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NISM Series XIX-D study materials
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NISM Series XIX-D practice questions

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Question 1Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which of the following is the correct definition of a Category I AIF?

  1. A fund that makes short-term investments with the objective of generating high returns through arbitrage
  2. A fund that invests primarily in the securities of listed companies and uses complex trading strategies
  3. A fund that invests only in real estate and does not undertake any other activity
  4. A fund that invests in start-ups, early-stage ventures, SMEs, infrastructure, or other sectors that the government or regulator considers economically and socially desirable Correct answer.

Explanation

Category I AIFs are those that invest in start-ups, early-stage ventures, SMEs, infrastructure, or other sectors the government or regulator deems economically and socially desirable. They include venture capital funds, SME funds, social impact funds, and infrastructure funds. The defining feature is the desirable policy objective attached to the investment.

Question 2Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following best describes a Category II AIF under the SEBI AIF Regulations?

  1. A fund that invests only in government securities and treasury bills
  2. A fund that employs diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives
  3. A fund that is registered as a mutual fund and operates under the SEBI Mutual Fund Regulations
  4. A fund that does not fall in Category I or III and does not undertake leverage other than as permitted for Category I Correct answer.

Explanation

Category II AIFs are the residual category: they are funds that do not fit into Category I or Category III and do not undertake leverage other than as permitted for Category I. Private equity funds and debt funds are common examples. They must still be registered with SEBI.

Question 3Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

What is the minimum corpus requirement for an Alternative Investment Fund under the SEBI AIF Regulations, 2012?

  1. INR 5 crore
  2. INR 20 crore Correct answer.
  3. INR 50 crore
  4. INR 10 crore

Explanation

The SEBI AIF Regulations prescribe a minimum corpus of INR 20 crore for an AIF. This threshold applies at the fund level and is distinct from the minimum investor commitment. The corpus is calculated from the commitments of all investors.

Question 4Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

What is the minimum investment commitment required from an individual investor in an AIF under the SEBI AIF Regulations?

  1. INR 50 lakh
  2. INR 1 crore Correct answer.
  3. INR 10 lakh
  4. INR 25 lakh

Explanation

The minimum commitment from an investor in an AIF is INR 1 crore. Certain categories of investors, such as employees and fund managers, may have a lower threshold as specified by SEBI. The minimum commitment supports the private placement character of AIFs.

Question 5Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF is permitted to raise funds through which of the following mechanisms?

  1. An offer for sale through a stock exchange listing
  2. A public issue with a prospectus filed with SEBI
  3. Private placement through a placement memorandum, subject to the AIF Regulations Correct answer.
  4. A rights issue to the general public

Explanation

AIFs must raise funds through private placement only, and the placement memorandum must contain the disclosures specified in the AIF Regulations. Public offers are not permitted for AIFs. This preserves the private, sophisticated-investor character of the vehicle.

Question 6Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following is a permitted form for an AIF under the SEBI AIF Regulations?

  1. Only a limited liability partnership
  2. Only a trust
  3. Only a company
  4. A trust, a company, or a limited liability partnership Correct answer.

Explanation

The AIF Regulations permit an AIF to be established as a trust, a company, or a limited liability partnership. The choice affects governance and tax treatment. The regulations apply regardless of the legal form selected.

Question 7Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF that has not been registered with SEBI and wishes to operate in India must do so only if:

  1. It is registered with SEBI as an AIF, or it is exempt under the regulations Correct answer.
  2. It invests only in listed securities
  3. It has a corpus below INR 20 crore
  4. It raises funds exclusively from foreign investors

Explanation

No entity may carry on the business of an AIF unless it is registered with SEBI or is exempt under the AIF Regulations. Registration is the gateway requirement. Operating without registration is a regulatory violation.

Question 8Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following is a recognized category of investor eligible to invest in an AIF?

  1. A resident individual with a minimum commitment of INR 1 crore Correct answer.
  2. A minor through a guardian
  3. Any retail investor with a demat account
  4. A person with an annual income of INR 5 lakh

Explanation

AIFs may accept commitments only from specified categories of investors, and for individuals the minimum commitment threshold must be met. The minimum commitment of INR 1 crore for a resident individual is a recognized eligibility route. Retail investors and persons below the threshold are not eligible.

