NISM Series XIX-E (Cat III AIF) cheat sheet

AIFs are privately pooled funds registered with SEBI under the SEBI (Alternative Investment Funds) Regulations, 2012; they are not registered as mutual funds, CIS, or collective investment schemes.

Category III AIFs employ diverse or complex trading strategies and may employ leverage, including through investment in listed or unlisted derivatives.

Category III AIFs may be open-ended or close-ended; close-ended funds with a defined tenure must provide an exit to investors at the end of the tenure.

Minimum investment per investor is INR 1 crore; for employees, directors, and designated persons of the manager/sponsor it is INR 25 lakh.

Each scheme of a Category III AIF must have a minimum corpus of INR 20 crore; the fund may have multiple schemes.

The fund is established as a trust, company, LLP, or body corporate; the manager or sponsor must have a continuing interest of at least 5% of the corpus or INR 10 crore, whichever is lower, in each scheme (Category III).

Registration requires an application to SEBI through a merchant banker, due diligence, and a certificate of registration valid for five years, renewable thereafter.

Category III AIFs cannot accept an investor below INR 1 crore except as permitted for employees/designated persons; the manager must maintain a register of investors and comply with KYC/AML norms.

The manager must be a body corporate or LLP with a minimum tangible net worth of INR 2.5 crore for Category III (INR 5 crore for Category I/II); the net worth must be maintained at all times.

Key personnel of the manager must have adequate professional experience and relevant qualifications; the principal officer and key management persons must meet SEBI fit-and-proper criteria.

The manager must appoint a compliance officer and an auditor; the auditor must conduct an annual audit and report to SEBI and investors.

The manager must file a quarterly report to SEBI on the AIF's activities, leverage, and investor complaints, and an annual report within 180 days of the financial year end.

The manager must report material changes to SEBI, including changes in the fund's strategy, sponsor, or key personnel, within the prescribed timelines.

The manager must obtain SEBI approval for changes in control or sponsor; prior approval is required for changes in the manager.

The manager must maintain a code of conduct, an internal policy on conflict of interest, and a whistleblower policy, and must disclose the same to investors.

The manager must ensure that the AIF and its schemes are not marketed to the public and that the private placement memorandum (PPM) is filed with SEBI at least 30 days before the launch of the scheme.

Category III AIFs may invest in listed equity, debt, derivatives, commodities, and complex structured products, including through offshore vehicles subject to SEBI conditions.

Common strategies include long-short equity, event-driven, arbitrage, quantitative/systematic, macro, and distressed-asset strategies.

The AIF may invest in unlisted securities, but the PPM must disclose the strategy, the maximum exposure to unlisted securities, and the valuation methodology.

Short selling is permitted only through derivatives (futures and options) on recognized exchanges; naked short selling of cash equities is not permitted.

The fund may use derivatives for hedging, speculation, and leverage, subject to the leverage limits and disclosure requirements in the PPM.

The PPM must state the investment objective, strategy, risk factors, leverage, and the maximum exposure to a single issuer or sector.

Category III AIFs may invest in units of other AIFs, subject to SEBI conditions and disclosure of the underlying fund's strategy and fees.

The manager must not deviate from the stated investment strategy without investor consent and SEBI approval; any change requires amendment of the PPM.

Category III AIFs may employ leverage, but the leverage must be disclosed in the PPM, including the maximum leverage and the method of computing it.

The aggregate leverage of a Category III AIF must not exceed the limit specified by SEBI; the fund must report leverage to SEBI quarterly.

Leverage may be achieved through borrowing, derivatives, or both; the fund must maintain a margin and collateral policy to manage counterparty risk.

Complex strategies must be disclosed with a description of the strategy, the instruments used, and the risk management framework.

The manager must have a documented risk management policy covering market, credit, liquidity, operational, and concentration risks.

The fund must not use leverage to invest in unlisted securities beyond the limits disclosed in the PPM.

The manager must monitor leverage on a daily basis and report any breach to SEBI and investors promptly.

Derivative positions must be marked to market daily, and the fund must maintain adequate collateral and margin with the counterparty or exchange.

Category III AIFs must value their investments in accordance with the valuation guidelines issued by SEBI; unlisted securities must be valued by an independent valuer at least once every six months.

The manager must disclose the valuation methodology in the PPM and must provide investors with periodic reports on the NAV and performance of the fund.

The fund must provide investors with an annual report, audited financial statements, and a statement of leverage within 180 days of the financial year end.

The manager must disclose all fees and expenses, including management fees, performance fees, and any other charges, in the PPM and in the investor agreement.

The fund must have a grievance redressal mechanism and must report investor complaints to SEBI on a quarterly basis.

The manager must not make any misleading statements or omit material facts in the PPM or in any communication with investors.

Investors must be provided with a copy of the PPM, the investor agreement, and the risk disclosure document before investing.

The fund must maintain a minimum corpus and must not accept investments below the minimum threshold, except as permitted for employees and designated persons.

Category III AIFs must maintain books of account and records for at least eight years and must make them available to SEBI on request.

The fund must appoint a custodian, a registrar and transfer agent, and an auditor; the custodian must be registered with SEBI.

Income of the AIF is generally pass-through for Category I and II AIFs; Category III AIFs are taxed at the fund level, with income taxed as business income or capital gains depending on the nature of the transaction.

The fund must file income tax returns and comply with TDS, GST, and other applicable tax laws; the manager must ensure compliance with the tax regime applicable to the fund's structure.

The manager must comply with the SEBI (Prohibition of Insider Trading) Regulations, 2015, and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.

The manager must maintain confidentiality of investor information and must not use it for personal benefit; conflicts of interest must be disclosed and managed.

The manager must have a code of ethics and must ensure that employees do not engage in front-running, market manipulation, or other unfair practices.

The fund must maintain a minimum corpus and must not accept investments below the minimum threshold, except as permitted for employees and designated persons.