must report to SEBI.

Investor protection: the manager must not guarantee returns, must clearly disclose the risks associated with the investment strategy, and must provide investors with the right to exit at the terms specified in the scheme documents.

The manager must ensure that the fund's assets are held in the name of the fund or trustee and are ring-fenced from the manager's creditors; in case of winding up, investors rank ahead of the manager's claims.

Registration process: application to SEBI in Form A with the prescribed fee, due diligence by SEBI, and grant of certificate; the manager must not launch a scheme until registration is granted.

Change in control: any change in the sponsor, manager, trustee or control of the AIF requires prior approval of SEBI and, where applicable, investor consent; failure can lead to cancellation of registration.

Penalties: SEBI may impose penalties, suspend or cancel registration, and issue directions for violations; the manager must respond to show-cause notices and comply with directions.

Investor consent: material changes to the scheme, including changes in investment strategy, fees, or tenure, require the consent of at least 75% of investors by value, unless the scheme documents provide otherwise.

Reporting: the manager must file reports on the SEBI intermediary portal, including quarterly and annual reports, and must report any material litigation or regulatory action.

Record keeping: the manager must maintain records of all transactions, investor communications, and valuations for at least eight years, and must make them available to SEBI on request.

Exemption from certain norms: Category I and II AIFs are not subject to the leverage limits applicable to Category III AIFs, but they must not undertake leverage except for operational requirements.

Ethical obligations: the manager must avoid conflicts, act with integrity, and ensure that the fund's operations are transparent; any violation of the code of conduct can attract regulatory action.

Minimum corpus: INR 20 crore per scheme for Category I and II AIFs (INR 10 crore for angel funds); minimum investor commitment: INR 1 crore (INR 25 lakh for angel funds).

Sponsor/manager continuing interest: 2.5% of corpus or INR 5 crore, whichever is lower, for Category I and II AIFs; this interest must be locked in until the scheme is wound up.

Maximum investors per scheme: 1,000 (excluding the manager, sponsor and their employees); angel funds may have a maximum of 49 angel investors.

Investment limits: a Category I or II AIF may invest not more than 25% of the corpus in a single investee company, and not more than 10% in a single company for debt funds, subject to exceptions for infrastructure and SME funds.

Tenure: the scheme tenure must be disclosed in the scheme documents; extension beyond the tenure requires consent of at least 75% of investors by value and intimation to SEBI.

Valuation frequency: unlisted securities must be valued at least once every six months, and the valuation must be reviewed by an independent valuer annually.

Filing: the manager must file the scheme information document with SEBI before the first close, and must file quarterly reports within 15 days of the end of each quarter.

Winding up: the scheme must be wound up within the tenure, and the manager must distribute proceeds within 30 days of the winding-up decision, after settling liabilities.

The manager must establish a risk management policy covering investment risk, liquidity risk, concentration risk, operational risk and reputational risk, and must review it at least annually.

Concentration limits: the manager must monitor exposure to a single investee, sector and geography, and must report breaches to the trustee or investment committee and to SEBI where required.

Liquidity management: the manager must assess the liquidity profile of the portfolio and disclose redemption or exit terms to investors; for close-ended schemes, exit is generally at the end of the tenure.

Operational risk: the manager must maintain business continuity plans, cybersecurity measures, and segregation of duties; the manager must also ensure that service providers such as custodians and registrars are SEBI-registered.

Compliance function: the compliance officer must monitor regulatory changes, conduct compliance testing, and report to the board or trustee; the manager must maintain a compliance manual.

Audit: the manager must appoint an independent auditor for the fund and must submit the audited financial statements to investors and SEBI within the prescribed timelines.

Conflict of interest: the manager must maintain a conflicts register, disclose conflicts to investors, and obtain consent for transactions where the manager or its associates have an interest.

Whistle-blower policy: the manager must have a policy for reporting unethical behaviour, and must protect whistle-blowers from retaliation; the policy must be disclosed to investors.

The manager must provide investors with a private placement memorandum containing complete and accurate information on the fund, its strategy, risks, fees, and the manager's track record; misleading statements are prohibited.

The manager must not guarantee returns or promise assured returns; any projection must be clearly labelled as an estimate and accompanied by risk disclosures.

Investors must be given the right to inspect the scheme documents and the manager must provide periodic reports on the performance of the fund.