Question 9Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category II AIF plans to invest in unlisted equity shares of a company. Which of the following statements about its permitted investments is correct?

  1. It may invest in unlisted securities, subject to the investment conditions and concentration limits in the regulations and the placement memorandum Correct answer.
  2. It may invest only in listed securities and cannot invest in unlisted equity
  3. It may invest in unlisted equity only after obtaining a separate mutual fund license
  4. It may invest in unlisted equity only if it also undertakes leverage

Explanation

Category II AIFs, such as private equity funds, may invest in unlisted securities subject to the conditions in the AIF Regulations and the disclosures in the placement memorandum. Concentration and other limits apply. Leverage and mutual fund licensing are not prerequisites for such investment.

Question 10Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is drafting the placement memorandum. Which of the following disclosures is mandated by the SEBI AIF Regulations?

  1. The investment strategy, risk factors, and the terms of the fund Correct answer.
  2. The personal income tax returns of the fund manager
  3. The names of all investors and their holdings
  4. The internal audit report of the fund's auditor

Explanation

The placement memorandum must disclose the investment strategy, risk factors, terms and conditions of the fund, and other specified particulars. These disclosures allow investors to make an informed commitment. Personal tax returns and investor-level details are not mandated disclosures.

Question 11Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF registered as a trust appoints a sponsor and a manager. Which of the following statements about the manager's role is correct?

  1. The manager is responsible for investment decisions and day-to-day operations, and owes fiduciary duties to the fund and its investors Correct answer.
  2. The manager must be a bank regulated by the Reserve Bank of India
  3. The manager is prohibited from charging any fees other than a fixed management fee
  4. The manager has no fiduciary duty to investors and acts only as an advisor

Explanation

The manager of an AIF is responsible for investment decisions and day-to-day operations and owes fiduciary duties to the fund and its investors. The manager's role is central to the AIF governance structure. The regulations also address fees and expenses.

Question 12Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following best describes the fiduciary duty of an AIF manager towards investors?

  1. A duty to act in the best interests of the fund and investors, with honesty, fairness, and disclosure of conflicts Correct answer.
  2. A duty to guarantee a minimum return to all investors
  3. A duty to maximize the manager's own fee income
  4. A duty to invest only in government securities

Explanation

An AIF manager must act in the best interests of the fund and its investors, dealing honestly and fairly and disclosing conflicts of interest. The manager cannot guarantee returns. Fiduciary duty is a core obligation under the AIF framework.

Question 13Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF proposes to charge a performance-linked fee to its investors. Which statement is correct under the SEBI AIF Regulations?

  1. Performance fees may be charged only if the fund generates a loss
  2. Performance fees are permitted subject to the terms disclosed in the placement memorandum and applicable conditions Correct answer.
  3. Performance fees must be approved by the stock exchange on which the fund is listed
  4. Performance fees are prohibited for all AIFs

Explanation

Performance-linked fees are permitted for AIFs, subject to the terms disclosed in the placement memorandum and the conditions in the regulations. The fee structure must be transparent to investors. AIFs are not listed on stock exchanges, so exchange approval is not relevant.

Question 14Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager wants to co-invest the fund's assets alongside the manager's own account. Which of the following is the most appropriate regulatory treatment?

  1. Such co-investment must be disclosed and managed to address conflicts of interest, consistent with the manager's fiduciary duty Correct answer.
  2. Such co-investment requires prior approval of every investor by a unanimous vote
  3. Such co-investment is prohibited in all circumstances
  4. Such co-investment is automatically permitted without disclosure

Explanation

Co-investment by the manager alongside the fund creates potential conflicts of interest and must be disclosed and managed. The manager's fiduciary duty requires fair treatment of the fund. The regulations and the placement memorandum govern the specific conditions.

Question 15Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the tenure of a close-ended AIF is correct?

  1. A close-ended AIF must have a fixed tenure, and the scheme must be wound up at the end of the tenure unless extended as permitted Correct answer.
  2. A close-ended AIF may continue indefinitely without any winding-up obligation
  3. A close-ended AIF must list its units on a recognized stock exchange within one year
  4. A close-ended AIF must be converted into an open-ended fund after three years

Explanation

Close-ended AIFs have a fixed tenure, and the scheme must be wound up at the end of the tenure unless an extension is permitted under the regulations. This gives investors certainty about the life of the fund. Listing of AIF units is not a general requirement.

