NISM Series XIX-E (Cat III AIF) flashcards

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Category III AIF definition

A privately pooled fund registered with SEBI under the AIF Regulations that employs diverse or complex trading strategies and may use leverage, including through derivatives.

Minimum investment

The minimum investment per investor in a Category III AIF is INR 1 crore, except for employees, directors, and designated persons of the manager or sponsor, for whom it is INR 25 lakh.

Minimum corpus

Each scheme of a Category III AIF must have a minimum corpus of INR 20 crore, and the fund must maintain this corpus throughout the scheme's tenure.

Manager's continuing interest

The manager or sponsor must invest at least 5% of the corpus or INR 10 crore, whichever is lower, in each scheme of a Category III AIF.

Registration validity

A Category III AIF's certificate of registration is valid for five years and must be renewed thereafter, subject to continued compliance with SEBI requirements.

Private placement memorandum

The PPM is the disclosure document that sets out the fund's strategy, risks, fees, leverage, and valuation methodology, and must be filed with SEBI before launch.

Manager net worth

A Category III AIF manager must maintain a minimum tangible net worth of INR 2.5 crore at all times, higher than the requirement for Category I and II managers.

Compliance officer

The manager must appoint a compliance officer responsible for monitoring compliance with SEBI regulations and reporting breaches to the board and SEBI.

Quarterly reporting

Category III AIF managers must file quarterly reports with SEBI covering the fund's activities, leverage, investor complaints, and other prescribed information.

Annual report deadline

The manager must provide investors with an annual report and audited financial statements within 180 days of the end of the financial year.

Fit and proper criteria

Key personnel of the manager must satisfy SEBI's fit-and-proper criteria, including integrity, financial soundness, and absence of regulatory disqualifications.

Change in control

Any change in control or sponsor of a Category III AIF requires prior approval from SEBI, and the manager must apply for approval before completing the change.

Long-short equity strategy

A strategy that takes long positions in undervalued securities and short positions in overvalued securities, using derivatives for short exposure where permitted.

Event-driven strategy

A strategy that seeks to profit from corporate events such as mergers, acquisitions, spin-offs, or restructurings by taking positions before or during the event.

Arbitrage strategy

A strategy that seeks to profit from price differences between related instruments, such as cash-futures arbitrage or cross-market arbitrage, with low directional risk.

Short selling restriction

Category III AIFs may take short positions only through derivatives on recognized exchanges; naked short selling of cash equities is not permitted.

Unlisted securities exposure

The PPM must disclose the maximum exposure to unlisted securities and the valuation methodology, and the fund may not exceed the disclosed limit.

Strategy deviation

A Category III AIF may not deviate from its stated investment strategy without investor consent and SEBI approval, which requires amendment of the PPM.

Leverage disclosure

The PPM must disclose the maximum leverage, the method of computing leverage, and the instruments used to achieve leverage, and the fund must report leverage to SEBI quarterly.

Leverage limit

Category III AIFs may employ leverage subject to SEBI-prescribed limits, and any breach must be reported to SEBI and investors promptly.

Margin and collateral policy

The fund must maintain a documented policy for margin and collateral management to manage counterparty and liquidity risk arising from derivative positions.

Daily mark to market

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

Risk management policy

The manager must maintain a documented risk management policy covering market, credit, liquidity, operational, and concentration risks, and must review it periodically.

Concentration limits

The PPM must disclose the maximum exposure to a single issuer or sector, and the fund must monitor compliance with these limits on an ongoing basis.

Valuation of unlisted securities

Unlisted securities held by a Category III AIF must be valued by an independent valuer at least once every six months in accordance with SEBI guidelines.

NAV disclosure

The manager must provide investors with periodic reports on the net asset value and performance of the fund, in accordance with the frequency disclosed in the PPM.

Fee disclosure

The PPM and investor agreement must disclose all fees and expenses, including management fees, performance fees, and other charges, in a clear and transparent manner.

Grievance redressal

The fund must maintain a grievance redressal mechanism and report investor complaints to SEBI on a quarterly basis, along with their resolution status.

Record retention

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

Taxation of Category III 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, unlike the pass-through treatment for Category I and II.

Insider trading compliance

The manager must comply with the SEBI (Prohibition of Insider Trading) Regulations, 2015, including maintaining a code of conduct and restricting trading on unpublished price-sensitive information.

Conflicts of interest

The manager must identify, disclose, and manage conflicts of interest, including those arising from proprietary trading, affiliated transactions, and performance fee structures.