The manager must treat all investors fairly and must not give preferential treatment to any investor unless disclosed in the scheme documents and approved by the trustee.

The manager must not use fund assets for personal expenses, political contributions, or any purpose not permitted by the scheme documents; misappropriation is a criminal offence.

The manager must disclose any litigation, regulatory action, or material adverse event to investors within a reasonable time and must cooperate with regulators.

Ethical marketing: the manager must not make false or misleading claims about past performance, and must present performance net of fees and expenses.

The manager must ensure that the fund's operations are transparent and that investors have access to the trustee or advisory committee for grievances.

SEBI may conduct inspections of AIFs and their managers, and may require the production of records, documents and information; non-cooperation can lead to penalties.

SEBI may issue directions, including disgorgement of profits, refund to investors, and restrictions on the manager's activities, in addition to penalties under the SEBI Act.

Investor grievances can be filed with SEBI through the SCORES platform; the manager must respond within the prescribed timelines, and unresolved grievances may lead to regulatory action.

The manager must maintain a grievance redressal policy and appoint a grievance redressal officer; the details must be disclosed to investors in the scheme documents.

Penalties for violations of the AIF Regulations can include monetary penalties, suspension or cancellation of registration, and debarment of the manager and its key personnel.

The manager must report any material regulatory action, including show-cause notices and penalties, to investors and to SEBI in its periodic reports.

Appeals against SEBI orders lie to the Securities Appellate Tribunal (SAT) within 45 days of the order, and further appeal to the Supreme Court.

SEBI's powers include search and seizure, and the manager must cooperate with investigations; obstruction can attract criminal liability under the SEBI Act.

The private placement memorandum (PPM) must contain the fund's investment objective, strategy, risk factors, fees, expenses, tenure, and the manager's track record and conflicts of interest.

The contribution agreement must specify the investor's commitment, drawdown schedule, distribution waterfall, exit terms, and the consequences of default.

The scheme information document must be filed with SEBI before the first close and must be updated for material changes; the manager must also file a term sheet with SEBI.

The manager must disclose the valuation methodology to investors and must obtain their consent for any change in the methodology.

The manager must provide quarterly reports to investors, including portfolio composition, performance, fees and expenses, and any material developments.

The manager must disclose the identity of the custodian, auditor, registrar and other service providers, and any change must be intimated to investors.

The manager must disclose any side letters or special arrangements with investors, and must ensure that they do not prejudice the interests of other investors.

The manager must maintain a website or investor portal with the scheme documents and periodic reports, and must provide access to investors on request.

Category I and II AIFs are generally pass-through entities for income from investments (other than business income), and the income is taxed in the hands of investors; the manager must issue the necessary tax statements.

The manager must obtain a Permanent Account Number (PAN) for the fund and must comply with TDS provisions under the Income-tax Act, 1961.

GST applies to management fees and other services provided by the manager; the manager must ensure proper invoicing and compliance with GST laws.

The manager must file income tax returns for the fund and must provide investors with the information required for their tax filings, including capital gains and income details.

The manager must comply with the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) reporting requirements, where applicable.

The manager must report to SEBI on a quarterly basis, including the fund's assets under management, portfolio, and any regulatory breaches.

The manager must maintain records of all transactions and valuations for at least eight years, and must make them available to tax authorities and SEBI on request.

The manager must disclose the tax implications of the investment to investors, including the tax treatment of distributions and exits, in the PPM.

The manager must be a company, LLP or body corporate with a minimum net worth of INR 20 crore, or the sponsor must meet this requirement; alternatively, the manager must have a five-year track record with minimum AUM.

Key personnel must satisfy the fit and proper criteria, including no conviction for fraud, no insolvency, and no disqualification by any regulator.

The manager must have a board or governing body with at least one independent director (for companies) or an equivalent governance structure.

The manager must appoint a compliance officer and a risk officer, and must have an investment committee to review investment decisions.

The manager must have a code of conduct for employees, covering confidentiality, conflicts of interest, and personal trading.

The manager must have a succession plan for key personnel and must disclose any change in key personnel to investors and SEBI.

The manager must maintain a conflicts of interest policy and a register of conflicts, and must review it periodically.

The manager must have a business continuity plan and a disaster recovery plan, and must test them periodically.