Question 16Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager delegates certain investment decisions to an external advisor. Which statement best reflects the manager's obligation?

  1. The manager is relieved of all responsibility once the delegation is made
  2. The manager remains responsible for the delegated functions and must ensure proper oversight and compliance Correct answer.
  3. The manager may delegate only to a bank
  4. The manager must obtain SEBI approval for every delegation

Explanation

Delegation does not relieve the AIF manager of responsibility; the manager must oversee the delegate and ensure compliance with the regulations. Accountability remains with the registered manager. This is consistent with the manager's fiduciary role.

Question 17Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following is a key difference between Category I and Category III AIFs?

  1. Category III AIFs may raise funds from the public, while Category I AIFs may not
  2. Category I AIFs are not required to register with SEBI, while Category III AIFs are
  3. Category I AIFs may employ leverage freely, while Category III AIFs may not
  4. Category III AIFs may employ leverage and complex trading strategies, while Category I AIFs are focused on economically desirable sectors and have limited leverage Correct answer.

Explanation

Category III AIFs may use complex trading strategies and leverage, whereas Category I AIFs focus on economically and socially desirable sectors and face tighter leverage limits. Both categories must register with SEBI and both raise funds through private placement. The distinction rests on strategy and leverage.

Question 18Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is considering investing in a scheme that would result in the fund holding more than the permitted concentration in a single investee company. What should the manager do?

  1. Proceed because AIFs are exempt from all investment limits
  2. Ensure the investment complies with the concentration limits in the regulations and the placement memorandum, or obtain the permitted relaxation Correct answer.
  3. Proceed and disclose the breach only in the annual report
  4. Proceed with the investment because concentration limits apply only to mutual funds

Explanation

AIFs are subject to investment conditions and concentration limits set out in the regulations and the placement memorandum. The manager must ensure compliance or rely on a permitted relaxation. AIFs are not exempt from all investment limits, and after-the-fact disclosure does not cure a breach.

Question 19Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the sponsor's contribution in an AIF is correct?

  1. The sponsor must contribute the entire corpus of the fund
  2. The sponsor is not required to contribute any amount to the fund
  3. The sponsor must contribute at least 2.5% of the corpus or INR 5 crore, whichever is lower, in the case of a Category I or II AIF Correct answer.
  4. The sponsor's contribution is limited to INR 1 lakh regardless of corpus

Explanation

For Category I and II AIFs, the sponsor or manager must contribute at least 2.5% of the corpus or INR 5 crore, whichever is lower, subject to the conditions in the regulations. This skin-in-the-game requirement aligns the sponsor's interest with investors. The contribution cannot be waived entirely.

Question 20Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager becomes aware of a material conflict between the fund's investment in a portfolio company and a personal investment. What is the most appropriate course of action?

  1. Disclose the conflict to the investors and the trustee or board, and recuse from the conflicted decision where appropriate Correct answer.
  2. Resign immediately from the manager role without any disclosure
  3. Conceal the conflict to avoid alarming investors
  4. Transfer the personal investment to a family member and take no further action

Explanation

Material conflicts of interest must be disclosed to investors and to the fund's governing body, and the conflicted person should be recused from the relevant decision. Concealment or cosmetic transfers do not satisfy the manager's fiduciary duty. Transparency is central to the AIF framework.

Question 21Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is required to maintain records and furnish reports to SEBI. Which statement is correct?

  1. The manager need not maintain any records once the fund is registered
  2. The manager may choose the reporting format without reference to SEBI
  3. The manager must report only at the time of winding up the fund
  4. The manager must maintain the records specified by SEBI and submit periodic reports and compliance certifications Correct answer.

Explanation

AIF managers must maintain the records prescribed by SEBI and submit periodic reports and compliance certifications. These obligations support regulatory oversight. Reporting is not confined to the winding-up stage, and the format is prescribed rather than freely chosen.

Question 22Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF registered under Category I wishes to launch a new scheme. Which of the following is required?

  1. Conversion of the AIF into a mutual fund
  2. A separate placement memorandum for the scheme and compliance with the applicable conditions, with intimation to SEBI as required Correct answer.
  3. A fresh public issue with a prospectus
  4. Approval of the scheme by the stock exchange

Explanation

A new scheme of an AIF requires a separate placement memorandum and compliance with the applicable conditions, with intimation to SEBI as required. Each scheme is distinct for investor disclosure. Public issues and stock exchange approval are not part of the AIF scheme process.

Question 23Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager discovers that the fund has inadvertently breached a leverage condition. Which of the following best reflects the correct regulatory approach?

  1. Wait until the annual audit to mention the breach
  2. Conceal the breach to protect the fund's reputation
  3. Ignore the breach because it was inadvertent
  4. Report the breach to SEBI and the investors as required, take corrective action, and prevent recurrence Correct answer.

Explanation

A breach of regulatory conditions must be reported as required and corrected promptly, with steps to prevent recurrence. Inadvertence does not excuse non-compliance. Concealment or delayed disclosure would compound the violation.

Question 24Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the winding-up of an AIF scheme is correct?

  1. The scheme must be wound up on expiry of its tenure, and the proceeds distributed to investors in accordance with the regulations and the placement memorandum Correct answer.
  2. The scheme may continue indefinitely if the manager wishes
  3. The scheme may be wound up only after all investors unanimously consent
  4. The scheme must be wound up within one year of registration

Explanation

A close-ended AIF scheme must be wound up on expiry of its tenure, with proceeds distributed in accordance with the regulations and the placement memorandum. The process protects investor interests. Indefinite continuation and a fixed one-year wind-up are inconsistent with the framework.

Question 25Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category II AIF proposes to invest in a portfolio company in which the manager holds a controlling stake. Which of the following is the most appropriate analysis?

  1. The investment is permissible only if the manager resigns from the fund
  2. The investment is automatically void under the AIF Regulations
  3. The investment is permissible without any disclosure because Category II AIFs have no conflict rules
  4. The investment raises a conflict of interest that must be disclosed and managed, and may require investor consent or recusal as per the fund documents Correct answer.

Explanation

An investment in a company controlled by the manager creates a conflict of interest that must be disclosed and managed, with consent or recusal as the fund documents and regulations require. Category II AIFs are not free of conflict rules, and the transaction is not automatically void. The manager's resignation is not the prescribed remedy.

Question 26Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Under the SEBI (Alternative Investment Funds) Regulations, 2012, which minimum investment threshold applies to an investor in an AIF (other than an angel investor or an accredited investor)?

  1. Rupees twenty-five lakh
  2. Rupees five crore
  3. Rupees fifty lakh
  4. Rupees one crore Correct answer.

Explanation

The AIF Regulations prescribe a minimum commitment of rupees one crore per investor, subject to the carve-out for angel investors and accredited investors. This threshold is intended to restrict participation to investors capable of bearing the risk of unlisted and illiquid strategies.

Question 27Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF is structured as a scheme of a registered AIF. Which description fits the 'scheme' concept under the AIF Regulations?

  1. A separate legal entity that must itself be registered with SEBI
  2. A sub-fund or unit of the AIF with a defined corpus and investment objective Correct answer.
  3. A portfolio company in which the AIF invests
  4. A custodian arrangement appointed for the AIF

Explanation

A scheme is a distinct corpus or unit of the AIF, launched under the registration of the AIF itself, with its own investment objective and disclosures. The AIF registration covers the schemes, so each scheme need not obtain a separate SEBI registration.

Question 28Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following best describes the eligibility of a person to act as the manager of an AIF under the SEBI AIF Regulations?

  1. A company or LLP with a minimum net worth and relevant professional experience, as specified by SEBI Correct answer.
  2. Any individual with at least three years of trading experience
  3. A foreign portfolio manager registered with a foreign regulator only
  4. Any bank branch approved by the RBI

Explanation

The manager must be a body corporate or LLP meeting the net worth and experience criteria set out in the regulations. These criteria ensure that the entity entrusted with investment decisions has financial substance and professional competence.

Question 29Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF intends to invest primarily in infrastructure projects. Which sub-category of Category I would normally cover such a fund?

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

Explanation

Category I includes sub-categories such as venture capital funds, infrastructure funds, social impact funds and angel funds, each with its own investment focus. A fund investing primarily in infrastructure projects falls within the infrastructure fund sub-category.

Question 30Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the investment restrictions applicable to a Category II AIF is correct?

  1. It may invest only in listed securities and money market instruments
  2. It must invest at least two-thirds of its corpus in unlisted securities, subject to specified exceptions Correct answer.
  3. It may invest up to 100% of its corpus in real estate projects
  4. It is prohibited from investing in unlisted debt

Explanation

Category II AIFs, such as private equity and debt funds, are required to invest a predominant portion of their corpus in unlisted securities, with limited exceptions permitted by SEBI. This distinguishes them from Category III funds, which may take leveraged positions across listed and unlisted markets.

Question 31Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager receives a subscription amount from an investor before the scheme's first closing. Under the AIF Regulations, what is the permitted treatment of such funds?

  1. They must be transferred to the sponsor's personal account
  2. They must be kept in a separate bank account and cannot be deployed until the scheme's closing conditions are met Correct answer.
  3. The manager may use them for the fund's investments immediately
  4. They may be used to pay the manager's performance fee

Explanation

Subscription money received before the scheme's closing must be held separately and cannot be deployed for investments until the closing conditions are satisfied. This protects investors whose commitments have been received but whose scheme has not yet become operational.

Question 32Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the tenure of a Category I or Category II close-ended AIF is correct?

  1. It must be wound up within one year of launch
  2. It has a fixed tenure, with an option to extend by up to two years with investor approval Correct answer.
  3. It has no restriction on tenure
  4. It must be open-ended so investors can redeem at any time

Explanation

Category I and II AIFs are typically close-ended with a defined tenure, and the regulations permit extension of the scheme by up to two years with the approval of investors. This allows the manager to realise investments in an orderly manner while preserving investor consent.

Question 33Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is required to appoint a custodian for the scheme. Which statement best reflects the regulatory purpose of this requirement?

  1. To market the scheme to prospective investors
  2. To provide investment advice to the manager
  3. To act as the scheme's auditor
  4. To safeguard the scheme's securities and monitor compliance with investment restrictions Correct answer.

Explanation

Custodians safeguard the scheme's assets and monitor whether investments comply with the regulations and the scheme's disclosures. Their role is custodial and compliance-oriented, not advisory or promotional.

Question 34Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category II AIF's placement memorandum states that the manager may invest up to 30% of the scheme in a single portfolio company. The scheme's actual investment reaches 35%. Which of the following best describes the manager's position?

  1. The manager has breached the scheme's disclosed investment limits and must rectify the position and report it Correct answer.
  2. The manager is free to exceed the disclosed limit because the memorandum is not binding
  3. The manager may exceed the limit if the sponsor approves
  4. The manager may exceed the limit if the investor is an accredited investor

Explanation

The placement memorandum is a binding disclosure document, and the manager must operate within the limits it states. Exceeding a disclosed concentration limit amounts to a breach that must be rectified and reported through the prescribed compliance channels.

Question 35Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF manager proposes to charge a fee based on the scheme's profits. Which statement about performance-linked fees is correct under the AIF Regulations?

  1. Performance fees may be charged only after the scheme's final winding up, regardless of disclosure
  2. Performance fees may be charged without disclosure if investors are institutional
  3. Performance fees may be charged only if disclosed in the placement memorandum and computed on a basis consistent with the regulations Correct answer.
  4. Performance fees are prohibited for all AIFs

Explanation

Performance-linked fees are permitted but must be clearly disclosed in the placement memorandum and calculated on a basis that is consistent with the regulatory framework. Transparency in fee structure is a core investor-protection requirement.

Question 36Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager plans to invest in a portfolio company where the manager's own affiliate holds a significant stake. What is the manager's primary obligation in this situation?

  1. Proceed without disclosure because the investment is commercially sound
  2. Transfer the investment opportunity to the sponsor
  3. Resign as manager to avoid the conflict
  4. Disclose the conflict to investors and obtain their consent where required, and act in the fund's best interest Correct answer.

Explanation

Where the manager or its affiliates have an interest in a portfolio company, the manager must disclose the conflict and seek investor consent where required, while continuing to act in the fund's best interest. This reflects the fiduciary duty owed to investors.

Question 37Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category II AIF manager wishes to co-invest in a portfolio company alongside the scheme. Which of the following is the most appropriate regulatory approach?

  1. Co-investment is permitted only for Category III AIFs
  2. Co-investment is permitted without disclosure if the manager uses its own funds
  3. Co-investment is prohibited in all circumstances
  4. Co-investment is permitted only if disclosed and consistent with the scheme's investment objective and terms Correct answer.

Explanation

Co-investment by the manager alongside the scheme is permitted where it is disclosed and consistent with the scheme's investment objective and terms. The key concern is that the manager must not prefer its own account over the fund's interests.

Question 38Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager delegates portfolio management decisions for a portion of the scheme to an external advisor. Which statement best reflects the manager's responsibility?

  1. The manager is relieved of responsibility once delegation occurs
  2. The external advisor becomes the registered manager of the scheme
  3. The delegation must be approved by the portfolio companies
  4. The manager remains responsible for the delegated activity and must exercise oversight Correct answer.

Explanation

Delegation does not transfer regulatory responsibility; the registered manager remains accountable and must supervise the delegate. The manager's fiduciary duty continues to apply to all activities carried out on behalf of the scheme.

Question 39Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Under the AIF Regulations, which of the following is a permissible source of leverage for a Category III AIF?

  1. Borrowing from retail investors directly
  2. Borrowing from banks and other permitted sources, subject to the limits and conditions specified by SEBI Correct answer.
  3. Issuing equity to the public
  4. Pledging investor commitments without disclosure

Explanation

Category III AIFs may employ leverage through borrowing and other permitted arrangements, subject to the limits and conditions specified by SEBI. The leverage framework is designed to control systemic risk while allowing complex strategies.

Question 40Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF manager becomes aware that the scheme has breached a leverage condition. Which of the following best reflects the required response?

  1. Continue operations and disclose the breach at the next annual report
  2. Immediately wind up the scheme without informing SEBI
  3. Transfer the breach to the custodian's account
  4. Rectify the breach within the prescribed timeframe and report it to SEBI and investors as required Correct answer.

Explanation

A breach of leverage or investment conditions must be rectified within the prescribed timeframe and reported to SEBI and investors as required. Prompt remediation and transparency are central to the compliance framework.

Question 41Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is preparing the scheme's audited financial statements. Which statement about audit requirements is correct?

  1. The audit may be conducted by the manager's internal team
  2. Audit is required only at the time of winding up
  3. The scheme need not be audited if all investors are institutions
  4. The scheme must be audited annually by an auditor appointed by the manager, and the audit report must be furnished to SEBI and investors Correct answer.

Explanation

Each scheme must be audited annually by an auditor appointed by the manager, and the audited accounts must be furnished to SEBI and investors as prescribed. Annual audit provides independent verification of the scheme's financial position.

Question 42Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF proposes to invest in a portfolio company where the sponsor holds a controlling stake. Which of the following is the most appropriate regulatory position?

  1. The investment requires prior approval of the portfolio company's shareholders
  2. The investment may proceed if the conflict is disclosed and the transaction is conducted on arm's-length terms in the fund's interest Correct answer.
  3. The investment is prohibited in all cases
  4. The investment may proceed without disclosure if the sponsor approves

Explanation

Investments involving the sponsor or its affiliates are not automatically prohibited but must be disclosed and conducted on arm's-length terms in the fund's interest. This preserves the manager's fiduciary accountability while allowing legitimate transactions.

Question 43Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager intends to market the scheme to investors in a foreign jurisdiction. Which statement best reflects the regulatory position?

  1. Marketing abroad requires the SEBI registration to be surrendered
  2. Marketing abroad is permitted without any conditions once the AIF is registered in India
  3. Marketing abroad requires compliance with the laws of that jurisdiction and with the AIF Regulations, including any conditions on overseas marketing Correct answer.
  4. Marketing abroad is prohibited for all AIFs

Explanation

Overseas marketing must comply with both Indian AIF Regulations and the laws of the target jurisdiction. The manager cannot rely solely on Indian registration to market freely abroad.

Question 44Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

Which of the following statements about the sponsor's contribution to a Category I or Category II AIF is correct?

  1. The sponsor's contribution may be withdrawn at any time
  2. The sponsor must contribute at least 2.5% of the corpus or rupees five crore, whichever is lower, and the contribution is locked in Correct answer.
  3. The sponsor need not contribute any capital
  4. The sponsor's contribution must be at least 50% of the corpus

Explanation

The sponsor or manager must contribute a minimum amount, being the lower of 2.5% of the corpus or rupees five crore, and this contribution is subject to a lock-in. The requirement aligns the sponsor's interest with that of investors.

Question 45Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager discovers that a material conflict has arisen between the scheme's investment in a portfolio company and a personal investment of the manager. Which of the following best reflects the manager's obligation?

  1. Ignore the conflict if the personal investment is small
  2. Delegate the decision to the portfolio company's board
  3. Resolve the conflict in favour of the manager's personal investment
  4. Disclose the conflict to investors and resolve it in the scheme's best interest Correct answer.

Explanation

The manager must disclose the conflict and resolve it in the scheme's best interest, reflecting the fiduciary duty owed to investors. Personal interests cannot be preferred over the fund's interests.

Question 46Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category II AIF manager is considering whether the scheme may invest in a portfolio company whose business is classified as a prohibited activity under the regulations. Which statement is correct?

  1. The scheme may not invest in activities prohibited by the AIF Regulations, regardless of investor consent Correct answer.
  2. The scheme may invest if the manager obtains investor consent
  3. The scheme may invest if the investment is below 5% of the corpus
  4. The scheme may invest if the sponsor approves

Explanation

The AIF Regulations prohibit investment in certain specified activities, and investor or sponsor consent cannot override a statutory prohibition. The manager must ensure that the scheme's investments remain within the permitted universe.

Question 47Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager is required to maintain records and furnish reports to SEBI. Which statement about the reporting framework is correct?

  1. Reports are required only when SEBI requests them
  2. Reports must be furnished at the frequency and in the format prescribed by SEBI, and records must be preserved for the prescribed period Correct answer.
  3. Records may be destroyed after one year
  4. Reporting obligations apply only to Category III AIFs

Explanation

The manager must furnish periodic reports in the format and frequency prescribed by SEBI and preserve records for the prescribed period. This enables regulatory oversight and supports investor protection.

Question 48Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

A Category I AIF manager wishes to launch a new scheme under the existing registration. Which of the following is required?

  1. Approval of the scheme by the portfolio companies
  2. Filing of the scheme's placement memorandum and compliance with the applicable scheme-level requirements under the existing registration Correct answer.
  3. A separate custodian registration for each scheme
  4. A fresh SEBI registration for each scheme

Explanation

New schemes are launched under the existing AIF registration, with the placement memorandum filed and scheme-level requirements complied with. Separate registration of each scheme is not required.

Question 49Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF manager proposes to invest the scheme's assets in a manner that would result in the fund holding more than the permitted concentration in a single portfolio company. Which of the following best reflects the regulatory position?

  1. The investment may proceed if the investor is an accredited investor
  2. The investment may proceed if the manager believes it is prudent
  3. The investment is not permitted beyond the prescribed concentration limits, and the manager must structure the investment accordingly Correct answer.
  4. The investment may proceed if the sponsor provides a guarantee

Explanation

The AIF Regulations prescribe concentration limits, and the manager must structure investments within those limits. Prudence, investor status or a sponsor guarantee do not displace the regulatory caps.

Question 50Alternative Investment Funds (Category I and II) - regulatory framework and manager obligations

An AIF registered under Category I is set up as a close-ended scheme. Under the AIF Regulations, which statement correctly describes the minimum tenure such a scheme must have, and the treatment of the scheme's corpus at the end of that tenure?

  1. The scheme must have a minimum tenure of seven years, and the corpus is automatically transferred to the sponsor on expiry.
  2. The scheme must have a minimum tenure of five years, and the corpus may be rolled over into a fresh scheme without any investor consent.
  3. The scheme must have a minimum tenure of three years, and the corpus must be fully liquidated and the proceeds returned to investors on expiry unless the scheme is extended with investor consent. Correct answer.
  4. The scheme must have a minimum tenure of one year, and the corpus must be reinvested in the same scheme until the manager decides otherwise.

Explanation

The AIF Regulations prescribe a minimum tenure of three years for close-ended Category I and Category II schemes. The scheme must be wound up at the end of its tenure, with the assets liquidated and proceeds distributed to investors, unless an extension is approved in the manner the regulations require (including investor consent). A short extension is permitted only on the terms specified, so the default outcome is liquidation and distribution.